Owner financing in real estate transactions

Also known as seller financing, owner financing is growing in popularity in today's economy. With the credit markets slowing down and people finding it harder and harder to borrow, owner financing is looking better and better as an alternative to traditional financing. Owner financing is when the seller of the property basically agrees to take payments rather than a lump sum if you aren't buying the home for cash. A seller can lend buyer money for the entire purchase or seller can offer owner financing as a second mortgage if buyer isn't approved for the sale price and both the buyer and seller are otherwise in agreement on the purchase price.

The best case scenario for a seller to offer owner financing is if he/she owns the home free and clear. In other words,owner doesn't need the proceeds from the sale in order to pay off his or her mortgage. Furthermore, the seller does not need the proceeds from the sale of the home for his/her new home

The terms of the purchase and loan need to be right for both parties. The interest rate, duration and repayment structure need to be acceptable for both parties. This usually requires a good deal of negotiation.

Some of the benefits for a buyer and seller to consider if you are entertaining the idea of owner financing:

1. You don't have to get traditional financing if owner finances entire purchase. If seller is willing to finance a portion of the loan, this might help you lower your down payment or help you qualify for traditional financing, but won't completely eliminate traditional financing.

2. Interest rate of loan is independent of market rate. It can be a negotiating tool for buyer and seller to make the deal happen. A seller may offer owner financing and may ask for a higher rate because he/she is taking on a financial risk (that a lender typically would). On the other hand,a seller might offer a lower interest rate if he or she is a motivated seller and buyer is reluctant to go forward with purchase because buyer either thinks mortgage rate is too high and/or buyer cannot afford monthly payments with the market interest rate.

3. As a seller,if you are financially comfortable with owner financing,you could be opening your home to a wider pool of home buyers. One of the biggest benefits for the buyer (if goes with owner financing) is not having to pay the costs associated with conventional loans. Points, origination fees, underwriting charges, appraisal, credit reports, title insurance and other fees charged by conventional lenders can amount to thousands of dollars at closing. The buyer is free from these with an owner-carry installment sale. If a buyer is otherwise approved for a loan,but the closing costs are too much for him/her, owner financing eliminates this objection.

4. If buyer cannot get approved for a loan due to credit score, loan,owner financing is a way to make the deal happen. As a seller, you might be able to be more firm in your terms. There are buyers who are willing to pay a premium for non-qualifying financing Owner financing may also give the buyer a chance to improve his credit rating by owning a home and making payments timely.

5. If purchase is done entirely with owner financing,then settlement date is not held up buy lender financing.

6. If as a home seller,you are many other homes on the market and/or there are homes that buyers might otherwise find more appealing,owner financing might improve the home's appeal since buyers won't have to go through the traditional loan process.

7. As FHA loans have become more popular,with nearly 1/3 of buyers in America using them (August 2010 article in Marketplace),if seller does owner financing,then buyer's loan isn't subject to FHA doing their own inspection of the home for funding purposes of the loan. Some transactions fall apart because FHA lenders won't fund loans based on their home inspections, unless seller or buyer agrees to make repairs. And after the repairs are made,the inspector comes back to approve the quality of the repair. Owner financing eliminates this issue (issues may come up with buyer's home inspector and the FHA inspection is another hurdle).

8. Some transactions fall apart because of the home not appraising. As a seller,if you offer owner financing,one term can be to eliminate the appraisal contingency since you don't need it in order to fund the buyer's loan. Buyer can ask for appraisal contingency,but since seller is loan holder,he/she is able to fund loan so there is no appraisal contingency. Buyer can either agree or disagree to this contingency. If buyer cannot otherwise get a traditional loan,needs owner financing and loves the home,then he or she should give a lot of pause before telling owner that sale is subject to an appraisal. Seller may acquiesce or that could be a deal breaker.

Through traditional mortgages,the lender sends out an appraisor and if in appraisor's professional opinion the home isn't worth the sale price,then the loan won't be approved for the full amount of the sale price and either the seller has to reduce the sale price to the loan price,the buyer come up with the balance in cash to cover the difference between the loan amount and sale price or the buyer and seller have to agree to a compromise. Otherwise the deal falls apart.

