We all sometimes need that extra push in our finances that doesn’t come from our salaries. Owner financing will provide just that. Owner financing in clear terms is basically a loan giver to the buyer of a property or business by the Owner. It is also known as owner financing when used in the context of residential real estate. Owner financing take place when the buyer does not have enough credit to claim outright possession of a property. The Owner however doesn’t just hand over the property to the buyer as that would not be considered as being wise. In Owner financing the buyer would make an amount of down payment for the property to the Owner, after which the buyer will make instalment payments for a period of time, till the debt is settled.
READ: In-House Financing – Requirements, Interest Rates, Dealership
The interval of instalment payment and interest rate of the loan would be agreed on by the buyer and the owner. It’s basically similar to obtaining a loan from the bank without all the annoying paperwork and collateral. Owner financing serves as a form of investment for the Owner and solely depends on the buyer’s readiness to settle debt. It is also beneficial to the buyer especially if he/she will be unable to get a loan from a bank. The property is transferred after completion of instalment payments. If the buyer decides to default on previous agreement, the owner will simply repossess the property.
There are no laid-down rules which are mandatory for owner financing. In order to ensure neither party falls victim to a scam, it is advised that both parties agree to the use of a legal purchase agreement drawn up by a lawyer and then signed by both of them. The purchase agreement would contain all the details of the agreement between both parties. It would contain information on the duration of the agreement, the agreed interest rate, etc.
Owner financing can sometimes serve as an incentive for a buyer to buy a property when he/she is low on credit.
READ: Finance Lease – Example, IFRS, Types
Owner financing are however short-term loans to save the owner of the stress of a prolonged period of payment after which the property may have been used extensively by the buyer. The importance of a down-payment can’t be underestimated as it gives the buyer a stake in the cost of the property.
As with every system, Owner financing has its own advantages and disadvantages for buyers and owners.
Pros & Cons of Owner Financing
For Buyers: Advantages for Buyers
- Higher chance of securing a loan with low credit
Owner financing presents opportunities to buyers who are unable to secure loans from banks. This is due to the fact that owner financing requires no capital.
- The process of owner financing is faster and cheaper
Owner financing is faster because there is no need for all the paperwork demanded by banks for a standard loan.
- The down-payment is based on agreement
Disadvantages for buyers
- There may be a chance of paying a high interest
- The owner may run a credit check and decide not to be involved in the loan if he feels it is too risky
For Owners: Advantages for Owners
- Owner financing may help you sell your property faster.
If you’re having trouble selling, offering owner financing makes your property unique, potentially getting a lot of offers faster. Just add “Owner financing available” to the listing to inform potential buyers.
- Sell your property without any extra cost
You may be able to sell the property as it is, as against making costly repairs that might be a requirement for regular sales.
- Better Interest rate
You have a higher chance of getting a better interest rate than you could get from other types of investments.
- You are still the owner of the property.
If the buyer defaults making payments, you get the property back and can keep the down payment including any additional money paid.
- Difficult to run at a loss
Owner financing is unique because you can sell the promissory note (usually at a discounted amount) right away to an investor, if desired. That would give you a lump-sum payment.
READ: Structured Financing – Explained, Investment Banking, Real Estate, Products
Disadvantages for Owners
- Complete ownership of the property is essential
In Owner financing, you typically need to own the property free and clear. If you still hold a mortgage, you must get approval from your lender before going forward with the deal.
- Defaulting buyers
- During instances of repossession, you may incur repair costs for the property
- Tax payment could be complicated.