In the US, twenty percent of property owners use some form of alternative financing when selling their home. Owners act as lenders because by doing so, they have more takers for their property. Some property sales might not happen because a property or person doesn’t qualify according to an institutional lender’s standards. Some reasons why people might not qualify include:
• person is self employed
• bad credit or no credit
• 1st time homebuyer
• credit card and car payment equal about one third of income
• one third of income spent on housing
• person is an active real estate investor
Some reasons why a property might not qualify include:
• doesn’t meet zoning requirements
• non-residential
• easements or access problems
• doesn’t have a concrete foundation
When using owner financing as an alternative, all of these obstacles can be overcome. Buyers have the benefit of expanding their price range, achieving lower closing costs, and possibly obtaining a loan with a lower interest rate compared to an institutional lender’s rate. Application fees, buy-down points, and other up-front costs that banks charge can be eliminated.
Besides sellers having the benefit of more takers for their property when he/she act as a lender, sellers also get the benefit of a higher rate of return on the money they will receive from the sale of their property compared to traditional investments (stocks, bonds, CDs). The interest rate on the owner’s income stream is totally negotiable between the owner and the buyer*. An owner can also avoid being placed in a higher tax bracket by spreading out the capital gains tax over a number of years**.
The legal contract that is used in an owner financed transaction may be referred to as a promissory note, mortgage note, or purchase money note. Some of the items that are included on this note include:
• origination date
• original balance of note
• interest rate
• amount of payment
• payment due date
• address where payments are to be sent
• any clauses such as an Attorney’s Fee clause
Another document used in an owner financed transaction is the security instrument or mortgage deed. This document states the property (real or personal) that secures the promissory note. In case of default, the owner would foreclose on this property. If you want to really get creative try this. Don’t use the property being purchased as security. Use another property that the buyer owns. This property might have more protective equity than the seller’s property. Make the seller feel even more comfortable by creating two notes, one for property being purchased and another for buyer’s property. Now the seller can foreclose on both in case of default.
A well structured owner financed transaction leaves both parties with a sense of satisfaction because all terms are negotiable between those parties. The use of owner financing may be the difference in a buyer getting the house of his dreams. Some real estate deals aren’t completed because of a lack in knowledge of creative financing. The 20 percent of deals that are completed can easily be 25 percent if real estate brokers, buyers, and sellers were more familiar with alternative ways of financing. Harris Homes, LLC is always just a phone call away to help with the structuring, purchase and sale of real estate notes. Contact us today at 443.219.7465.
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*Check your state’s usury limits
**Always consult w/your CPA about tax implications