Seller Financing – When ‘Owner Will Carry’
YMMV o’ course — but in our Northwest Arizona real estate market, properties are frequently offered with, among other terms, OWC which means Owner Will Carry (also called Seller Carryback, Seller Financing or Land Contract).
Owner financing can be a GREAT way to buy a property!
- No loan costs!
- Escrow length can be shortened because there is no lender involved. The seller is your bank.
- You can buy a property that a bank can’t/wont finance (perhaps due to the age or type of the property, such as pre-HUD or singlewide mobilehomes, commercial property for a startup, properties with ‘issues’ like repair or permit problems, or a home in a rezoned commercial area)
- In rapidly appreciating or declining markets where appraisal would be an issue, you can typically bypass it (but do have your agent research the market so you are not overpaying!)
Owner financing can be a GREAT way to sell a property!
- No appraisal contingencies!
- No fallthroughs or delays from overloaded/unconcerned loan processors.
- No clueless underwriters.
- Your transaction can close fast.
- And YOU collect the interest!
Then again . . .
Owner financing can be a TERRIBLE way to buy a property!
- Terms tend to be more advantageous for the seller. You can expect to pay a higher interest rate and larger down payment than if you got conventional financing. Also, owners do not like to carry for long periods or with too-low monthly payments. They want you to be in as risky a loss position as they are in order to agree to finance you. And who can blame them?
- Your payments generally do not appear on a credit report. So you will most likely not be rebuilding poor credit UNTIL you have paid off the property and/or can show that you pay timely.
- There are setup and servicing fees that have increased dramatically in recent years.
Owner financing can be a TERRIBLE way to sell a property!
- The risk and cost of a default rests on the seller. You will need to remove the squatters, reclaim the property and repair it after it’s been ‘lived in’.
- If you don’t insist on impounds for taxes and insurance, you may end up on the hook, as unpaid property taxes can be liened and even title quieted after a few years of default. And should that property burn to the ground and the buyer didn’t pay those insurance premiums . . . OUCH!
When selling an OWC property:
- Either require a credit report or employment/income statement from your buyer.
- Insist on impounds for taxes, insurance and any assessments that have been assumed.
- Offer a home warranty, to help buyers avoid cash flow problems due to system or appliance failure.
- Receive a significant late fee for payments not on time.
- TALK TO AN ATTORNEY about the tax/legal implications of owner financing and the remedies for default. Protect yourself. Some owners have made a career of making seller-advantageous deals and reclaiming/reselling after default-over and over-keeping the interest and DPs.
- Know that changes in the law in recent years are affecting the way investors carry paper and on what type of property. Make sure you’re doing everything by the book.
When buying an OWC property:
- There are five major negotiating points:
Price – Interest rate – Down Payment – Term – Monthly Payment
Be ready and willing to compromise on at least three of those terms. You will probably not create a win-win if you ask the seller to deeply discount with low down, low interest, low payments long term!
- Be forthcoming with evidence that you can be trusted to repay timely. If you have good credit, pull your report/FICOs. At least be prepared to disclose your employment or source of income. Yes it IS the seller’s business, and it is the law that they must have reasonable expecation of your ability to pay.
- If the property is ‘theoretically’ financeable, don’t expect the seller to offer a low interest rate because, if they are offering the property OWC, they WANT to earn the interest.
Personally, I love to buy with the seller as noteholder. If you offer the seller a ‘skin in the game’ DP and decent monthly payments short-term, you can often get a great deal and save on loan costs from the get.
PS. There are often occasions that owner financing is not LISTED as offered, but if you make your offer strong, research the encumberance level of the seller and ask for it . . . well, it has been known to happen . . .