Owner Finance Homes

Purchasing owner finance homes may seem like an attractive option to many individuals.

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In such cases, the owner (or the seller) of a property essentially lends you the money, financing the purchase of their own previous property. Purchasing a home financed by the owner usually means lending can occur without the need for a bank because the previous owner essentially is the bank, loaning the money necessary to cover the cost of the purchase. As with any financial venture, owner financing comes with the possibility of great reward, but at the expense of great risk.

Owner finance homes can come in a variety of different situations. For example, land contracts become the property of the buyer (he or she receives the deed) once an owner financed contract is paid in full. Lease purchase agreements work similarly to rent-to-own agreements, wherein the property is leased to a buyer until the terms of the agreement are met. Promissory notes and mortgages can also be sold to buyers through owner-financed agreements. In all of these situations, owner financed homes are eventually purchased in full by the buyer, with the original owner acting as the lender.

Owner finance homes work for several reasons:

• The owner can charge more money than a mortgage requires to a buyer with poor credit
• The owner may collect interest
• Tax advantages may result in a greater monetary gain.

One of the biggest reasons owners offer financing is to open up an available home to a much wider market. More people will be able to pursue the property, resulting in a much quicker (and potentially hassle-free) transaction. Owner financing often works to the benefit of the owner of a property.

Purchasing owner finance homes is attractive to the buyer as well as the lender. This is the case for several reasons.

• Individuals with low credit scores need not worry about being turned down by bank after bank in an attempt to procure the necessary loan amount.
• The middleman is done away with, so to speak.
• Sellers might require little to no down payment for an owner financed property, which means individuals and families will not need to scrimp and save to come up with the recommended 20% down payment of the full purchase.
• Financing may often be tailored to the needs and requirements of those seeking to buy, so less-than-interest or early interest-only payments become possible for buyers, even those that have poor credit.

In short, properties financed by the owner do not include some of the restrictions—practical or monetary—that often prevent banks from lending money to certain individuals.

Owner financed homes also have a few notable drawbacks. The buyer’s financial station weighs heavily on the payments that must be paid. Commonly referred to as balloon payments, lenders might set up a system that requires the interest to be paid off first, usually in small increments, and then the principal loan is paid back in much higher amounts.

For individuals who anticipate making more money down the road (for example, if loans or debt will be paid off before the principal is due), such a situation may work to the benefit of the buyer; however, by and large, such a payment plan has the potential to trap the buyer in just a couple of years. In these situations, if the owner wants a 30-year loan paid off much earlier, the buyer may end up scrambling to pay off the principal.

Homes financed by the owner, while they provide both attractive benefits and obvious drawbacks for both parties, can work to everyone’s benefit if the transaction is pursued with care. They may also work to the detriment of all parties if the purchase and loan payments are poorly planned, ill-conceived, and designed without regard to everyone’s needs. When looking to purchase a property financed by the home owner, you should consider in detail the benefits of going forward with such a plan instead of carefully planning out financing through a bank or lending firm.

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