What is it involve in an owner financing, this is my first one

[Dee Xixi]

I am closing on my first Owner Financing, all you that I have done it before please tell me how to handle the process. The owner accept my offer so what come next?

[Uwe S.]

The Owner works with an broker/agent?

-Uwe

[Jim Wineinger]

The owner and you must put your agreement down on paper, in an acceptable form to be recorded so that the deed may change hands and the promissary note is secured to the property.

This is best handeled by an attorney IMO, but I have heard that it can be done through a title company.

[David C.]

So in an owner financing situation, the buyer's name is on the deed and payments are sent to original owner? Sorry when I searched for owner financing, an error occurred.

[Jim Wineinger]

That will depend upon the way a mortgage is handled in your state.

Some states are deed states and some are mortgage states.

In a deed state the actual deed will change hands from seller to buyer, then a trust deed will be given by the new owner to the seller which states that the new owner pledges to give the actual deed back to the seller IF they miss too many payments (seller forcloses).

But in a mortgage state, the mortgage is recorded which gives the buyer rights to do things on the property as if it is his, but the actual deed will not change hands until the mortgage is paid off in full.

It is similar to a car title, where the buyers name goes on the title, but he does not get the title until all payments are made.

Check with a local RE lawyer to see which way your state is.

[Bill Gulley]

Hi, On the buyer's side you should do some due diligence as to who you are dealing with. If the property is not the seller's primary residence and is an investment property, you need to do some checking.

First, check the seler's name in the real estate records where the property is located. What you are looking for is any tranfer of deeds to or from the seller. If you find that the property you're buying has been foreclosed upon or a quit claim deed has been filed, this is a red flag. It may indicate that the seller is a "churner" who sells property for the down payments, accepts payments over a term and then declares default and takes the property back. They set up borrowers for failure. If this has been the case, you can continue in the deal, but you need to protect yourself.

Even if this is an arm's length transaction, following this advice will make the deal much safer for you.

Go to a bank or a mortgage broker and have them pull a credit report. Have them pre-qualify you for a mortgage on the property. What you need to know is if you would qualify and if not, what you need to do to qualify. If you have credit problems you need to know exactly what to do to cure the problems, raise your score as necessary to qualify in the future. You need to know how long it will reasonably take to qualify for a mortgage, when you know this, then you are ready to deal on the terms of the seller financed loan. Any balloon payment under the seller financed note must be after the date, like 6 months after, the balloon payment will be required. Otherwise, you will be required to payoff the loan and you may not qualify which will require you to sell the home or be foreclosed upon.

Next are the terms of the promissory note. Even if you would qualify for a loan make sure the term is sufficient before any payoff requirement, at least three years. Three to five years is better. The amoritization is the length of time payments are scheduled to fully repay the obligation. Seller financing usually uses a 30 year amoritization period, but 20 or 15 years is customary as well. The shorter the period the more your payment will be and the quicker the principal will be reduced.

Interest rates will vary widely but check in Mass. for a "usury law" which is a interest rate limit that can be charged by the seller. Right now, you might be looking at 6 to 10 per cent. You need to negotiate the rate as you do the price. If you plan on keeping the property for a short period, you can ask for a lower price and give a higher rate, that has worked before.
Next make sure there is no pre-payment penalty, a charge made by the seller in the event you make additional payments to principal or payoff the loan early. Many sellers will charge a pre-payment penalty equal to their tax liability, which means you'll be paying the gains on the sale for them, know what that amount would be and if you're paying close to market rate for the property, I suggest you not to the deal unless they change the penalty. People die, get divorced and things happen in life that may require you to sell the house or pay it off and your profit could go to pay their taxes!
These are terms of the promissory note that are important, but here is the most important aspect. Servicing the loan.
Servicing a loan is the administration for payments, taxes, insurance and the security agreement. If the seller's name poped up as having sold the property before, you must insist on the loan being serviced by a third party! Regardless, you should insist on it. This means you will be sending your payments to a third party and they will eiother advance funds or forward fund to the seller. The servicer will ensure that any other underlying moretgage is paid if the deal is a sub-2 transaction. They will pay the taxes as due if you include escrows in your payment as a bank would. They also take care of tax requirements and calculate interest paid and earned and can provide you with proper payoffs if necessary..
Not using a servicer is dangerous. A seller can simply not deposit your payments in a timely manner and you will not have proof of timely payments for your credit to be established or shown as necessary for any future loan. The seller can manipulate payments so that the borrower will not qusalify in the future, causing a default.
There will be a deed of trust in Mass. This appoints a trustee to provide you with a deed of release, which releases the collateral interest when the note is fully paid. You will be "in title" to the property but the deed of trust provides a security interest in the property to the lender. The trustee is also responsible to act in the event of default and sell the property through a foreclosure sale if necessary. Make sure the deed of trust and or promissory note require a notice of demand for payment at least thirty days prior to any notice of demand for the payoff or acceleration of the note to its maturity. The security agreement will also allow the lender to advance funds to pay any encumbrance or lien as well as unpaid taxes and insurance and these amounts will become part of the principal bearing interest until fully paid. These issues may be a default, but may or may not be cause for accelerating the note to maturity as would be the case if you missed payments. Such advances can also have penalties and be very expensive. If you have a servicer and you escrow for such expenses, you nor the seller will have to worry about it.
The closing agent will require you to sign the note and deed of trust and the seller will execute a general warranty deed, the closer will explain the deeds and related documents at settlement.
Servicing can cost as little as $15.00 a month and is well worth it, as for a new note, the borrower generally pays servicing costs. It's the best insurance your deal will go smoothly you can get!
This is just the basics.
Good Luck, and Follow Me, Bill

[Dory Peters]

I never thought of using the tax liability for the pre-payment penalty. That's a good one. :)

[Jim Wineinger]

One of the purposes of doing seller financing is not having to have to pay buyers agents or sellers agents so I do not understand this part of your statement

The closing agent will require you to sign the note and deed of trust and the seller will execute a general warranty deed, the closer will explain the deeds and related documents at settlement.