Some negatives about owner financing

1. Seller responsible (him/herself or needs to hire somebody) to keep records of monthly payments and buyer's loan balance. An amortization schedule helps to accurately calculate the interest, principal, and remaining balance due. There are also annual 1098 mortgage interest statements to prepare. Many sellers decide to leave all this to a professional and make use of an outside servicer.

2. The duration of the loan. Does seller want to be collecting buyer's loan for perhaps 30 years or does he want to be free and clear of his/her former home in every possible manner? Seller could offer a shorter loan term with a balloon payment at the end.

3. Seller has to become a "collection agency" if buyer not paying loans on time. As the lender, sellers also have to worry if the buyer maintains the property, lets the property insurance lapse, fails to keeps the real estate taxes current, or violates any other terms of the financing arrangement. If seller no longer wants to be the lender and/or needs the money from the entire loan,then he/she has to sell the loan to an investor.


4. If buyer isn't paying loan,seller may need to initiate foreclosure proceedings. One risk for a lender when a home goes to foreclosure is that the property might be worth less than the buyer's outstanding balance.

5. If seller sells home with owner financing and seller also has outstanding loans of his/her own,buyer has to be concerned about seller paying off his/her bills.

There are many things to consider with real estate trasactions involving owner financing and I am sure that I haven't touched on everything.

Before agreeing to owner financing, seller and buyer should consult separate legal counsel in their state. .

If I can be of service in helping you and yours in selling or buying a home,please let me know. I always have time for and greatly appreciate your referrals.


Adam

Cell: (301)943-4370

adambashein@mris.com
(301)718-4100
www.basheinhomes.info

Adam Bashein
Licensed in MD & DC
Weichert Realtors

Owner financing in real estate transactions

Also known as seller financing, owner financing is growing in popularity in today's economy. With the credit markets slowing down and people finding it harder and harder to borrow, owner financing is looking better and better as an alternative to traditional financing. Owner financing is when the seller of the property basically agrees to take payments rather than a lump sum if you aren't buying the home for cash. A seller can lend buyer money for the entire purchase or seller can offer owner financing as a second mortgage if buyer isn't approved for the sale price and both the buyer and seller are otherwise in agreement on the purchase price.

The best case scenario for a seller to offer owner financing is if he/she owns the home free and clear. In other words,owner doesn't need the proceeds from the sale in order to pay off his or her mortgage. Furthermore, the seller does not need the proceeds from the sale of the home for his/her new home

The terms of the purchase and loan need to be right for both parties. The interest rate, duration and repayment structure need to be acceptable for both parties. This usually requires a good deal of negotiation.

Some of the benefits for a buyer and seller to consider if you are entertaining the idea of owner financing:

1. You don't have to get traditional financing if owner finances entire purchase. If seller is willing to finance a portion of the loan, this might help you lower your down payment or help you qualify for traditional financing, but won't completely eliminate traditional financing.

2. Interest rate of loan is independent of market rate. It can be a negotiating tool for buyer and seller to make the deal happen. A seller may offer owner financing and may ask for a higher rate because he/she is taking on a financial risk (that a lender typically would). On the other hand,a seller might offer a lower interest rate if he or she is a motivated seller and buyer is reluctant to go forward with purchase because buyer either thinks mortgage rate is too high and/or buyer cannot afford monthly payments with the market interest rate.

3. As a seller,if you are financially comfortable with owner financing,you could be opening your home to a wider pool of home buyers. One of the biggest benefits for the buyer (if goes with owner financing) is not having to pay the costs associated with conventional loans. Points, origination fees, underwriting charges, appraisal, credit reports, title insurance and other fees charged by conventional lenders can amount to thousands of dollars at closing. The buyer is free from these with an owner-carry installment sale. If a buyer is otherwise approved for a loan,but the closing costs are too much for him/her, owner financing eliminates this objection.

4. If buyer cannot get approved for a loan due to credit score, loan,owner financing is a way to make the deal happen. As a seller, you might be able to be more firm in your terms. There are buyers who are willing to pay a premium for non-qualifying financing Owner financing may also give the buyer a chance to improve his credit rating by owning a home and making payments timely.

