Understanding Owner-Financed Real Estate Transactions

Owner-financed and “seller-financed” generally mean the same thing. Owner or seller financing is a substitute for obtaining a traditional mortgage from a lender to buy a property. Instead of a bank or mortgage company financing your purchase, the seller—the person from whom you are buying the property—will act as the bank or the lender.
You will sign a legally-binding contract with the seller to make the payments on the property. The lender will record the contract with the local property recording agency, as the bank would do for a mortgage.

Why Would a Buyer Want to Finance a Purchase This Way?

The most common reason a buyer would benefit from financing a real estate purchase this way is because the buyer is not able to qualify for traditional mortgage financing. Buyers can have difficulty when:

  • Their credit score is not high enough or they can’t make a large enough down payment for a traditional lender.
  • They have had a bankruptcy or foreclosure in the past and need to wait a few years to qualify for regular financing.
  • They or their spouse are temporarily unemployed or have a pending job offer.

Also, depending upon whether the current market is a sellers’ or buyers’ market, buyers may be able to get a lower interest rate than they could with a traditional bank.

Why Would a Seller Offer to Finance Your Purchase?

Sometimes, in markets where interest rates are high, or there is too much housing inventory on the market, sellers find it difficult to sell their homes. Rather than continue to wait for markets to adjust or the perfect buyer to come along, sellers will offer to finance the sale for a certain time period. The seller benefits because:

  • The seller can get the house sold sooner
  • Sellers benefit because they collect the interest on the loan they make to the buyer
  • The seller may be able to sell at a higher price and require a higher-than-market interest rate, knowing that you can’t obtain traditional financing

What Are the Risks?

Buyers take on more risk if they buy this way, rather than use a traditional mortgage to finance the purchase:

  • If the buyer misses a payment or is late, you don’t have the same foreclosure protections that you’d have with bank mortgages.
  • The seller can immediately call the loan due for breach of contract without going through traditional foreclosure proceedings
  • Your landlord could evict you immediately
  • If you have made any improvements to the property, you could lose any money you spent to make the improvements if you violate the terms of the loan
  • In most situations, the seller can legally keep the entire amount of your down payment AND take back the house
  • If the seller is paying a mortgage on the house, fails to pay it even after you make your payment, then you could lose the house for the seller’s default
  • Title insurance will not cover every title or fraud issue
  • You will likely be paying a higher price for the house in the long-run, a higher interest rate and make large monthly payments

Get Answers From a Knowledgeable Attorney

Before getting into any kind of seller-financed or “contract for deed” buying arrangement, please consult with us. It’s extremely important to us that no one takes advantage of you. It’s best if we can review your transaction before you sign anything. Contact us online for more information.

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