Selling a home today is complicated enough. So, why would a home seller take on the bank’s responsibilities by opting for owner financing?
The practice doesn’t happen often around Denver or, for that matter, across the country. But some property sellers and buyers do seek out this financial arrangement. In today’s economy, getting creative is often the best way to strike a deal.
Owner financing occurs when the seller, not a bank, takes on part or all of the purchasing price — less the buyer’s down payment. The seller becomes the buyer’s bank, in essence, lending the buyer the money needed for the sale. The buyer then makes mortgage-style payments to the seller.
Greg Zadel, president of the Colorado Association of Realtors, said owner financing isn’t nearly as common today as it once was.
“We saw it a lot back in the ’80s when there were assumable loans,” he said.
“It’s not practical”
The decline in owner financing deals has little to do with the current housing market, Zadel said. Most loans today aren’t assumable, or they’re assumable with qualifications. Plus, lower interest rates have made owner financing deals less attractive.
“For the most part, it’s not practical,” he said
Nonetheless, in certain situations such arrangements can still be appealing.
Sellers who enter into such arrangements can sell their properties at a higher price because of the attractive terms made available to the buyers, Zadel said. They also may get a better return on their money than they might if they sank that same cash into other investments.
Andrea Raven Blaschke, a Realtor and owner of Urban Home Group in Denver, said owner financing can help both the seller and buyer, if conducted properly.
Blaschke said first-time homebuyers are more likely to consider owner financing because they may have much less than 20 percent to put down on a property. Finding a loan requiring only 5 percent down can be difficult these days, she said.
Owner financing also may help buyers who have lower credit scores but can boast a solid history of paying bills and rent in a timely fashion, she said.
Just make sure to seek out legal advice before entering into such a deal.
The risks for sellers are the same as for any bank offering a mortgage. For example, if the buyer stops making payments, the seller must go through a foreclosure process to get the money or house back, Zadel said.
He added that owner financing occasionally occurs with people negotiating land transactions, particularly with commercial or farm properties.
In such cases, the deals can be struck because the property in question already is paid off or will be paid off by the buyer’s down payment, Zadel said. No loan has to be assumed.
House flippers like approach
Bob Costello, managing broker for , said he sometimes sees a variation of owner financing for those who flip homes.
Some eager house flippers “fix it up too much,” Costello said. “Then, they can’t sell it for what they want.”
Eager for some cash influx and to be rid of the property, they enter into a quasi-owner financing deal.
“They say, ‘We’ll charge you $1,000- a-month rent, and we’ll take half of that and collect it,’ ” he said. In two years or so, there will be enough in that collection to serve as an official down payment, and the delayed buying process can begin.
“It’s investors trying to find a creative way out of their property,” he said.
Bill Kosena, broker associate with Re/Max Masters in Greenwood Village, said owner financing also can occur with larger property transactions.
Someone who owns a 10-unit property might be tired of renting out the building and just wants to wash his hands of the investment.
“Owner-carry financing allows him to do that,” Kosena said.
Kirk Lautensleger, vice president of website development at ReLogic, sees a window opening for owner financing.
“Banks are definitely becoming a harder source of financing,” said Lautensleger, whose real estate firm works extensively on the Internet. “It is another option, but it’s not the easiest thing to get accomplished.”
If a seller or buyer is curious about owner financing, Lautensleger suggests making sure every part of the process is totally transparent to both parties.
