Owner Financing -Step by step

[Tracey Williams]

Hi everyone,

I have read a lot about owner financing and I notice there are lots of profit /advantage to the seller but looking at it from the perspective of a buyer I do have questions when considering owner financing for a multi family-unit

1. Who draw up the agreement? seller's Attorney or buyer's lawyer?

2. If owner finance with 10% down, do you get a title? or is the deed just going to be recorded?

3. Does the issue of closing cost/points comes up and who is going to be paying the buyers agent assuming there was one involved

4. Is there a need for inspection & Appraisal?

5. If buyer pays for inspection/appraisal and something was discovered and seller refused to reduce the price is there anyway to get your money back. (money paid for the inspection)

5. If seller still has a lien on the property how can you find out or how to prevent him from putting lien on the property

6. How can a buyer be assured the seller is paying the mortgage on the property.

As the new buyer do you need a second insurance on the property if the seller as one already?

I will appreaciate your answer to any of the questions or if you have a step by step action to take for owner financing as a buyer.

Thanks

[Jon Holdman]

1. Doesn't matter as long as both parties agree to it.
2. With normal financing you would "get a deed". That's the same as "getting title". What it really means is a deed document is created (again, doesn't matter by who) with the seller as the grantor and the buyer as the grantee and it gets recorded.
3. Most of the closing costs are exactly the same. Recording fees, title insurance, insurance prepaids, tax prepaids, tax prorations, and the plethora of fees from every government entity with their fingers in the pie still apply. The lender (seller) may not charge you a loan origination fee, processing fee, or the other fees banks tend to charge. Then again, they may, since they do have to do some of the same functions.
4. The inspection's for your benefit. Do it or not, as you wish. Lenders typically require an appraisal where a seller/lender may not. You may want one for your protection.
5.1. That would depend on your purchase contract. A purchase contract for a seller financed deal is (or, at least can be) the same as for a deal financed by a bank.
5.2. Title insurance. Do a seller financed deal at a title company the same as any other deal. Buy title insurance. Pay for it yourself, if the owner won't pay. After the transaction, the seller no longer owns it, so they can't put a new loan on it.
6. Here you must be referring to a "wrap" or AITD (all inclusive trust deed.) These are deals where the seller has an existing loan. You buy the property, but the existing loan doesn't get paid off. You pay the seller/lender on your note, and they (hopefully) pay the existing note.

This sort of deal is risky. Why? Because it violates the due on sale clause. The underlying lender has the right to call the note (i.e., to foreclose, even if the loan is current. Will they? Probably not. At least not right now. Will they in the future if rates are 10%, this loan is at 6% and the backlog of bad loans has cleared? Entirely possible.

If you do this, use a payment service. You send them your payment, and they pay the existing payment and send the seller whatever's left.

A better way to do this might be "subject to". You take over the payments on the existing loan.

If the seller owns the property free and clear, buying a seller financed property is exactly the same as a purchase with a conventional loan. The ONLY difference is the seller is also the lender.

With an existing mortgage, its still much the same. The difference is the deed you get, and the title insurance policy you buy (or the seller buy's for you) will have an exception for the existing loan. And you'll have this worry about the loan getting paid and possibly getting called.

If the seller doesn't want to do this formally, that is, with title insurance and a title company, don't walk, RUN away. You're about to be fleeced.