It is a very good idea to protect yourself in the areas suggested (as most banks do) but this can be accomplished simply by an RE lawyer.

Lets try to remember the purpose of seller financing despite all the calls from those who would like to limit it in todays society.

[Dory Peters]

Originally posted by jawsette:
One of the purposes of doing seller financing is not having to have to pay buyers agents or sellers agents so I do not understand this part of your statement

The closing agent will require you to sign the note and deed of trust and the seller will execute a general warranty deed, the closer will explain the deeds and related documents at settlement.

Closing agent in this case isn't a buyer's/seller's broker/agent; rather, it's the escrow/title agent, or closing/title attorney (depending upon the state).

Although some people might use seller financing to avoid having to pay a buyer's and/or seller's agent, this is largely not one of my concerns. I learned to structure my deals including those costs (which of course means I'll have to buy the property for a lower price initially).

Check out some of Dawn Rickenbaugh's (aka The Note Queen) resources on seller financing. She's got some great info out there.

[Bill Gulley]

Originally posted by jawsette:
One of the purposes of doing seller financing is not having to have to pay buyers agents or sellers agents so I do not understand this part of your statement

The closing agent will require you to sign the note and deed of trust and the seller will execute a general warranty deed, the closer will explain the deeds and related documents at settlement.

Hi, I see you got an answer to your question, sorry I missed it. These are the settlement issues, nothing to do with Realtors as mentioned. But,

Interesting comment.....what do you see as the purpose of seller financing? I'd really like to hear opinions on that...Thanks, Bill
It is a very good idea to protect yourself in the areas suggested (as most banks do) but this can be accomplished simply by an RE lawyer.

Lets try to remember the purpose of seller financing despite all the calls from those who would like to limit it in todays society.

[Jim Wineinger]

I guess, Bill, that in all reality seller financing is based upon two different factors.
1 The pool of buyers is increased by the seller not being as strict in his qualification requirements as the conventional financing would be. And in return he gets his higher price to boot.
2 The realization of the seller, acting as investor, that he can get a higher price and also collect all the interest that would normally go to the conventional lender.

It seems to be a win win situation at first glance, but many get strapped and wish the buyer would refinance. And many do not realize the headaches of the accounting paperwork that must be maintained and again wish the buyer would refinance.

But another whole group think they can avoid all the fees, realtors commissions, appraisals, ect and therefore pocket more themselves.

I think this was the main driving force when the economy was good, but those other accounting costs over the years have those people rethinking things.

[Bill Gulley]

Hi, OK. SF does open the marketablity of a property. But I advise decent buyers not to pay any premium for the sale price sence an over priced house is harder to refi when the balloon pops. Too high of a price can be seen as preditory lending! Look at the reduction of principal in three teays on a 30 year amortization. If the buyer didn't build 15 or 20% by that time (with the down payment) it may be an impossibility to refi and setting up a buyer to fail will get you in trouble, now days. If you were selling to me on a SF transaction, I'm going to justify why you should take less if I were buying it!

Your second comment, very good! It provides the seller with tax savings and interest income. It can be handy in estate planning issues as well. I'd rather be a note holder than a landlord anyday! But I suffer as a LL too! LOL

I'd sure like to know why when I do a quote and scroll down past the brackets and type my comment, why it ends up in the middle of the person quoted!?
Sorry about that! Bill

[Steve Babiak]

Originally posted by Financexaminer:
... I'd sure like to know why when I do a quote and scroll down past the brackets and type my comment, why it ends up in the middle of the person quoted!?
Sorry about that! Bill

I have experienced that too. I think it's just that nested comments are broken; I see this especially when the quote does not have a person's name attached to the quote.

[Bill Gulley]

Originally posted by Steve Babiak:

Originally posted by Financexaminer:
... I'd sure like to know why when I do a quote and scroll down past the brackets and type my comment, why it ends up in the middle of the person quoted!?
Sorry about that! Bill

I have experienced that too. I think it's just that nested comments are broken; I see this especially when the quote does not have a person's name attached to the quote.

Hi, thanks, but I don't really don't get it...nested? I don't claim to know a thing about this stuff, I just type! Thanks We can see how this works...Bill

IT WORKED! Thanks Steve! LOL

[Steve Babiak]

Bill,

By "nested", I mean one within another. Because both of the quoted blocks in the post you just made had the user's name included, it worked as you expect. I have seen problems mostly when one of the quoted sections didn't have a user's name connected to it.

So, for example, jawsette's first post with a quoted block - that quoted block lacks a username. When you try to do a quote of that post, it gets all mangled. I'm pretty sure I once posted a complaint regarding this, but it may have been missed by Josh, or it may just not be enough of a priority.

[Bill Gulley]

OK, Thanks Steve, I bug Josh enough, like on the current post going on followers and collegues...I'll watch for that, Thanks, Bill

[Dee Xixi]

hi guys thanks for all the great response. By any chance does anyone have a sample of the structure of owner financing. I know i might have a lawyer in Ma draw the note but I just want to see a sample please.
Thanks

[Bill Gulley]

Originally posted by Dee Xixi:
hi guys thanks for all the great response. By any chance does anyone have a sample of the structure of owner financing. I know i might have a lawyer in Ma draw the note but I just want to see a sample please.
Thanks

Hi, if you contact me, I'll help you out here. I'll also have you read a what both of you need to do, in greater detail. I will try to get something copied to load here in the blogs, but I need to get with Josh first.....so, just PM me. Bill