Pitfalls of buying a home on owner finance terms

[Donald Hendricks]

I found a house that is being sold on owner finance. The numbers work, with about $300 a month cash flow using the 50% rule and 2% rule.

Question is, what are the pitfalls of buying on owner financing? What must I make sure is in place to protect me and the property from dastardly deeds of the seller at any point?

[Bill Gulley]

Installment sales, by any method of seller financing can have several issues that can be a problem for a buyer.

If any method is used where title is not transferred the seller may encumber the property, creating liens under several instances. The seller can sell or pledge or lose their interest. For example, I have purchased properties sold on contract for deeds subject to the contract at a lower price.

Depending on how the transaction is accomplished you can have insurance and tax complications. If lease-options are not done properly the equity established may not be recognized by lenders causing sufficient equity not to be available for a refinance.

Contracts and notes that are not specific as to the application of payments can cause accounting issues.

Sellers who serviced their own contracts could pull shady stunts. Take a check and toss it in the trash and claim it was never received, invoke late fees or worse call the obligation in default, if at the time the borrower discovers the non-payment if they were not in a position to make the payment they could end up losing the property under the contract. If they can't bring a payment up to date they usually don't have funds to get to an attorney to fight in court either.

There can be other issues as well, unique to the type of contract, but these risks and matters can be managed or even eliminated by a well written agreement or note. "We written" that may be hard to come by with all the old boilerplate forms used. I suggest you have your attorney take a look at as well as a finance type familiar with underwriting and servicing aspects. :)

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