Owner financing, in very simple terms, means that the seller of a piece of property acts in the place of a bank or lending institution and loans the property buyer part or all of the funds necessary to purchase the property.

What does this mean to you, as a home seller?  Basically, it means that when you sell your home, you will create a loan, in the form of a mortgage or trust deed, that will allow the buyer to purchase your home from you.  Why would you want to do this?

• Offering owner financing will create more interest in your home and generate a larger number of qualified buyers.

• You will be able to sell your home more quickly because you will not need to wait for bank approval and closing can occur much more quickly.

• Closing costs are much lower.  There are no "junk fees" or points involved.

• You will be able to sell your home for its fair market value, because offering owner financing allows you to create a seller's market.

• You will likely be able to sell your home regardless of whether the current housing market is good or bad.

Once the mortgage or trust deed is created, you have several options open to you.  Because you have agreed to furnish the financing for your buyer, you have the right to collect payments on a monthly basis from your buyer, as specified in the mortgage or trust.  You may simply elect to collect each payment on a monthly basis and do nothing further.  The benefits to this option?

• You will collect a monthly payment which you are free to spend or invest as you like.  It's your money.

• You will receive a tax break because your capital gains are spread over time. 

• You will be the owner of an investment which is secured by real estate, giving you the option of foreclosing on the home and reselling it if the loan defaults.

• Your investment will earn a relatively good interest rate.  Interest rates on owner-financed mortgages and trust deeds are often higher than interest rates on more traditional savings solutions.

• You now own a liquid asset which can be sold to generate immediate cash if necessary.

Receiving a check every month for the 15 years or longer would be a nice thing for most of us.  However, the reality of the situation for most is that cash will be necessary immediately in order to purchase a new home or for other purposes.  So, can you use owner financing if you need to receive cash up-front for the sale of home, instead of monthly payments?  Yes, you can.  You can do so by selling the mortgage or trust deed you have created as soon as you close the sale on your home.  This is called a "simultaneous closing".  It is also sometimes referred to as "table funding". 

If you do elect to sell your mortgage or trust deed upon its creation, you have several "purchase options" available.

• You may choose to sell the entire mortgage or trust deed.  By doing so, you will receive a large lump sum of money, sometimes as much as 90% or more of the purchase price of your home, depending on the individual characteristics of the mortgage or trust deed.  You will no longer be involved with the mortgage or trust deed once the sale is complete, so if the buyer defaults at some point, you will not be affected at all.  This is called a "full purchase".

• You may choose to sell part of each individual payment and retain the rest.  By doing so, you will receive a large lump sum of cash and still receive monthly payments for the term of the note.  For instance, you might elect to sell 50% of each of each payment and keep the other 50% for yourself.  If you elect this option, you will still be involved with the mortgage or trust deed, because you are still collecting money from it periodically.  So if the buyer defaults at any point, you will be directly affected.  This is called a "partial purchase".

• You may choose to sell a certain number of payments and retain the rest of the payments.  This may work in one of two ways:  1.)  You may elect to sell the payments from the front end of the mortgage or trust deed.  In this case, you would sell perhaps 24 payments out of 120.  Once those 24 payments have been made, the payments will once again revert to you and you will collect the remaining 96 of them.  This is another form of "partial purchase"  2.)  You may elect to sell the payments from the back end of the mortgage or trust deed instead of the front.  In this case, if you sold 24 payments out of 120, you would receive the next 96 payments and the remaining 24 payments would be sent to the note buyer (the person who purchased the payments on your mortgage or trust deed).  This is called a "reverse partial purchase".  

• Combinations of these "purchase options" can be used as well.  For instance, if you have a mortgage or trust deed with a term of 120 months, you might elect to sell the first 24 payments outright and 1/2 of the following 24 payments.  In this case, you would receive nothing for the first 24 months (the payments would go to the note buyer).  After the first 24 months, you would receive 1/2 of the monthly payment for the following 24 months (with the other half going to the note buyer).  Once these 48 months have passed, the entire monthly payment would revert to you and you would collect the entire payment for the rest of the 120 month term.

• If you decide to utilize a "partial purchase" agreement of some type, you will often have the option of extending the purchase agreement if you find yourself in need of a more cash in the future.  For instance, using one of the scenarios above, if you have elected to sell the first 24 payments of a 120 payment mortgage or trust deed and you find that you need additional money about 8 months later, it will probably be possible for you to sell additional payments.  You might decide to sell another 48 payments and receive the cash for those payments immediately.  Please note, you do not have to wait until the initial 24 payments have been made to exercise this option.  You may choose to do so at any point in time.

To summarize, owner financing can enable you to sell your home quickly, at top dollar and still structure an "all-cash" sale of your home, if you desire it. 

If you are interested in pursuing this avenue, we can help you with our resource "How To Sell Your Home Fast In Good Or Bad Markets".  We will also buy your mortgage or trust deed from you when you are ready to sell.  For more information, visit our home page.  

 

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