Owner Financing Questions
Investor · San Francisco, CA · Member since 2022 · 36 posts · 41 votes
Owner Financing Questions
Most Popular Reply
Andrew PostellPro Member
Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes@Account Closed you have a good post above already. I'll try to add a little here:
1) Is it possible that the seller would accept a lower interest rate than the market rate? If so, why would they do this? - There are all sorts of reasons "why" someone might do this and sometimes we may not know "why". It is not common...but it is possible (but it is rare).
2) Would the seller also accept a lower down payment than 20%? If so, why would they do this, since this increases their risk right? - Same here, it is possible, it is rare, they aren't usually thinking about "risk".
3) Why would a seller ever agree to this? It seems like a bigger headache to manage a loan? What are some of the dire situations they would agree to doing this? - Well, this isn't really your problem. This is their loan. You don't really worry about Bank of America and their position, right? Same thing here. If they choose to go this route, the responsibility is theirs.
4) Would the seller provide me monthly mortgage statements? If I wanted to pay down the principle quickly, is this possible? - If it's a sophisticated lender, then yes, they would provide you with monthly statements. But for the scenario you seem to be describing, it sounds more like someone who is not sophisticated - and then you will have a little more responsibility of tracking your payments. Sometimes owner financers don't even provide a 1098 for us at the end of the year...and we have to generate (and track) our own tax deductible interest. Usually the better the terms, the less support you receive.
5) Would I put the seller down as the mortgagee on my homeowners insurance? Would they also collect escrow for taxes and insurance? - Again, this is NOT your responsibility. This is theirs. If they don't require you to put them as a mortgagee on their insurance...then that's to your benefit. It's not to THEIR benefit...but it's to your benefit. Same with the taxes and insurance. That's on them. Requiring an inexperienced person to use a mortgage servicer might actually backfire. They may not be savvy enough to understand what that is nor have any interest in making their loan to you more complicated. All of that is on them.
Hope some of that makes sense.
8 Replies
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes3y
Quote from @Account Closed:
As I understand it, owner financing is a way for the buyer to purchase a property, without having a bank involved. Instead, you take out a loan from the seller and pay them instead.
This leaves me with some questions:
1) Is it possible that the seller would accept a lower interest rate than the market rate? If so, why would they do this?
2) Would the seller also accept a lower down payment than 20%? If so, why would they do this, since this increases their risk right?
3) Why would a seller ever agree to this? It seems like a bigger headache to manage a loan? What are some of the dire situations they would agree to doing this?
4) Would the seller provide me monthly mortgage statements? If I wanted to pay down the principle quickly, is this possible?
5) Would I put the seller down as the mortgagee on my homeowners insurance? Would they also collect escrow for taxes and insurance?
1.Yes they may. Why? Typically because they are uneducated on financing or they desperately want to sell the house. Typically when its a lower rate you may be paying more for the property as well. Now someone will come on like a lottery winner and say they have gotten both a lower rate and price - yes it happens but the reason is the seller wants out.
2. Yes. Again they really want out. It increases their risk significantly and I have heard and seen horror stories of 0-5% down then the borrower never pays and lives in the house for 2 years before being foreclosed and evicted.
3. We have a fund investing in mortgage notes and its like managing your own property - I STRONGLY advise someone not to do it as all is simple when things go good, but when they go bad it can go bad quick and cause a lot of financial harm
4. If you were to buy make sure they use a licensed servicer for that very reason
5. Yes. Their servicer should also collect taxes and insurance
7e investments53 Reviews - 3yAndrew PostellPro MemberLender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
@Account Closed you have a good post above already. I'll try to add a little here:
1) Is it possible that the seller would accept a lower interest rate than the market rate? If so, why would they do this? - There are all sorts of reasons "why" someone might do this and sometimes we may not know "why". It is not common...but it is possible (but it is rare).
2) Would the seller also accept a lower down payment than 20%? If so, why would they do this, since this increases their risk right? - Same here, it is possible, it is rare, they aren't usually thinking about "risk".
3) Why would a seller ever agree to this? It seems like a bigger headache to manage a loan? What are some of the dire situations they would agree to doing this? - Well, this isn't really your problem. This is their loan. You don't really worry about Bank of America and their position, right? Same thing here. If they choose to go this route, the responsibility is theirs.
