OWNER FINANCING
Owner Financing is where there is a standard closing (usually by & at a title company) and the deed (or title) to the property transfers to the new owner. The title company ensures that a complete title search has been done and then insure the title from any "missed" title issues.
What makes Owner Financing unique is that the buyer does not get a new mortgage/loan for the purchase. The seller takes back a mortgage OR the buyer takes over the payments of the sellers own mortgage (called taking-subject-to or a "wrap") OR any combination. There can be many serious complications with these transactions and they are beyond most all Realtors ability and experience. Lenny has been doing Owner Financed transactions for over 35 years.
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- you will need at least 10% cash for a down payment + 1% additional for the 1st mo's payment/insurance & approximately $3,000 for inspections/closing costs
- You MUST be able to pay off the property or get a new mortgage in approximately 5 years or less - but it is possible to extend this time frame
- new construction &/or foreclosures can NOT be bought with seller financing
- we can help you improve your credit scores so you can get mortgage approval for the re-financing
- rent to own and lease purchase are scams --- for goodness sake, don't do it!
The search below is virtually the entire MLS... not all can be purchased with seller financing... Lenny is a master at getting sellers to understand the benefits of Seller Financing so you don't have to be limited to the few sellers (or investors) advertising Owner financing! We can work with you to find the properties that will work with owner financing.
Owner Financing 101
by Attorney William Bronchick
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There are many benefits for doing an owner-carry installment sale as opposed to conventional financing for both the buyer and seller. Sometimes the advantages inure to the benefit of one or the other, but in most cases the transaction is “Win/Win” for both parties.
Benefits for the Seller
Most sellers of real property insist on the highest price and all cash. Sellers want a fast closing with little hassle. Sellers also want to pay as little taxes as possible on the gains incurred. In many cases, the seller can have most of his needs satisfied by an installment sale rather than a traditional cash sale. Let’s look at these needs one by one.
1. Highest Price. There is no doubt that a seller can insist on and receive the highest price when offering flexible owner-finance terms. In many cases, the seller can receive more than the fair market value of the property by offering these “soft” terms. People are always willing to pay a premium for non-qualifying financing.
2. Cash. Nearly ever seller says he wants all cash, but few need it. What the typical seller wants is the most net cash from the deal. Often, the seller has to pay closing costs, title insurance, broker fees and the balance of the existing financing. In addition, there may be capital gains tax due to Uncle Sam. In many cases, the sale of a property by an installment sale (particularly a “wraparound”) will net the seller more future yield than any source from which the cash proceeds were reinvested.
3. Fast Closing. Nothing holds up a sale more than new lender financing. In some areas of the country, it can take months for a buyer to qualify and close a new loan to purchase your property. Since most standard real estate contracts contain a financing contingency, you may end up back at square one if your buyer does not qualify. Furthermore, if your house is not particularly nice or unique, it may take you some time to even find an interested buyer. Since you are competing with all of the other houses for sale, you may need to spend thousands of dollars in paint, new carpet and landscaping just getting the house ready for the market.
There are very few “assumable” loans and few sellers are offering “soft terms.” Thus, an owner-carry sale makes your house unique. Furthermore, an owner-carry transaction can be consummated in a matter of days, since there is no appraisal, underwriting, survey or other nonsense involved. In many cases, you will be able to sell the property yourself, saving thousands in real estate broker’s fees.
4. Tax Savings. On an installment sale, so you only pay gains to the extent you receive payments each year. This can be particularly advantageous if you have owned the property for several years. Furthermore, you can combine the installment sale with an I.R.C. §1031 Tax-Deferred Exchange for further savings.
As you can see, the installment sale provides many advantages to the seller of real property. Let us now turn to the advantages for the buyer.
Advantages for the Buyer
1. Easy Qualification. The buyer, in many cases, prefers an installment sale to conventional financing because it does not require traditional bank income and credit approval. The buyer may have poor credit because of a divorce or recent bankruptcy. He may be self-employed and cannot prove income. He may be new to his job and cannot meet strict lender guidelines. Even if he could qualify for a loan, the rate will be astronomical if he has poor credit. Furthermore, few conventional lenders offer fixed interest rate loans to people with a poor credit rating.
