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Friday, October 16, 2009

How to use "Owner Financing" for Real Estate investing

By Doc Schmyz

Owner financing often produces a winning situation for both the homeowner who is selling the property and for the buyer who is purchasing the property. Owner financing may be defined as the situation when a seller is willing to help finance a real estate transaction by creating a loan for the entire purchase if they own the home outright or by creating a loan for part of the purchase price when there is already an existing loan on the property.

There are numerous benefits when an owner financed transaction is used. For one, the transaction can proceed more quickly and easily than when conventional financing is used because there are fewer steps involved. For another, the seller is more apt to receive a higher sales price, and the seller will receive payments and interest over a long period of time. There are tax savings realized by selling under this installment plan. Additionally, the buyer will realize savings by avoiding loan fees and lender charges, and the negotiated interest rate will generally be lower than the available interest rates from a commercial lender. Also when you factor in that 20% of home buyers cannot qualify for a traditional funding; this type of financing offers home ownership to a group of buyers that may not have the chance otherwise.

There are a few disadvantages to owner financing to consider. For one, if the buyer defaults on the loan the seller will have to initiate foreclosure proceedings. This can be costly. Of course, after the foreclosure the property can be sold again, an advantage for some owners and a disadvantage for other owners. Also, the interest income generated by the loan will be subject to taxes, which could be a disadvantage to a seller who is in a higher tax bracket. Additionally, the seller does not receive cash for their equity immediately, but rather will receive their equity in installment payments over time. This can be a problem if the seller needed funds to purchase another home.

TIPS: For the seller and the buyer to consider when negotiating an owner financed transaction. The seller should research the buyer's creditworthiness and ask numerous questions to become confident that the buyer can fulfill their obligation. The buyer should provide a written explanation of any problems that appear on their credit report, as well as give a list or personal references. The buyer should research the local housing market and get a home inspection done to identify any major problems. Also, a proof of payment provision should be included in the sales contract so the seller can verify that the new owner is making all insurance and property tax payments.

An owner financed home sale can be a winning situation for both seller and buyer. It is important, however, that the seller and the buyer do their due diligence in order to reduce possible risks. - 23212

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