Why would a buyer or seller want to use Owner Financing?
In yesterday's post, What is Owner Financing, we examined the basics of how owner financing works. Today we will look at the advantages of this type of financing.
Currently, seller financing is not very popular. Interest rates for home loans are at an all time low – roughly 5% for a 30 year fixed mortgage. That’s a low interest rate! If a buyer were comparing conventional financing to using seller financing, they would be comparing the conventional loan versus the seller’s loan. That means a seller would have to compete with the current interest rates. The seller is loaning out their money, so they have to view it as an investment. How much interest will they make on their money and how long will it take the buyer to repay? You won’t find many investors who are willing to take a 5% return on a 30 year investment. For this reason, most buyers go out and get a conventional loan from the bank. In the 1980’s when interest rates were pushing 20%, seller financing was very popular. Sellers could lend their money at 10+% and the buyers were still getting a deal relative to the market. Of course, if the buyer or property can’t qualify for a conventional loan, then it is a different story! Let’s go through the potential advantages for the Buyer or Seller.
Advantages for the Buyer
The buyer does not have to qualify for a traditional loan. The seller will qualify the buyer and may use different standards than a traditional bank. This may help someone repairing their credit, someone who is self employed, or someone going through a personal situation that prevents them from obtaining normal financing.
The Buyer cannot make the required down payment on a traditional loan. The buyer may need to make a large down payment on top of their traditional financing. If the traditional lender allows it, the seller can seller finance part of the down payment in the form of a second mortgage.
Lower closing costs. You don’t have to pay the bank to originate the loan, which is normally a large chunk of the Buyer’s closing costs. The loan does not go on the buyer’s credit report. This is an advantage for investors who are trying to accumulate multiple rental properties. Their ability to qualify for additional properties can be hindered by having more home loans on their credit report.
The buyer needs a short term loan. The buyer may just need the loan for a short period of time and the seller will delay their pay day to move the property. For example, they buyer could be renovating the property and then they will refinance after the renovation. They could be waiting for a large bonus and at that time, they will pay off the 2nd mortgage from the seller. The house does not qualify for traditional financing. Maybe the property is unique or in need of repairs and does not meet conventional lending requirements.
Advantages for the Seller
They widen the pool of available Buyers. They can now sell the property to buyers with conventional financing and buyers who cannot. It also may allow them to sell a property that does not qualify for conventional financing.
Tax Advantages. I’m not accountant, but if the seller sells and gets all of their proceeds at closing, they have to handle the entire tax burden that year (of course they may not have one if it is a personal residence). If the seller finances it, then the do not have to pay income taxes on the amount they finance in the current year.
Invest their proceeds. Some sellers like to invest their money in something they know – their former property. The seller is getting a return on their investment that is essentially equal to the interest rate at which they lend to the buyer. If they feel like this interest rate is better than their other investment options or is a good diversification to their other investments, they may want to lend their money in this manner.
As I previously mentioned, the terms of owner financing are negotiable. I’ve helped multiple buyers and sellers through this part of the negotiation and am happy to do the same for you!
Justin Landis
Keller Williams Peachtree Road
404-803-0471
justin.landis@kw.com
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Thursday, April 14, 2011
Wednesday, April 13, 2011
What is Owner Financing?
A friend sent me an email last night asking me about owner financing. I've had quite a bit of experience with owner financing, but it made me realize that most buyers and sellers probably have not. Here are the basics:
Owner financing is when the seller of the property also acts as a lender for the buyer. In essence, the seller becomes Fidelity Bank or Bank of America or whoever you were going to borrow money from to purchase the home. Instead of or in addition to getting a traditional loan, the seller lends you the money out of their proceeds. However, the title of the property is transferred to the new buyer, so the only interest the old seller has once the property is sold is that of the lender. They no longer have any ownership, so the buyer has all the same rights as they would if they used traditional financing.
When sellers do this, they can either be the sole lender or they may lend a 2nd mortgage that is in addition to a traditional loan. Typically, sellers can only be the sole lender if they own the property out right (i.e. they do not have a mortgage). If they have a mortgage, most mortgages have a “due on sale” clause that their current lender can exercise if the property is sold. Since we said that in an owner financing situation, the property is truly sold to the new buyer, then the old mortgage lender could call the rest of the mortgage due at this point. That would require the seller to pay off the existing mortgage in one payment. That can be a problem for most sellers. Of course, if the seller does not have a mortgage, then they can finance the purchase for the buyer instead of getting all of their proceeds in cash at the closing. If the seller is lending a 2nd mortgage, the buyer’s down payment and 1st mortgage may be enough to pay off their existing loan, so they just make the loan out of their proceeds.
It may be easier to see with some numbers, so let’s compare three situations in which a buyer is going to purchase a house for $300,000 and needs to make a $60,000 down payment.
1. Conventional Financing. The buyer goes to Fidelity Bank and gets a loan for $240,000 to cover the difference between their down payment and the purchase price. The seller’s proceeds at closing are $300,000 minus closing costs, commissions, and any mortgages.
2. Seller Financing – The buyer makes a $60,000 down payment to the seller, and the seller lends them $240,000 to be paid back at agreed upon terms over an agreed upon length of time. Like everything in real estate, those terms are negotiable. This time, the seller’s proceeds at closing are $60,000 minus closing costs, commissions, and any mortgages.
3.Seller 2nd Mortgage Financing – The buyer makes a $30,000 (instead of $60,000) down payment and borrows $240,000 from Fidelity Bank. They need another $30,000 to close the transaction. In this case, the seller lends the additional $30,000. This time, the seller’s proceeds at closing are $270,000 minus closing costs, commissions, and any mortgages.
