What to look for when buying with owner financing
This is an overview of buying with owner financing methods for the buyer of real estate. If you are interested in the Seller’s perspective, I have a page for that as well. click here for selling with owner financing I am not an attorney. Please seek competent legal advice before doing something that you might live to regret. I sell real estate in Southern Indiana and these methods are from my experience, I guarantee you that your state’s real estate laws are different than mine and owner financing is done differently in each area of your state. You will need more information than this page provides to properly protect your interests.
There are two primary reasons that someone will agree to sell you a property and provide financing. Both reasons involve profit. They are getting at least top retail dollar price for the property and maybe a premium or they wish to spread out the capital gains tax through an installment sale. There are other reasons, but these are the two I see the most often. If you happen to get lucky and find someone that just wants out of a property, you can do very well. That happens but not often.
Here in Indiana we have four methods of buying with owner financing that are used on a regular basis. There are a lot of methods for buying with owner financing and there are many variations, but this is an overview, not a college term paper. Buying with owner financing using a Real Estate Contract, buying with owner fianacing and the Seller holding a first mortgage, buying with owner financing using rent to own and buying with owner fianacing using rent with the option to buy are the four that I will discuss today. I will attempt to explain a little about each method and point out drawbacks from the Buyer’s perspective.
Buying with owner financing using a Real Estate Contract
The buyer and the seller agree in writing to a price, interest rate, payment schedule and a large number of covenants regarding possession, repairs, who does the maintenance, who pays the taxes and how they will be paid and the most important is what happens if the buyer doesn’t pay or the buyer pays and the seller gets greedy. There are many more covenants that should be included, like what if you (the buyer) want to remodel? Should the seller have the right to approve the changes? All these things have to be worked out in advance so that you don’t end up in court or cheated.
Typically the buyer gives the seller a down payment and starts making regular payments to the seller or the seller’s agent. A very important point to note is the property usually stays in the seller’s name until it is paid in full. The Buyer does not receive a deed to the property until He pays in full. This can be a serious concern to the buyer, because the down payment could be at risk. Any liens or judgments paced against the seller will also attach to the property that you are buying. If you are the seller, any liens or judgments against the buyer probably will not attach to the property unless they are mechanics liens, taxes or property specific, in which case you might be notified of the lien.
Basically, the buyer gives the seller a down payment and regular payments as agreed and the seller gives the buyer a deed to the property when it is paid in full. There are a million things that can change over the course of a long-term agreement and if you want to sell the property before it is paid in full, the seller will have to agree and sign the deed to transfer the property to the new buyer. If your attorney does a good job, there should be a covenant covering this contingency.
Seller providing a first mortgage.
I believe this is a method that is better for the buyer than a real estate contract. It isn’t bad for the ethical seller, but it limits the shysters and they usually won’t agree. Do not assume that a seller is a shyster because he doesn’t want to carry a first mortgage. His financial situation may not allow him to use this method or he may have gotten burned in the past. Once bitten, twice shy. The method is very similar to a real estate contract, but the legal documents are different and title passes the buyer at the closing. This is how banks and mortgage companies finance properties. The buyer signs a promissory note and a mortgage to secure the note.
I am going to slow down a minute for the clueless. When people say they are getting a mortgage, what they actually have are two different legally binding agreements. They sign a note which is the legal term for a loan and they give a mortgage which is a legally binding document that states, if I don’t pay the loan back, you can take my property. Most people find it strange that they get a loan but technically give a mortgage. The bank gives a loan and takes a mortgage as security for the loan. The only people that find that even remotely interesting are fat bald real estate people that set around and write web pages.
The advantage to you as a buyer is the property is in your name and it is much easier to remodel, refinance or resell. If you have an ethical seller, take could care of the property and you make your payments on-time, you will probably never have a problem with a real estate contract, but this page is about avoiding problems.
Either method requires the seller to use proper legal methods to reclaim the property. It must be by agreement or by legal action. The seller can’t just kick you out on his own or change the locks with out proper authorization. Unless, you abandon the property, the seller (unless he is an idiot) has a covenant in the mortgage or contract to allow him to protect his interests. Any resolution of a problem that you both agree to is fine as long as it is legal. If you have a problem and you and the seller cannot agree or one of you fails to live up to their agreement, you are headed for court.
Buying with owner fianancing using rent to own
If you find a seller that will let you use this method, I guarantee he doesn’t know what he is doing or he is crooked as a barrel of fishhooks. This is where you rent the property and the seller gives you full or partial credit for the rent towards the purchase of the property. If it is a short-term agreement that allows you to build some equity, the seller may be okay, but if it is long term, the seller has some serious challenges if you don’t pay your rent. If you have an ownership interest, the seller must foreclose; he can’t just change the locks or go through the eviction process. The seller has little or no down payment to cover lost rent and legal fees and he still has to go through with foreclosure proceedings.
I wish that everybody involved in real estate was completely ethical, but a few are not, so pay attention and get proper legal advice. Now if the seller plans to cheat you from the very beginning, he may use this method to get your down payment and rent and not really give you a legally binding right to purchase the property or build equity. If you use this method to purchase a home, get everything in writing and keep your copies!
Buying with owner financing using rent with the option to buy.
This is one of the methods that a knowledgeable seller will use to help you purchase a property. You once again have two legally binding agreements. A lease to handle the rental agreement and an option that gives you the right to purchase the property at a specified price by a specified date in accordance with the terms of your agreement with the seller. These agreements may be on one document or they may be separate documents. A knowledgeable seller will have separate documents.
The lease agreement says, you will pay x number of dollars per month and have clauses to explain what happens if you don’t pay or violate the terms of the lease. The option agreement gives you the legal right to purchase the property inside a specified time frame. It might be a month, a year, a day, or many years the length of the option and the terms of the purchase for you and the seller to agree upon. The option agreement gives you the absolute legal right to purchase the property in accordance with the terms of the option agreement. A knowledgeable seller will not let you bind him to a purchase price and terms for free. Expect to pay for the option.
The seller can also carry a second mortgage, help with closing costs and down payments or provide partial financing but I consider that to be creative financing and I will have a page about that soon.
In conclusion I have to explain there is no way that I can cover every aspect of owner financing on this page and there are always special circumstances. This is just a general overview of what may happen here in Southern Indiana and is no way set in stone and may not apply to you or your situation.
Good luck buying with with owner financing, you can email me with questions, but I will probably tell you to seek competent legal advice from a professional.
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