With inventories at record highs, sellers are looking for a way to make their property stand out and sell quickly.  However, that usually means offering an above average home at a below average price which can be a tough pill to swallow.  Many sellers are considering a lease-purchase or lease-option which would allow the buyer to rent the home for a period of time before purchasing it.  This is risky and not for everyone.  However another alternative may be to offer seller or owner financing.

Essentially, in owner financing, you, the seller, are acting as the bank for the buyer.  They qualify based on your criteria, pay you a mortgage every month, and they own the house.  Much like the bank, if they are late on a mortgage payment, you can foreclose based on the terms of the mortgage and when the sell it, they will pay you the balance.  While it is risky and isn’t for everyone, it can be extremely profitable and an excellent source of income though the interest paid on the loan.

Most people never consider why a bank would every consider lending money to someone who couldn’t pay it back.  However, all one needs to do is to pull up an amortization chart to realize the profit involved in mortgages.  For an example, take a $200,000 mortgage at a 5.5% interest rate.

In the first year, the buyer has paid the seller $10,932.72 in interest and only $2694.20 in principal.  The next year, the seller would receive $10,780.78 in interest and $2846.18 in principal.  Year 3: $10,620.24 and on and on and on.  At the end of five years, you would have earned more than $53,000 in interest payments in alone.

So with all of this upside, is there a downside?  Yes.

First, if the buyer defaults, you have to foreclose on them which can be expensive.  However at the end of the foreclosure, you get the house back to sell again.  Unlike these big mega banks. you can foreclose or react to a buyer in distress quickly compared to those that are not foreclosing until a year after the buyer stopped making payments.

Second, it’s not for everyone.  As you might expect, you won’t be able to have a mortgage on the home yourself.  The buyer may elect to have a second mortgage through someone else but you will not be able to.

Third, if not executed properly, it will cost you dearly…but what investment wouldn’t.  When you choose to explore this opportunity, consult with your own real estate attorney who can draft up the documents and advise you on the laws in your state.  You will want to have the deed and mortgage recorded, you will want to be in first position on the deed like any bank, and you will want the buyer to purchase mortgage insurance if not putting 20% down.

Ok ok ok, so you may be wondering why would a buyer consider a home that is owner financed?  Well, if the buyer is self employed or in sales, they are having a tough time getting a mortgage even with good credit.  Divorced folks on alimony, someone starting a new career, a recent relocation, and others would jump at the opportunity.  Your property may not allow for financing in its current configuration or condition (i.e. a CO-OP condo not in New York).

In todays market, being create may be what it takes to get your home sold.  Owner financing isn’t just create but profitable as well

Charlotte Real Estate