As you can see, the math adds up to $300,000 each time. What changes is from whom the buyer borrows the money and how and when the seller gets their proceeds. The seller is going to get $300,000 in both cases. However, in cases 2 and 3 they will be getting a portion of their proceeds back over time and with interest.
In the next post, we will examine the benefits of owner financing for the buyer and the seller.
Justin Landis
Keller Williams Peachtree Road
404-803-0471
justin.landis@kw.com
Owner financing is when the seller of the property also acts as a lender for the buyer. In essence, the seller becomes Fidelity Bank or Bank of America or whoever you were going to borrow money from to purchase the home. Instead of or in addition to getting a traditional loan, the seller lends you the money out of their proceeds. However, the title of the property is transferred to the new buyer, so the only interest the old seller has once the property is sold is that of the lender. They no longer have any ownership, so the buyer has all the same rights as they would if they used traditional financing.
When sellers do this, they can either be the sole lender or they may lend a 2nd mortgage that is in addition to a traditional loan. Typically, sellers can only be the sole lender if they own the property out right (i.e. they do not have a mortgage). If they have a mortgage, most mortgages have a “due on sale” clause that their current lender can exercise if the property is sold. Since we said that in an owner financing situation, the property is truly sold to the new buyer, then the old mortgage lender could call the rest of the mortgage due at this point. That would require the seller to pay off the existing mortgage in one payment. That can be a problem for most sellers. Of course, if the seller does not have a mortgage, then they can finance the purchase for the buyer instead of getting all of their proceeds in cash at the closing. If the seller is lending a 2nd mortgage, the buyer’s down payment and 1st mortgage may be enough to pay off their existing loan, so they just make the loan out of their proceeds.
It may be easier to see with some numbers, so let’s compare three situations in which a buyer is going to purchase a house for $300,000 and needs to make a $60,000 down payment.
1. Conventional Financing. The buyer goes to Fidelity Bank and gets a loan for $240,000 to cover the difference between their down payment and the purchase price. The seller’s proceeds at closing are $300,000 minus closing costs, commissions, and any mortgages.
2. Seller Financing – The buyer makes a $60,000 down payment to the seller, and the seller lends them $240,000 to be paid back at agreed upon terms over an agreed upon length of time. Like everything in real estate, those terms are negotiable. This time, the seller’s proceeds at closing are $60,000 minus closing costs, commissions, and any mortgages.
3.Seller 2nd Mortgage Financing – The buyer makes a $30,000 (instead of $60,000) down payment and borrows $240,000 from Fidelity Bank. They need another $30,000 to close the transaction. In this case, the seller lends the additional $30,000. This time, the seller’s proceeds at closing are $270,000 minus closing costs, commissions, and any mortgages.
As you can see, the math adds up to $300,000 each time. What changes is from whom the buyer borrows the money and how and when the seller gets their proceeds. The seller is going to get $300,000 in both cases. However, in cases 2 and 3 they will be getting a portion of their proceeds back over time and with interest.
In the next post, we will examine the benefits of owner financing for the buyer and the seller.
Justin Landis
Keller Williams Peachtree Road
404-803-0471
justin.landis@kw.com
Monday, April 11, 2011
Fortune Magazine - It's Time to Buy Again
That's right. In a recent article in Fortune Magazine, the author says:
"Forget stocks. Don't bet on gold. After four years of plunging home prices, the most attractive asset class in America is housing."
You can read the article for yourself to decide if you agree with his fundamentals. One thing that I am seeing a lot of in Atlanta is multiple buyers bidding on the same house. In the last three months, I've had 10 situations where my clients have been bidding against other buyers. These situations aren't for $40,000 foreclosures. They have been in all price ranges and in various parts of the city. My main takeaway - there are buyers in the market who are ready to buy when the deal is right.
Read the full article at: http://finance.fortune.cnn.com/2011/03/28/real-estate-its-time-to-buy-again/
Justin Landis
Keller Williams Realty Peachtree Road
404-803-0471
justin.landis@kw.com
"Forget stocks. Don't bet on gold. After four years of plunging home prices, the most attractive asset class in America is housing."
You can read the article for yourself to decide if you agree with his fundamentals. One thing that I am seeing a lot of in Atlanta is multiple buyers bidding on the same house. In the last three months, I've had 10 situations where my clients have been bidding against other buyers. These situations aren't for $40,000 foreclosures. They have been in all price ranges and in various parts of the city. My main takeaway - there are buyers in the market who are ready to buy when the deal is right.
Read the full article at: http://finance.fortune.cnn.com/2011/03/28/real-estate-its-time-to-buy-again/
Justin Landis
Keller Williams Realty Peachtree Road
404-803-0471
justin.landis@kw.com
Friday, April 8, 2011
Team Rich Richardson - $17 Million in Sales for 2010!
For the last 53 years, The Atlanta Board of Realtors have recognized the "best of the best" with their Million Dollar Sales Club. The 2010 results just came out, and Team Rich Richardson was recognized in the over $15 Million Dollar category. In fact, Rich and I together combined for over $17 Million Dollars in sales in 2010. That put us in the Top 40 teams in all of Atlanta.
Thanks to all of our great clients and friends for making such a year possible. Almost 100% of our business comes from personal referrals, so it's true that we couldn't do it without you!
Thanks!
Justin Landis
Keller Williams Realty Peachtree Road
404-803-0471
justin.landis@kw.com
Thanks to all of our great clients and friends for making such a year possible. Almost 100% of our business comes from personal referrals, so it's true that we couldn't do it without you!
Thanks!
Justin Landis
Keller Williams Realty Peachtree Road
404-803-0471
justin.landis@kw.com
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