Owner Financing is a unique transaction where the seller of a property finances the purchase directly with the person or entity buying it. This can be for the entire purchase price or a portion of it. 

One benefit for this arrangement is that it eliminates the bank intermediary which can mean a lot of savings for the close. There are more risks and responsibilities for the parties however which is important to note. 

 

Owner Financing Scenario

 

Let’s display how this transaction would work in a scenario:

A buyer is interested in the purchase of a property with a $500,000 USD asking price. 

The buyer can place 20% down, $100,000 USD.

The buyer has to finance $400,000 USD (the mortgage amount), yet they only got approved for $350,000 from a traditional mortgage lender.

The seller can agree to loan the buyer the $50,000 USD to fill the gap between the mortgage amount and down deposit vs the purchasing price. 

The buyer would pay the seller a monthly amount that contains both principal and interest for the loan. 

 

The amount that the seller finances can be the entire $400,000 USD as well, whatever the deal terms are for the transaction.

 

More Info on Owner Financing

 

Owner financing is common in a buyers market, where the seller can more easily find a buyer and complete the transaction faster. On the downside they take the risk that the buyer may default. 

The seller may require a larger down payment, beyond the standard 20%. The seller also gets the benefit of getting monthly cash flow, with returns that can beat fixed-income investments. 

Buyers can benefit from better terms with owner financing, and save a lot on closing costs without the bank intermediary. 

 

The owner-financing deal should be done with a promissory note. This outlines the terms of the deal. The owner/seller usually keeps the property title until all the payments have been made, to protect the seller from the buyer’s default.

 

 

Sellers who offer owner financing tend to advertise that on their listing, since it is very attractive to buyers. Always ensure you review the terms of the deal, since they will vary from a standard mortgage from a lender. It’s also best to do extra due diligence, since there is no bank involved to provide a second review. 

This unique method of purchasing a property can be a great way to get started on your portfolio. With so many unique strategies to financing, finding the right one is key.