As you can see, there are dozens of reasons why a buyer cannot (or will not) qualify for a conventional bank loan. The installment sale becomes the perfect solution for him.
2. Credit Rating. An installment sale may give the buyer a chance to improve his credit rating by owning a home and making payments timely.
3. No Loan Costs. One of the biggest benefits for the buyer is not having to pay the costs associated with conventional loans. Points, origination fees, underwriting charges, appraisal, credit reports, title insurance and the plethora of other “junk” fees charged by conventional lenders can amount to thousands of dollars at closing. The buyer is free from these with an owner-carry installment sale.
4. Fast Closing. A buyer can close and move into a property within days, since there is no third party lender holding up the transaction.
Despite the elevated purchase price and interest rate, there are many benefits to a buyer who engages in an installment sale transaction.
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The Mechanics of Owner Financing (Three Scenarios)
by William Bronchick, JD
To sell a house quickly, the house must be attractive and so should the terms. By fixing your home to present it in the best light and offering flexible terms as well, you have, in fact, given your buyer an "offer they can't refuse."
By selling your house for an all-cash purchase only, you limit your market. If you're flexible on the financing terms of the property, you increase your pool of buyersand therefore the demand for your house
Let's discuss the mechanics of the owner financing, which is different if the seller has existing financing on the property.
Property owned free and clear
Let's begin with a simple explanation of owner financing a property that is owned free and clear of any mortgage liens; that is, there is no debt owed on the property. Let's say Sally Seller owns her home "free and clear"--she owes nothing to the bank, and there are no mortgage liens on the property.
Sally agrees to sell her property to Barney Buyer for $100,000, with the terms of 5% down and owner-financing for $95,000 (95% of the purchase price). At closing, Barney tenders $5,000 in cash and signs an I.O.U. (known as a "promissory note") for $95,000.
Sally executes and delivers a deed (ownership of the property) to Barney. The promissory note is secured by a mortgage that is recorded against the property as a lien in favor of Sally. In this case, Sally is essentially acting as a lender to fund part of the purchase price of the house.
Sally can set a balloon date by which the loan must be paid in full--at which time, Barney must either sell the property or get a new loan from a traditional source such as a bank or mortgage lender. When Barney gets his new loan, the loan to Sally is paid off, and the mortgage lien is removed from the property. Some states use a different form of mortgage called a "deed of trust."
Seller has a mortgage, but some equity
The preceding example is for illustrative purposes only because most people probably owe money to a lender secured by a mortgage lien on your property. Let's consider a more common example--a house that has some equity because it has appreciated since it was purchased or was purchased with a sizeable down payment.
Let's say Sammy Seller owns a property worth $100,000 that's encumbered by a mortgage of $80,000. Sammy agrees to sell the property to Betty Buyer for $100,000. Because there's $20,000 in equity ($100,000 value minus the $80,000 loan), Betty offers to pay $10,000 down and borrow the balance of the $90,000 from Manny Mortgage Lender.
At the last minute before closing, Manny decides that Betty Buyer's eyes are the wrong color and refuses to fund her loan. Instead, Manny offers to lend $80,000, which is $10,000 short of the amount Betty needs to close.
One choice is for Sammy to drop the price of $90,000. Another choice is for Sammy and Betty to part ways and for Sammy to put the property back on the market to find another buyer.
A third choice is for Sammy to accept a promissory note for $10,000 as part of the purchase price. At closing, Betty will pay Sammy $10,000 down, borrow $80,000 from Manny, and give Sammy a promissory note for $10,000.
Sammy signs over to Betty a deed to the property, and Betty signs a mortgage lien for $80,000 to Manny, who will possess a first lien on the property. Betty also signs another mortgage lien to Sammy, who will have a second mortgage on the property.
In a year or so, Betty gets a new loan for $90,000, paying off both the first (Manny's) and second (Sammy's) mortgage liens. In the meantime, Betty can make Sammy payments of interest on the $10,000 promissory note, which is a nice income stream for Sammy.
Seller has a mortgage, and little or no equity
If the seller has little or no equity but a reasonably low payment on his note (whether a fixed-rate loan or fixed for a few more years), he can sell the property by using a wraparound transaction.
