Owner-Financing has been used since the beginning of buying/selling real estate. Banks aren't the only entities able to finance real estate, owners do it every day. There could be many reasons and benefits for buyer / seller to engage in owner-financing. Here are a few example of why an owner may consider financing:
You have property worth 300,000. You paid more for it and refuse to sell for 300,000. Your got a loan for 280,000 when the home was purchase, owe a little less today.
Buyer comes along and is very interested in buying your home. As a matter of fact he is so interested he’s willing to pay 325,000 – 25,000 over market (he realizes he doesn’t qualify conventionally and thinks overpaying and owning is better than renting). Because buyer has a short-sale on their record, or is self-employed and doesn’t show all his income, or perhaps the bank doesn’t like the buyer’s new frohawk hair-do, they refuse to loan them the money required to close. After meeting and speaking with the buyer face to face and reviewing some documentation you feel buyer is a perfectly viable candidate. Both buyer and seller understand risks and benefits of owner-financing and decide to transact. You will require a 35,000 down payment, and finance the rest for 6%.
Let’s say the bank is charging 4.5% interest on the amount you still owe them (280k).
Here’s how it would look:
325,000 Price
-35,000 Down Payment
290,000 Remains (amount you’re financing back at 6% Interest)
You will now collect cash up front 35,000 (minus closing fees) + the override interest on the amount financed. In this example, you would be earning 6% on 10,000 (the additional amount financed over your loan balance - Remember you owe 280,000 but financed 290,000) Plus the override between the 4.5% you owe to the bank and the 6% you are getting from the buyer.
6% on 10,000 = $600 / yr
1.5% (override between 6% youre getting and 4.5% you owe) on 280,000 = $4,200
Netting you near $4,800 / yr in Cash flow Payments
Learn more about owner-financing online and through the resources available on my website. Call me direct to discuss the different ways to buy and sell with owner-financing.