5. If purchase is done entirely with owner financing,then settlement date is not held up buy lender financing.

6. If as a home seller,you are many other homes on the market and/or there are homes that buyers might otherwise find more appealing,owner financing might improve the home's appeal since buyers won't have to go through the traditional loan process.

7. As FHA loans have become more popular,with nearly 1/3 of buyers in America using them (August 2010 article in Marketplace),if seller does owner financing,then buyer's loan isn't subject to FHA doing their own inspection of the home for funding purposes of the loan. Some transactions fall apart because FHA lenders won't fund loans based on their home inspections, unless seller or buyer agrees to make repairs. And after the repairs are made,the inspector comes back to approve the quality of the repair. Owner financing eliminates this issue (issues may come up with buyer's home inspector and the FHA inspection is another hurdle).

8. Some transactions fall apart because of the home not appraising. As a seller,if you offer owner financing,one term can be to eliminate the appraisal contingency since you don't need it in order to fund the buyer's loan. Buyer can ask for appraisal contingency,but since seller is loan holder,he/she is able to fund loan so there is no appraisal contingency. Buyer can either agree or disagree to this contingency. If buyer cannot otherwise get a traditional loan,needs owner financing and loves the home,then he or she should give a lot of pause before telling owner that sale is subject to an appraisal. Seller may acquiesce or that could be a deal breaker.

Through traditional mortgages,the lender sends out an appraisor and if in appraisor's professional opinion the home isn't worth the sale price,then the loan won't be approved for the full amount of the sale price and either the seller has to reduce the sale price to the loan price,the buyer come up with the balance in cash to cover the difference between the loan amount and sale price or the buyer and seller have to agree to a compromise. Otherwise the deal falls apart.

Some negatives about owner financing

1. Seller responsible (him/herself or needs to hire somebody) to keep records of monthly payments and buyer's loan balance. An amortization schedule helps to accurately calculate the interest, principal, and remaining balance due. There are also annual 1098 mortgage interest statements to prepare. Many sellers decide to leave all this to a professional and make use of an outside servicer.

2. The duration of the loan. Does seller want to be collecting buyer's loan for perhaps 30 years or does he want to be free and clear of his/her former home in every possible manner? Seller could offer a shorter loan term with a balloon payment at the end.

3. Seller has to become a "collection agency" if buyer not paying loans on time. As the lender, sellers also have to worry if the buyer maintains the property, lets the property insurance lapse, fails to keeps the real estate taxes current, or violates any other terms of the financing arrangement. If seller no longer wants to be the lender and/or needs the money from the entire loan,then he/she has to sell the loan to an investor.


4. If buyer isn't paying loan,seller may need to initiate foreclosure proceedings. One risk for a lender when a home goes to foreclosure is that the property might be worth less than the buyer's outstanding balance.

5. If seller sells home with owner financing and seller also has outstanding loans of his/her own,buyer has to be concerned about seller paying off his/her bills.

There are many things to consider with real estate trasactions involving owner financing and I am sure that I haven't touched on everything.

Before agreeing to owner financing, seller and buyer should consult separate legal counsel in their state. .

If I can be of service in helping you and yours in selling or buying a home,please let me know. I always have time for and greatly appreciate your referrals.


Adam


Cell: 301-943-4370

adambashein@mris.com
301-718-4100
www.basheinhomes.info

Adam Bashein

Licensed in MD & DC

Weichert Realtors

Would you agree to temporarily renting back your new home to the home seller/Post Settlement Occupancy

Rent-Backs are not as simple as many believe. There are risks as there are in any transaction.

1. This is elementary, but often overlooked because rent back/post-settlement occupancy by the former owners is generally for a short period of time. PUT EVERYTHING IN WRITING AS THOUGH. Treat it like you would in signing a lease for a rental.

