Owner Financing

[Michael McGarity]

I am trying to make my first offer on a property, and I want to see if the owner will possibly do a sellers finance, but I want to know some pros and cons to owner financing so I can be ready to speak with the owner so I can make my offer and get my deal?

[Jeff Rappaport]

@Michael McGarity I think the first thing you should identify when looking at owner financing is what will your exit strategy be?  Will you be holding the property?  Will you be wholesaling the property to another investor or owner occupant?

The good and bad is pretty straightforward! 

 The pros:  The seller will get a higher price for their property (in some cases), sell their property quickly, not be responsible for any maintenance, repairs or taxes and may have some tax benefits depending on what their situation is.  Typically a great scenario when the seller is looking for debt relief or is tired of managing a rental.  

The cons:  The seller does not receive all of their equity now.  They receive it in monthly installments and get the balance sometime in the future.  The biggest seller objection is what will happen if the buyer defaults.  Will they need to foreclose?  What if the buyer tears up the property?  How long will it take to get the property back?  How much will it cost?  

I like to offer every seller I deal with multiple options.  Obviously this depends on the situation of the seller but whenever possible.  It is fine if the seller has a mortgage.  I live and work in markets that are Trust Deed states.  The typical instruments we use in these markets are All Inclusive Trust Deed (Wrap around mortgage), Subject to,  Contract for Deed (Land Contract) and a new Trust Deed and Note.   You should know the difference in each one and when to use them.  

A brief description of each one:

All Inclusive Trust Deed - deed actually transfers to new buyer.  It will encompass any existing loans as it basically wraps around them.  You are creating a new note.  You are violating the due on sale clause on the existing financing in almost every case.  Seller's recourse in terms of default is to foreclose on the new buyer.  

Subject to - basically the deed is just signed over to the new buyer.   I describe it as "buying the property with the existing debt already on it."  It also violates the due on sale clause.  Seller has no recourse against the buyer if the buyer defaults on the underlying loan.  

Contract for deed - it is like buying a car.  You buy a car and finance it through a bank you own the car but do not have title to it until you pay it off in full.  In this case, the deed is held in escrow and only transferred to the buyer once the seller has been paid in full.  This does not violate the due on sale clause.  The seller has multiple remedies to get the property back in case of default.  

New Trust Deed and Note - Used only when the property is free and clear.  Seller would have to foreclose on the buyer to get the property back in case of default.  

In my experience, banks do not want to call loans due.  The chance of it happening is not likely.  However, you definitely should let the seller know what the risks are and certainly spell them out in your purchase agreement.  There are things you can do to make it difficult, if not impossible, for the bank to know the property has been transferred.  

You should also know the Dodd Frank rules as well.  I will not go into that at this point but would be smart to talk to a real estate attorney and understand how you need to structure these type of deals.

Sorry for the lengthy response.  Hopefully it was helpful!