A "wraparound" or "wrap," is an arrangement wherein you sell a property encumbered with existing financing by accepting payments in monthly installments, leaving the existing loan in place. The seller uses the payments he collects from the buyer to continue making payments on the underlying mortgage note.
For example, Susie Seller owns a house worth $100,000 and she owes $90,000 to First Federal Financial on a favorable 6%, 30-year, fixed-rate loan. Her principal and interest payments on the loan are roughly $600 per month.
She can sell the property for $100,000 for cash, but this might take a few months and $6,000 or more in broker fees and concessions, leaving bread crumbs on the table after Susie pays off her loan. Susie advertises the property as for sale by owner (FSBO) with owner financing and sells the property to Barry Buyer for $100,000, taking $5,000 down and carrying the balance of $95,000 at 8% for 30 years.
Susie doesn't pay off her underlying loan, but rather collects payments from Barry (roughly $700 per month) and continues to make payments on the underlying loan (roughly $600 per month). Susie collects $100 per month cash flow on the "spread" until Barney refinances.
The mechanics of a wraparound transaction
A wraparound is commonly done with an installment land contract. The installment land contract is an agreement by which the buyer makes payments to the seller under an agreement of sale. The transaction is also known by the expressions "contract for deed" or "agreement for deed." The seller holds title as collateral until the balance is paid.
In many ways, the installment land contract is similar to a mortgage, in that the buyer takes possession of the property, maintains it and pays taxes and insurance. However, the deed remains in the seller's name until the balance of the debt is paid by the buyer.
An installment land contract usually contains a forfeiture provision, under which a defaulting buyer may be evicted like a defaulting tenant. Under the contract, legal title remains in the seller's name until the purchase price is satisfied. When the buyer satisfies the indebtedness, legal title passes to the buyer.
About the Author:
William Bronchick, J.D. is an author and attorney who regularly presents workshops and do-it-yourself seminars at real estate and landlord associations around the country. He is the president and co-founder of the Colorado Association of Real Estate Investors.
Bill specializes in all forms of asset protection and is the author of several great home study courses:
The Ultimate Guide to Wholesaling
The Ultimate Guide to Fix & Flip
The Ultimate Guide to Owner Financing
The Ultimate Guide to "Buy & Hold"
Power Real Estate Negotiating
How to Create a Bulletproof Corporation
Your Step-By-Step Guide to Land Trusts
How to Form Your Limited Liability Companies
Wealth Protection Strategies
Complete Wealth Protection Library
by William Bronchick, JD
To sell a house quickly, the house must be attractive and so should the terms. By fixing your home to present it in the best light and offering flexible terms as well, you have, in fact, given your buyer an "offer they can't refuse."
By selling your house for an all-cash purchase only, you limit your market. If you're flexible on the financing terms of the property, you increase your pool of buyersand therefore the demand for your house
Let's discuss the mechanics of the owner financing, which is different if the seller has existing financing on the property.
Property owned free and clear
Let's begin with a simple explanation of owner financing a property that is owned free and clear of any mortgage liens; that is, there is no debt owed on the property. Let's say Sally Seller owns her home "free and clear"--she owes nothing to the bank, and there are no mortgage liens on the property.
Sally agrees to sell her property to Barney Buyer for $100,000, with the terms of 5% down and owner-financing for $95,000 (95% of the purchase price). At closing, Barney tenders $5,000 in cash and signs an I.O.U. (known as a "promissory note") for $95,000.
Sally executes and delivers a deed (ownership of the property) to Barney. The promissory note is secured by a mortgage that is recorded against the property as a lien in favor of Sally. In this case, Sally is essentially acting as a lender to fund part of the purchase price of the house.
Sally can set a balloon date by which the loan must be paid in full--at which time, Barney must either sell the property or get a new loan from a traditional source such as a bank or mortgage lender. When Barney gets his new loan, the loan to Sally is paid off, and the mortgage lien is removed from the property. Some states use a different form of mortgage called a "deed of trust."
Seller has a mortgage, but some equity
The preceding example is for illustrative purposes only because most people probably owe money to a lender secured by a mortgage lien on your property. Let's consider a more common example--a house that has some equity because it has appreciated since it was purchased or was purchased with a sizeable down payment.