2. What kind of loan is the purchaser using (if not paying with cash?)?
HAS THE PURCHASER BEEN APPROVED FOR A LOAN WITH OWNER OCCUPANT INTEREST?? If the rent back/Post Settlement Occupancy is for more than 60 days, the buyer may lose their standing as an owner-occupant and the concomitant interest rate. Mortgage interest rates are higher for investors...where buyer isn't owner occupant.
Many Post Settlement Occupancy Agreements are available for a 60 day occupancy only. For occupancy to last for more than 60 days, a standard Residential Lease Agreement may be required involving Landlord and Tenant law. If you do a "long term rent back", buyer risks charges of mortgage fraud. Lender may think buyer really doesn't have intention of moving into home and only wanted the better interest rate.

3. Home buyer should make sure to receive a security deposit from the former owner in case damage is done during the rent back. 4. One challenge is if the former owners don't move out when the rental period ends. The home buyer may have to go through the eviction process and incur legal expenses in order to force the former owner to move out.

4. Damages. What if the seller/tenant neglects and/or damages the property? There will be significant costs and/or loss of value on the part of the purchaser/landlord. The seller and the buyer should do a walk through and take notes regarding property condition prior to signing the rental agreement to avoid any disputes when then the former owner moves out. This is important for both parties in case seller claims the damage was pre-existing condition before settlement or buyer claims damage was done during seller's rental period. An adequate security deposit is the only way to mitigate the new owner's costs and/or loss.

5. Utilities. Who is going to pay the final utility bills? Without an adequate security deposit, the new owner will have no funds to cover the final utility charges if the seller/tenant fails to pay for their usage. Without a zero balance when the utility service is transferred from the former to the new occupant, many utility companies will not provide service to the new occupant. Water is usually a lien on the property. However, electric/gas is usually in the name of the occupant and final bills have to be satisfied or the new occupant may not have electricity/gas.


6. Another thing buyers have to consider when renting back their home to the seller is where to store their items in case they had to move out of their former residence. Even if buyers don't have to move out of their former residence prior to the end of the rental agreement with the sellers, the buyers still have to coordinate moving their items into their new home with when the sellers' out, unless sellers and buyers lease agreement allows buyers to move their items into the house during rental period.


7. A couple of reasons for sellers and buyers to engage in a rent back/post settlement occupancy agreement

a. Sellers are buying a new home and they want to make sure settlement on their new home goes as scheduled. If settlement is delayed, then sellers have to delay their move.
b. If sellers are buying a new built home and it isn't going to be ready prior to settlement on their former home.
c. Sellers are still working/in the middle of a project that doesn't end prior to settlement and they need to finish the job/assignment.
d. Buyers may be coming from out of town, and even if they are in town, they may not want to physically move during certain times of the year because of work, the weather, and the school year to name other reasons.
e. The buyers haven't sold their current home yet and a post-settlement occupancy period helps buyers generate income to help pay mortgage on their new home while they are still paying the mortgage on their unsold homes.

If you or anyone you know would like to further discuss this topic, other topics or talk about the real estate market and how I help people realize their home dreams, give me a call or send me a message. I always have time for your referrals.

Adam
Cell: 301-943-4370

adambashein@mris.com

www.basheinhomes.info

Adam Bashein

Licensed in MD & DC

Weichert Realtors

7821 Tuckerman Lane

Potomac, MD 20854

301-718-4100 ext. 132

If you are a business owner and want to buy a home,make sure to always pay yourself a salary or a bonus,no matter how good or bad business is

Are you a business owner? Pay yourself as though someone else is your boss. Even if business is slow,at least give yourself "a bonus" (less than what you regularly pay yourself) to show consistent income (even if not a consistent level). Without doing this you can damage your credit score. One of my clients didn't pay ...themselves (co-owners of a business) for 4 months,during the rough winter and consequentally,at this point in time cannot get a loan.

Below is a link with an interesting article on this subject:

http://smallbusiness.yahoo.com/r-article-a-114495-m-2-sc-53-youre_the_boss._make_sure_youre_getting_paid-i

Curious about your credit score and purchasing power? Contact me today
for a free consulation.

By the way,if you know anybody in Maryland or Washington,DC looking to sell or buy a home,I always have time for their referrals.

I'm wherever you want to be in Metro DC.

Adam
adambashein@mris.com
www.basheinhomes.info
Adam Bashein
Licensed in MD & DC

Weichert Realtors
7821 Tuckerman Lane
Potomac,MD 20854
301-718-4100 ext. 132