Top 7 Tips to Protect Sellers who Owner Finance

Why Seller / Owner Financing

Interestratesareontherise.

Sellerswantfullprice.

Buyersstruggletoqualifyforfinancing.

What'stheSolution?

In an effort to stand out from the crowd, sellersareturningtoownerfinancing. By accepting payments over time from the buyer, the seller provides an alternative to bankfinancing.

Why agree to "Be the Bank" and offer financingterms?

The Owner Financing Solution

Usingthephrase"OwnerFinancingAvailable"in forsaleadsandlistingswillattractmorebuyers. Buyerscanavoidtheexpenseofabank mortgageandstrictapprovalguidelines.In exchange,sellerscangetabettersalesprice andsellthepropertyquickly(withoutmultiple pricereductions).

Itcanevenprovideinterestincomethatbeats inflationandoffersapotentialtaxstrategyto investorssubjecttocapitalgainstaxes.

Ofcourse,itisimportanttoprotectyour valuableassetbytakingsomeimportantsteps.

7 Tips to Protect Sellers who Owner Finance

Tip#1-Reviewthe Buyer'sCredit

Howbuyershavepaidbills inthepastisagood indicatorofhowtimely theywillmakefuture payments.Alwaysreview thebuyer'screditpriorto acceptingapromiseto pay.

Sellerscanobtainasigned authorizationfromthe buyertopullcreditthrough areportingagency,or simplyaskthebuyerto obtainacopyofhisorher reportforreview.Mostnote investorsprefercredit scoreabove650.Ifthe scoresarelower,itwill likelyreduceanyoffersto purchasethenoteafter closing.

Tip#2-Geta DownPayment

Themoremoneyabuyer putsdown,themore“skin” theyhaveinthedeal.The greatertheequity,the lowerthelikelihoodthe buyerwillstoppaying.A downpaymentof20%is consideredstrongand anythingunder10%carries risk.

Whenpeoplehavelittleto noequity,theyaremore likelytodefaultorjustwalk awayfromthehome.Few sellerswantthehassleof takingbackaproperty throughforeclosure,so increasetheoddsinyour favorbyrequiringadown payment.

7 Tips to Protect Sellers who Owner Finance

Tips to Protect Sellers who Offer Owner Financing

Tip#3-Verify Affordability

Ifabuyercan’taffordthe monthlypaymentsitsoon resultsinlatepaymentsor worse,nopayments. Buyersshouldbewillingto sharetheirjobhistory alongwithhowmuch moneytheymakeeach month.Paycheckstubsor taxreturnscanhelpverify theincome.

Acommongaugeofaffordabilityistokeepthe housingexpensearound27-30%ofincome.The monthlyhousingexpenseisacombinationofthe principalandinterestpaymentplus1/12thofthe annualpropertytaxandinsurancebills(known asPITI). AMortgageLoanOriginator(MLO)can helpreviewthequalificationsandprovideany disclosuresunderDodd-FrankortheSafeAct.

Tips to Protect Sellers who Offer Owner Financing

Tip#4-Set ValuableTerms

Thetermsincludeinterest rate,paymentamount, andtheduedatefor paymentinfull.Thereare alsolatefees,default clauses,requirementsfor insurance,andother standardprovisions.

Whilethetermscanbewhateverthebuyerand selleragreeupon,sellersthatcharge2-4%above thestandardmortgageinterestrateincreasethe valueoffuturepayments.Thebuyerstillsaveson theexpensiveloanfeesandtheselleris compensatedforhavingtowaitforpayments.

Chargingabelowmarketratemeansthebuyeris unlikelytorefinanceinthenearfuture.Italso resultsinahigherdiscountshouldthenotebesold.

Tips to Protect Sellers who Offer Owner Financing

Tip#5-SeekProfessionalHelp

The legal documents are an important part of safe seller financing. They put the agreement in writing and make sure the terms can be enforced. The do it yourself approach is great for some projects but when it comes to legal documents seek the help of an attorney and/or title company familiarwithlocallaws.

Theseprofessionalshandlethe closingandpreparethedocuments. TheywilllikelysuggestaPromissory Notefortheobligationtopaywitha MortgageorTrustDeedrecordedin thecountyrecords.Insomestatesa ContractforDeedorRealEstate Contractcanbeanalternative option.TheHUD-1Settlement Statementitemizesthesalesprice andpaymentofclosingexpenses.

Tip#7-TrackTaxesandInsurance

Making sure the buyer keeps taxes and insurance current is right up there with collectingtimelypayments.Acheckwiththe county where the property is located will verify if taxes have been paid current on theirduedate.

Whenthepropertyincludesa homeorbuildingsthe documentsshouldrequire insurancetoprotectagainst fire,hazard,orflood(ifina floodzone).Thebuyercan provideacopyofthe insurancedeclarationpage, showingthesellerasaloss payee.Acalltotheinsurance companywhenpremiumsare duewillverifythecoverageis beingkeptcurrent.