Let's say Sammy Seller owns a property worth $100,000 that's encumbered by a mortgage of $80,000. Sammy agrees to sell the property to Betty Buyer for $100,000. Because there's $20,000 in equity ($100,000 value minus the $80,000 loan), Betty offers to pay $10,000 down and borrow the balance of the $90,000 from Manny Mortgage Lender.
At the last minute before closing, Manny decides that Betty Buyer's eyes are the wrong color and refuses to fund her loan. Instead, Manny offers to lend $80,000, which is $10,000 short of the amount Betty needs to close.
One choice is for Sammy to drop the price of $90,000. Another choice is for Sammy and Betty to part ways and for Sammy to put the property back on the market to find another buyer.
A third choice is for Sammy to accept a promissory note for $10,000 as part of the purchase price. At closing, Betty will pay Sammy $10,000 down, borrow $80,000 from Manny, and give Sammy a promissory note for $10,000.
Sammy signs over to Betty a deed to the property, and Betty signs a mortgage lien for $80,000 to Manny, who will possess a first lien on the property. Betty also signs another mortgage lien to Sammy, who will have a second mortgage on the property.
In a year or so, Betty gets a new loan for $90,000, paying off both the first (Manny's) and second (Sammy's) mortgage liens. In the meantime, Betty can make Sammy payments of interest on the $10,000 promissory note, which is a nice income stream for Sammy.
Seller has a mortgage, and little or no equity
If the seller has little or no equity but a reasonably low payment on his note (whether a fixed-rate loan or fixed for a few more years), he can sell the property by using a wraparound transaction.
A "wraparound" or "wrap," is an arrangement wherein you sell a property encumbered with existing financing by accepting payments in monthly installments, leaving the existing loan in place. The seller uses the payments he collects from the buyer to continue making payments on the underlying mortgage note.
For example, Susie Seller owns a house worth $100,000 and she owes $90,000 to First Federal Financial on a favorable 6%, 30-year, fixed-rate loan. Her principal and interest payments on the loan are roughly $600 per month.
She can sell the property for $100,000 for cash, but this might take a few months and $6,000 or more in broker fees and concessions, leaving bread crumbs on the table after Susie pays off her loan. Susie advertises the property as for sale by owner (FSBO) with owner financing and sells the property to Barry Buyer for $100,000, taking $5,000 down and carrying the balance of $95,000 at 8% for 30 years.
Susie doesn't pay off her underlying loan, but rather collects payments from Barry (roughly $700 per month) and continues to make payments on the underlying loan (roughly $600 per month). Susie collects $100 per month cash flow on the "spread" until Barney refinances.
The mechanics of a wraparound transaction
A wraparound is commonly done with an installment land contract. The installment land contract is an agreement by which the buyer makes payments to the seller under an agreement of sale. The transaction is also known by the expressions "contract for deed" or "agreement for deed." The seller holds title as collateral until the balance is paid.
In many ways, the installment land contract is similar to a mortgage, in that the buyer takes possession of the property, maintains it and pays taxes and insurance. However, the deed remains in the seller's name until the balance of the debt is paid by the buyer.
An installment land contract usually contains a forfeiture provision, under which a defaulting buyer may be evicted like a defaulting tenant. Under the contract, legal title remains in the seller's name until the purchase price is satisfied. When the buyer satisfies the indebtedness, legal title passes to the buyer.
About the Author:
William Bronchick, J.D. is an author and attorney who regularly presents workshops and do-it-yourself seminars at real estate and landlord associations around the country. He is the president and co-founder of the Colorado Association of Real Estate Investors.
Bill specializes in all forms of asset protection and is the author of several great home study courses:
The Ultimate Guide to Wholesaling
The Ultimate Guide to Fix & Flip
The Ultimate Guide to Owner Financing
The Ultimate Guide to "Buy & Hold"
Power Real Estate Negotiating
How to Create a Bulletproof Corporation
Your Step-By-Step Guide to Land Trusts
How to Form Your Limited Liability Companies
Wealth Protection Strategies
Complete Wealth Protection Library