In a perfect real estate investing world, every real estate investor would have a perfect credit score. He/she would have the ideal employment history. Essentially, every real estate investor would be the perfect candidate for a traditional home mortgage.
In a perfect real estate investing world, every real estate seller would find an interested buyer who has no trouble acquiring a conventional home mortgage. There would be no bumps on the road of closing on a house for a real estate transaction.
But, there is no such thing as a perfect real estate investing world. Many times, beginner real estate investors hardly start the journey of investing before mortgage lenders close the door. Real estate sellers end up holding onto a vacant property for far longer than they intended to. The reason this is a common occurrence is that many real estate investors don’t know about all of the different options for financing when buying a home. One great option is owner financing, also called seller financing. What is owner financing, exactly?
What Is Owner Financing?
The answer to the question “What is owner financing?” can be found in the name itself. Seller financing is when the seller of an investment property decides to provide financing for the buyer in order to complete a real estate transaction. The real estate seller doesn’t exactly hand over cash to the buyer. Instead, he/she extends a kind of credit for the real estate transaction. The buyer then makes monthly mortgage payments. Compared to a traditional home mortgage, the payments for seller financing are amortized over a shorter period of time, usually five years. In most cases, part of the value of the investment property is amortized over the time period, and then, at the end, a balloon payment for the rest of the price is paid.
Related: What are Your Options for Financing Rental Properties?
What Is an Owner Financing Promissory Note?
All the information about the seller financing (interest rates, monthly house mortgage payments, amortization schedule, balloon payment, etc.) is outlined in an agreement called a promissory note. A promissory note is basically a promise that one party will pay the other party a set sum of money when buying a home. A promissory note also includes what will happen if the person buying a home defaults on payments.
When Is Owner Financing Mostly Used?
Unfortunately, there exists a kind of real estate market where a real estate investor can find great investment properties but will have trouble getting a mortgage. It’s not necessarily because he/she is a high-risk borrower; it’s just a trend in this real estate market.
Two things end up happening in this real estate market: real estate buyers can’t buy, and real estate sellers can’t sell. Ultimately, any real estate transaction suffers. That is why in such markets real estate investors turn to owner financing.
Why Don’t We Hear More About Owner Financing in Real Estate Investing?
There are a few reasons why owner financing isn’t a word thrown around too often in real estate investing. It’s because of fear from both parties in a real estate transaction: those selling and those buying a home.
Real estate sellers fear the risk of financing borrowers who have been turned away by mortgage lenders. Many real estate investors use the full cash payment from closing on a house with a traditional home mortgage to purchase their next investment property in the real estate market.
Real estate investors buying a home often don’t consider seller financing simply because they could end up paying more money for an investment property through higher interest rates or asking price. Borrowers buying a home in this way also risk foreclosure. Most investment properties that have a conventional home mortgage don’t allow a real estate investor to sell without paying off the home mortgage. If the investment property is sold with owner financing, the mortgage lender will require the payment. If the seller can’t pay, the investment property is foreclosed.
Finally, many real estate investors simply don’t bother asking “What is owner financing?” or learning how it works. For these reasons, many don’t consider seller financing as an alternative way to finance investment properties when selling or buying a home.
Why Should You Consider Owner Financing When Selling a Home?
There are many ways in which a real estate investor can benefit from selling a home with owner financing.
Make Passive Income
The best reason is passive income. Being a landlord and managing an investment property can take a lot of work, even though it can be the best way of making money in real estate. While there are other ways of making money in real estate through passive income, owner financing is a great way with a few extra benefits.
Sell Your Investment Property “As Is”
Mortgage lenders usually require a home inspection of an investment property when borrowers apply. The repairs found are sometimes taken on by the buyer, but many times for a seller to complete the closing on a house, he/she will have to pay for a share of the needed repairs. With seller financing, a real estate investor can sell an investment property “as is” and avoid costly repairs.
Save Some Money
As long as a real estate investor is holding onto an investment property, all of the costs that come along with it will have to be paid. This includes carrying costs as well as any general costs of an investment property. If the investment property remains on the real estate market for too long, it can hurt the overall return on investment in this way, depending on the investment strategy and property. So, selling quickly with owner financing would be a plus in this case. Giving buyers the option of owner financing will likely give your property an edge, especially in a down market, allowing you to sell even quicker.
Get a Better Return on Investment
Want to get a great return on investment? With seller financing, a seller can usually ask for 10-20% above the value of the investment property. As borrowers are asking a real estate investor to take on some risk, it’s generally understood that this requires a larger payment.
Most real estate investors offering seller financing can also expect to benefit from higher interest rates than what a typical mortgage lender would offer. Again, this can result in a great return on investment.
Related: What is Good Return on Real Estate Investment?
Click here to find an investment property with the best return on investment.
Sell the Promissory Note
Avoiding the risk of becoming a lender through owner financing is possible if you choose to sell the promissory note. You can sell the promissory note on the same day when closing on a home. Selling the promissory note is an option for making money in real estate if you want to purchase a property without waiting for the agreed upon term to pass.
Making money in real estate through passive income, saving money, and even getting a good return on investment are reasons why any real estate investor should opt for seller financing.
Why Should You Consider Seller Financing When Buying a Home?
Besides the fact that owner financing is providing you with a way to real estate investing when you’ve been denied a home mortgage, there are actually other benefits.
Close on a House Faster
Closing on a house through a home mortgage from a bank can sometimes take up to two or three months in some locations. With seller financing, buying a home can happen much quicker, and you can start making money in real estate investing faster.
Of course, don’t rush things. Due diligence on an investment property is still important, especially with seller financing. (You might be wondering why a real estate seller is trying to get rid of an investment property so quickly! Be careful.)
Save Money on Closing Costs
Closing costs for real estate investing can amount to 2-5% of the price of an investment property. A lot of what you pay for closing costs is simply services that the bank provides for the mortgage. Cut the bank out of the picture, and the price of closing costs goes way down.
Negotiate the Down Payment
While buying a home with owner financing, you just might be able to get the real estate seller to be flexible with the down payment. Some might be willing to go less than the typical 20-30% that mortgage lenders expect. It just depends on the specific real estate transaction, but it is a possibility.
The Best Ways to Approach Owner Financing in Real Estate Investing
Real Estate Sellers:
For real estate sellers, there are two things to do when approaching owner financing:
1. Simply put “seller financing available” with your property listing.
2. Have all the information about what you expect from owner financing ready when real estate buyers show interest in the investment property; be prepared to answer the question “What is owner financing?”.
Real Estate Buyers:
Closing on a house with seller financing is trickier for real estate buyers, but there are still ways to approach it:
1. Be ready to answer the question “What is owner financing?”.
2. Make sure to be clear as to why you don’t qualify for a traditional home mortgage.
3. When asking for owner financing, outline an enticing plan to convince the real estate seller that it is a good idea.
Consider owner financing for your real estate transactions. Don’t let tight credit in a real estate market stop you from closing on a house and making money in real estate. Don’t settle for just any investment property for owner financing. Visit Mashvisor and find one that promises a great return on investment. Make all of the risks of owner financing worth it!
Related: How to Make Money in Real Estate: Follow Our Guide