4) Would the seller provide me monthly mortgage statements? If I wanted to pay down the principle quickly, is this possible? - If it's a sophisticated lender, then yes, they would provide you with monthly statements. But for the scenario you seem to be describing, it sounds more like someone who is not sophisticated - and then you will have a little more responsibility of tracking your payments. Sometimes owner financers don't even provide a 1098 for us at the end of the year...and we have to generate (and track) our own tax deductible interest. Usually the better the terms, the less support you receive.
5) Would I put the seller down as the mortgagee on my homeowners insurance? Would they also collect escrow for taxes and insurance? - Again, this is NOT your responsibility. This is theirs. If they don't require you to put them as a mortgagee on their insurance...then that's to your benefit. It's not to THEIR benefit...but it's to your benefit. Same with the taxes and insurance. That's on them. Requiring an inexperienced person to use a mortgage servicer might actually backfire. They may not be savvy enough to understand what that is nor have any interest in making their loan to you more complicated. All of that is on them.
Hope some of that makes sense.
- New to Real Estate · NJ · Member since 2023 · 71 posts · 20 votes3yReally appreciated this breakdown Andrew,
Quote from @Andrew Postell:
@Account Closed you have a good post above already. I'll try to add a little here:
1) Is it possible that the seller would accept a lower interest rate than the market rate? If so, why would they do this? - There are all sorts of reasons "why" someone might do this and sometimes we may not know "why". It is not common...but it is possible (but it is rare).
2) Would the seller also accept a lower down payment than 20%? If so, why would they do this, since this increases their risk right? - Same here, it is possible, it is rare, they aren't usually thinking about "risk".
3) Why would a seller ever agree to this? It seems like a bigger headache to manage a loan? What are some of the dire situations they would agree to doing this? - Well, this isn't really your problem. This is their loan. You don't really worry about Bank of America and their position, right? Same thing here. If they choose to go this route, the responsibility is theirs.
4) Would the seller provide me monthly mortgage statements? If I wanted to pay down the principle quickly, is this possible? - If it's a sophisticated lender, then yes, they would provide you with monthly statements. But for the scenario you seem to be describing, it sounds more like someone who is not sophisticated - and then you will have a little more responsibility of tracking your payments. Sometimes owner financers don't even provide a 1098 for us at the end of the year...and we have to generate (and track) our own tax deductible interest. Usually the better the terms, the less support you receive.
5) Would I put the seller down as the mortgagee on my homeowners insurance? Would they also collect escrow for taxes and insurance? - Again, this is NOT your responsibility. This is theirs. If they don't require you to put them as a mortgagee on their insurance...then that's to your benefit. It's not to THEIR benefit...but it's to your benefit. Same with the taxes and insurance. That's on them. Requiring an inexperienced person to use a mortgage servicer might actually backfire. They may not be savvy enough to understand what that is nor have any interest in making their loan to you more complicated. All of that is on them.
Hope some of that makes sense.
Thank you very much. - Rental Property Investor · Bermuda Run, NC · Member since 2014 · 44 posts · 33 votes2y
To piggyback on your replies, a mentor of mine would always say, "don't think for the seller."
We have utilized this strategy 5 or 6 times over the last 5 years while purchasing. In those instances, we are interested in monthly, residual cashflow on DAY 1. Therefore we are willing to sacrifice on the overall purchase price, for better monthly terms. If we are paying down principal faster than a bank note & we cashflow more with less down payment, we are happy; However, our strategy is to hold for a long time, so we can afford to do it this way.
On the other side, we have sold where we have been the bank. In that instance, it is a home that we are not comfortable putting money into. Because we are shouldering the risk, we require a substantial down payment and interest rate from our end buyer. The one thing I will never do though, is implement a pre-payment penalty. I believe the goal should be for the buyer to pay us off & to create raving fans that could not otherwise obtain a loan from a bank.
- 2yCliff BennerBusiness MemberAccountant · Denver, CO · Member since 2020 · 394 posts · 183 votes
Quote from @Andrew Postell:
@Account Closed you have a good post above already. I'll try to add a little here:
1) Is it possible that the seller would accept a lower interest rate than the market rate? If so, why would they do this? - There are all sorts of reasons "why" someone might do this and sometimes we may not know "why". It is not common...but it is possible (but it is rare).
