Owner financing is very well known to sell properties quickly, particularly in cases where the properties or potential buyers do not meet the traditional lending/mortgage requirements. The seller offers to hold the mortgage deed (the owner-financed mortgage) and receive monthly payments from the buyer as does the bank.
The problem with this approach is that sometimes sellers don’t want to charge small monthly payments, but instead want to shell out cash shortly after closing to buy another property, or for many other reasons. The benefits of owner financing are many, but sometimes these aren’t enough to help seal the deal.
Basically, this is how an owner-financed mortgage note works:
1. The seller sets the sale price according to the exact appraised value and announces, “Owner will finance… no qualified bank!”
Interested buyers go through a pre-qualification process to identify the best potential customer.
2. The buyer and seller agree to the structure and terms of the memorandum to be created (note that the buyer may make some suggestions) and sign the property purchase contract.
3. At closing, the seller creates a first mortgage and shortly after sells/assigns the mortgage deed to the debenture buyers.
4. The seller receives the buyer’s down payment in addition to the proceeds from the sale of the bond. In the case of a seller-financed bond purchase, the note buyer typically covers all closing costs and the cost of appraisal of their own property.
Let’s say the seller owns a property valued at $100,000, but because it’s not a matching lot, he’s having problems getting qualified buyers. Buyers do not appear to commit to buying and those who do, do not get the bank’s approval of the mortgage.
The seller listed the home at $90,000 and expects to get $80,000-$85,000 after paying incentives and costs. But even this price does not attract real buyers.
This is where the note buyer can step in. The seller is advised to create a $90,000 note, and the remainder ($10,000) will be the down payment. The interest would be 8%, for 360 months, you pay $660.39 per month (principal + interest).
A buyer of note will purchase this note for approximately $80,000 in cash shortly after closing on the property. Add to that the down payment, and the seller gets a total of $91,000 (minus the closing costs of the real estate transaction).
Soon after the property closes and the new note is registered, the buyer buys the paper and the seller gets his money back. An excellent example of how an owner financed mortgage can sell real estate. And there are no hidden fees or costs other than the normal property closing costs that have to be paid anyway. Bond buyers generally cover all closing costs of purchasing the bond.
This approach attracts a large number of buyers and within a few days, the seller can have their cash in hand.