The market for owner financed homes is not a huge one, but you still need to know about it if you want to get the best deal for yourself. There are many reasons why owner financed homes are so rare, and learning these reasons is the first step to identifying the best deals in that space. Here are the basics of the owner financed home and how you may be able to use one to your advantage as a buyer.
What is an owner financed home?
An owner financed home means that the seller is providing the financing for a buyer instead of a third party lender like a bank. In short, the seller is also the lender.
Buyers will usually make an upfront down payment and monthly mortgage payments directly to the lender. The interest rate is also agreed upon between the buyer and the seller.
Owner financed homes are also known as seller financed homes.
What are the advantages to the seller of an owner financed home?
A seller can move a home much more quickly if he finances it himself. Without the extra rigors that a third party lender will require, the process and the closing have the opportunity to become much simpler. Third party lenders invariably bring in additional third parties such as lawyers, accountants, inspectors, insurance agents, and appraisers. There is also extra government paperwork that is usually associated with a third party lender.
Sellers can use this tool in tight credit markets in order to get additional eyes on a property. When banks are not providing loans to purchase housing, sellers can step into the void and entice the buyers who are getting rejected. In the wake of the 2008 housing crisis, seller financed homes experienced a rise, for instance.
Sellers have the ability to increase profits on a home when financing the home themselves. Not only does the seller save on the multiple third party fees that are waived and moved aside, but the interest rate can be set according to the seller rather than to the market. Savvy buyers will always demand an interest rate that is close to market trends, but they may be enticed by the simpler process and immediacy of the buy.
What are the advantages to the buyer of an owner financed home?
The buyer also benefits from cutting the middleman out of the home buying process. Many of the closing costs in the process are culturally attributed to the buyer. They may be passed along to the seller, but someone has to pay them. Removing them from the process completely means there is more room for the buyer and seller to negotiate a price without the annoyance and pressure of high fixed costs.
Buyers can get into a house more easily with a seller financed home. The process can be as quick as the seller and the buyer make it, outside of a little government paperwork and a few recording fees. If either party is pressed for time to move into or out of a home, the seller financing option is a great way to speed up the negotiation.
Buyers have the ability to negotiate a better interest rate or better terms with a seller directly. With a seller financing option, there is no third party lender that is exercising business volume and equity leverage over the negotiation, so an educated buyer and seller may actually be able to come to a compromise that improves the position of both parties.
With all of the advantages of the seller financed home, why are they so rare in the market?
First of all, sellers are not immortal banks, but finite individuals. Many sellers do not believe that they will be around to collect the payments from a financed home. After all, many mortgages can last 30 to 40 years or even more. Even if there is more money from a higher interest rate for a seller, it is no good if that money cannot be collected.
Most sellers are also afraid of financing a home themselves because of the lack of leverage. Sellers have a legal right to certain actions if a buyer does not pay, but who wants to waste time implementing them? Many sellers will go for a complete, upfront payoff from a third party lender for the sole reason that they do not have to chase payments. This is a large part of the reason that most seller financing options are implemented between people who know each other very well.
Finally, sellers may need all of their money upfront. Depending on the personal financial situation of the seller, month to month payments may not fulfill certain needs. Lump sums are not only guaranteed, but they provide financial leverage that month to month payments do not. Seller financing will usually come from investors with plenty of business volume and enough leverage to take or leave a single monthly payment from a home sale.
Why should I look for seller financed homes if I am a buyer?
The reasons that seller financing is so rare are the same reasons that buyers should look for them. People who offer seller financing are usually in fairly good financial situations, meaning that they can offer you better terms. You also have the opportunity to save money and create a business relationship with the owner.
2 Point Highlight
With a seller financed option, there is no third party lender that is exercising business volume and equity leverage over the negotiation, so an educated buyer and seller may actually be able to come to a compromise that improves the position of both parties.
People who offer seller financing are usually in fairly good financial situations, meaning that they can offer you better terms.
