The Pros and Cons of Owner Financing

Photo by Jessica Furtney on Unsplash

Updated on October 23rd, 2019.

As we discussed in our first post, concerning What is Owner Financing, we stated that owner financing is a sale transaction that is legally held under a contract between seller and buyer where the seller takes on the risk by financing the sale of their home to the buyer.

Owner financing is sometimes referred to as "seller financing" or "creative financing", capable of providing extra income for the seller and flexibility for the buyer. It's important to note that while owner financing may seem like the best solution for selling a house, there are some pros and cons to consider before deciding if its the proper selling strategy for a home, so let's learn what some of those considerations are.

Advantages of Owner Financing

In a buyer's market, where you have more homes for sale than you do buyers, owner financing will usually be the favored choice of selling method. Sellers will likely find a buyer much faster if they agree to owner financing, allowing the buyer to skip any negotiations with traditional lenders.  

For sellers, the real benefit is cash flow, which the buyer generates by submitting monthly payments with interest for the house. If the buyer misses a couple payments then the contract is forfeited and the owner can take back the house, keeping all payments made thus far by the buyer. The upside is that sellers will have a better return with owner-financing than with fixed-income investments (e.g., CDs, ETFs, Bonds).

In regards to the buyer, the benefit is the flexibility and speed of the sale. They can negotiate the overall terms with the owner instead of a traditional lender, resulting in little to no money down, quick transaction, and no closing costs.

Disadvantages of Owner Financing

It may seem like owner financing is a great option for both the seller and buyer, but it does come with its set of disadvantages. 

From the seller's perspective, things can get pretty ugly if the buyer defaults. When the buyer can no longer continue to make the payments that were agreed to under the contract, the seller can reclaim the property, but if the buyer refuses to leave then the seller might need to foreclose on the property. On the other hand, if the buyer defaults and the seller reclaims the house then they might need to deal with repairs, depending on how well the buyer maintained the house. 

In terms of the buyer, there are some major warnings to consider such as the interest rate they could be paying, which could be higher than what traditional lenders are asking. Also, in owner financing its common to pay a balloon payment at the end of the term, which would equal the large amount that remains for the value of the house in question. If the buyer fails to make their balloon payment then the seller can legally take back the house and the buyer will lose all the money they had paid up to that point. Lastly, the due on sale clause, which means that if an owner still has a mortgage on the house then the lender can demand immediate payment for the house once they set up an owner financing agreement.

Summary

Owner financing is a "creative financing" method to sell a house, allowing the owner to sell quickly and for the buyer to get access to their new home faster. There are multiple advantages and disadvantages to consider for both parties, so make sure to run some due diligence and consult with an experienced real estate attorney before committing to any owner financing arrangements.

If owner financing sounds like the right fit for you then feel free to get in touch with Properters and make a deal today.