How to do owner financing in a real estate transaction
In my last post, ‘What is a lease to buy option?,’ I explained how a lease to buy agreement can help sellers sale their property to a buyer who doesn’t have the down payment.
In a challenging real estate market, it’s all about getting creative. So here’s another creative option to consider: If you’re the seller, you can also act as a partial or full lender to the buyer.
The buyer can’t come up with the entire down payment
Since the market bust of 2008, it’s harder to qualify for mortgage loans. Buyers must typically come up with a 20 percent down payment (or more), when 10 percent used to be standard. There are a variety of new lending restrictions, related to appraisal, owner-occupancy ratios in condo developments, and other issues, that can make it harder for borrowers to secure loans today.
As a result, some potential buyers are getting shut out of the market. And sellers sometimes find it more difficult to find qualified buyers.
One solution: owner financing
One way to solve this impasse is owner financing, when the seller provides financing to the buyer.
For example, let’s say you own a house in San Francisco and really need to sell. A buyer has agreed to your asking price of $850,000. He’s saved up 15 percent of the down payment, which is $127,500. But his lender requires a 20 percent down payment, $170,000.
The difference is $42,500. Not exactly something the buyer can put on his American Express card, right?
And so, in this situation, the seller might agree to provide the buyer financing for the $42,500 at an agreed-upon interest rate. The seller gets to sell the house at the price she wants, plus she earns interest on the financed amount. And the buyer gets the property he wants, though he must pay interest on the seller’s loan.
Generally speaking, the seller charges a higher interest rate than most lending institutions. The seller isn’t in the business of financing, after all. But if sellers try to charge too high a rate, they’re likely to unravel the deal.
Talk to your Realtor
Before you offer a buyer financing, talk to your Realtor. You might also need a real estate attorney or escrow officer to deal with the necessary paperwork.