Finance

How does owner financing work

How does owner financing work

How does Owner financing work or the term owner financing is also known as seller financing. Owner financing is a case in which the owner of the property lend money out to a buyer to buy the property from him (owner). For example, Mr John who does not have money on him to buy a car from Salvardorr Business Enterprises, goes to the owner of the company that he wants to buy the car but do not have money on him, Mr Salvardorr then lends him money to buy the car. In this case we say there is owner financing as Mr Salvardorr who is the owner of the car is the one that indirectly pay for the vehicle into the Salvardorr Business Enterprises account. In owner financing, the seller and buyer sign a promissory note issuing an interest rate, the time of repayment and the consequences of elapsing the default (the money paid here is called finance charge).

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Owner financing provides the buyer the opportunity to make mortgage payment to the seller who gets the interest than he could get elsewhere weekly or monthly at a higher rate. Arrangements in owner financing are usually within five years on short terms basis. The purpose of this is for the buyer to be able to refinance at the due end of the mortgage payment.

How does owner financing work

This kind of arrangement is not common because of the trust issues or orientation about the seller that he does not involve in lending. Some believes owner is very risky as the buyer might not pay back and this is so because there must be full proceedings on the property sold before another property can be bought. There is this problem  according to a real estate investor in central Florida, Robin Daniel, of people not knowing that the promissory note held with them could still be sold to another person if the buyer refuses or could not pay back . The sellers can do this on the closing date and gets his cash straight up. So sellers do not need to have the cash or becomes a lender before they can engage in owner financing.

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Typical owner financing terms

There are many reasons why many sellers engage in the term, how does owner financing work, some of the reasons are stated below.

  1. To get the property sold out quickly and remove off the list of other documents. They try to get the property out quickly before it starts losing its value. Properties like cars that are liabilities and lose value quickly are usually owner financed.
  2. To get a higher returns in buying another property.
  3. To get rid the monthly expenses in taking care of the properties while waiting for a buyer that can buy the property at once.
  4. To get rid all bills and fees paid on owning the property. E.g. Tax.

Typical owner financing terms are does not just benefit the benefit the buyer who could not buy the property with immediate fund but found way to get the property without paying bank charges, it also benefits the seller who gets extra down payment for the property being sold out on owner financing.

Is owner financing safe

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How does owner financing work is simply what you want as a seller, there are some steps or ways to go about it to get it done quickly.

  1. Get it down to the list of the property to be sold. As a seller who want to go into owner financing for the first time, you should make your intention know to the people by including it in the list alerts for the property. ‘SUV 2018 HERE. OWNER FINANCING AVAILABLE INCLUSIVE’. This would get the attention of people when they want to buy the property.
  2. Make it always available even when you are not around at the moment. Make the information to be clear enough without explaining to the buyer when you are not around to make clarification.
  3. Make promissory note available always whenever a buyer wants to buy your owner financed property. Make them to understand terms and conditions and the interest before they sign the promissory note. If they are to pay 30% of the payment every month or weeks should be stated clearly to avoid argument in the future. You can also include finance charge.
  4. You can sell the promissory note to another buyer who was ready to pay cash if the former buyer could not pay at due end as was said by Robin Daniels.
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Harish Yadav

Finance and market analyst and chief writer on howtofinance. Passionate to read books and articles on marketing and accounting. Also edits other articles and publish them here.

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