2) Would the seller also accept a lower down payment than 20%? If so, why would they do this, since this increases their risk right? - Same here, it is possible, it is rare, they aren't usually thinking about "risk".
3) Why would a seller ever agree to this? It seems like a bigger headache to manage a loan? What are some of the dire situations they would agree to doing this? - Well, this isn't really your problem. This is their loan. You don't really worry about Bank of America and their position, right? Same thing here. If they choose to go this route, the responsibility is theirs.
4) Would the seller provide me monthly mortgage statements? If I wanted to pay down the principle quickly, is this possible? - If it's a sophisticated lender, then yes, they would provide you with monthly statements. But for the scenario you seem to be describing, it sounds more like someone who is not sophisticated - and then you will have a little more responsibility of tracking your payments. Sometimes owner financers don't even provide a 1098 for us at the end of the year...and we have to generate (and track) our own tax deductible interest. Usually the better the terms, the less support you receive.
5) Would I put the seller down as the mortgagee on my homeowners insurance? Would they also collect escrow for taxes and insurance? - Again, this is NOT your responsibility. This is theirs. If they don't require you to put them as a mortgagee on their insurance...then that's to your benefit. It's not to THEIR benefit...but it's to your benefit. Same with the taxes and insurance. That's on them. Requiring an inexperienced person to use a mortgage servicer might actually backfire. They may not be savvy enough to understand what that is nor have any interest in making their loan to you more complicated. All of that is on them.
Hope some of that makes sense.
For #5, wouldn't you as the buyer get title in your name and then the taxes would be billed by the municipal entity to you directly to pay twice a year and same with insurance, you can just pay for the year in advance so you don't have to worry about an escrow with the Note payment?
Benner Stride52 Reviews - 2yAndrew PostellPro MemberLender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
@Cliff Benner yes, but the post here was asking about the "mortgagee clause" on the home insurance policy. If you have a mortgage on a home, the mortgage company wants to be listed as a "mortgagee" on the insurance policy itself. It's an official thing and it happens even if your insurance is NOT escrowed. That's why sometimes people will have a claim and their mortgage company is listed on the claim check with them. That's so the mortgage company can make sure the asset was repaired if a claim was made. That's what the "mortgagee clause" is for. Hope that makes sense.
- 2yCliff BennerBusiness MemberAccountant · Denver, CO · Member since 2020 · 394 posts · 183 votes
@Andrew Postell Yes that makes sense now, i see what you are saying. Thanks!
Benner Stride52 Reviews - 2yVince CraigPro MemberReal Estate Agent · salt lake city · Member since 2019 · 43 posts · 31 votes
Lots of good insight here. I'll try not to be too repetitive.
1) Is it possible that the seller would accept a lower interest rate than the market rate? If so, why would they do this?
In today's market it will help the home sell for more and faster. I just did one were the seller was paid out ALL is equity about 165k, we left the underlining in place at 3.124% on a 5 year fixed. After year 5 we turn the rate up .5% each year for the life of the note. The seller did this because he needed to sell fast and wanted top dollar. We did just that.
2) Would the seller also accept a lower down payment than 20%? If so, why would they do this, since this increases their risk right?
Again in today's market homes are setting longer. Sometimes a seller can't be patient and needs to unload. I'm currently Under contract on a deal like this details below...
Days on market are about 188.We are offering 5k under asking.
5% down. with another 5% down in 12 months 5% fixed with a 5 year balloon.
Seller is paying 6% commission. The seller will make roughly $1500 per month on the carry plus have her big payout in 5 years. We are easing her immediate pain, and still giving her what she needs long term.
.
3) Why would a seller ever agree to this? It seems like a bigger headache to manage a loan? What are some of the dire situations they would agree to doing this?
Here in Utah there are two companies to handle this. Escrow Services and Elite, I would not do a deal without using a service like this.
4) Would the seller provide me monthly mortgage statements? If I wanted to pay down the principle quickly, is this possible?
The provider that handles the payments will provide statements also. As far as paying down faster, so long as there isn't a prepayment penalty clause in the note.
5) Would I put the seller down as the mortgagee on my homeowners insurance? Would they also collect escrow for taxes and insurance?
We typically will have the seller keep their home owners insurance in place but change it to a landlord policy. Then have the buyer get a renters policy. The company handling the payments will handle those disbursements as well.
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