Owner financing can be a lucrative option for property owners looking to sell their property, especially if they are dealing with a proven investor. This arrangement can provide advantages to both the owner and the investor. In this blog, we will discuss the benefits of owner financing and the type of owner who is better suited to capitalize on this strategy.
Advantages of Owner Financing with an Investor
- Greater Access to Buyers: Owner financing can attract buyers who are unable to obtain traditional financing. This opens up a wider pool of potential buyers, which can lead to a quicker sale.
- Flexibility in Terms: The owner has the ability to set the terms of the loan, including the interest rate, down payment, and repayment schedule. This flexibility can attract more buyers and allow for a more tailored arrangement.
- Regular Monthly Income: The owner will receive regular monthly income from the payments made by the buyer. This income can be a reliable source of passive income.
- Tax Advantages: The owner can also benefit from tax advantages. The interest income received is taxed at a lower rate than regular income, and the owner can also benefit from depreciation deductions.
Type of Owner Suited to Capitalize Off Owner Financing
An owner who owns a property free and clear or has a low mortgage balance is well suited to capitalize off owner financing. They have the ability to offer attractive terms and the flexibility to negotiate with potential buyers.
Let’s say that John owns a property worth $275,000, and he wants to sell it to an investor named Sarah. Sarah has $27,500 (10% of the purchase price) to put down on the property, but she would like to finance the remaining $247,500. John decides to offer owner financing to Sarah with the following terms:
Purchase Price: $275,000
Down Payment: $27,500
Loan Amount: $247,500
Interest Rate: 8% fixed
Repayment Schedule: 30-year amortization with a balloon payment due in 5 years
Breakdown of Payments
In the first 60 months of the loan, Sarah will make 60 payments of $1,815.44. Here is a breakdown of what John will collect:
Down Payment: $27,500
Total Interest Payments: $54,924.10
Principal Balance Remaining: $217,677.56
A Note Is Created
That’s right, as the seller of an owner-fiancing property you are now a note holder. This is the same way banks work when they loan someone for a traditional mortgage, there is a recorded note and it’s held against the property for collateral. We use experienced real estate attorneys to draft and create these notes, or you can use your own. At the end of the day, all the paperwork is properly documented and recorded with the proper entities so that you are legally protected.
You Can Sell The Note
This is something many people are unaware of or do not think about. In fact, note-buying is a big business. If for some reason down the line, you want or need a lump sum of money, you can look for a note buyer to sell your note to, this could even be a friend that likes the terms of the note. It does not have to be a large company, in fact, many smaller private investors love buying notes. This might be even more reason for you to keep and service the note yourself, after all, it’s a desirable asset to possess.
Here are a couple of links to some well-rounded information regarding the note business as a whole.
In conclusion, owner financing can be a great option for an owner looking to sell their property. It can provide flexibility in terms, a wider pool of buyers to choose from, and a reliable monthly income with attractive interest. This strategy is particularly beneficial for owners who own their property free and clear or have a low mortgage balance. As demonstrated in the scenario above, owner financing can also provide a substantial return on investment for the owner.