An overview of selling with owner financing
This is an overview of selling with owner financing. If you want to know about buying with owner financing, I have a page for that as well. click here for buying with owner financing
I am not an attorney, I am a real estate broker in Southern Indiana and I am also licensed in Kentucky. Please seek competent legal advice before selling with owner financing. You can create serious problems for yourself if you do it incorrectly.
You can make a lot of money, buying real estate and then selling owner financing to the buyer. I am going to give you a bare bones explanation of selling with owner financing. I live and sell real estate in Southern Indiana and I am going to tell you how it is usually done here. Every state and even different areas of a state do things differently. This overview is general in nature and written for the person that is new to real estate.
I am going to talk about four types selling with owner financing, selling with owner financing using Real Estate Contracts, selling with owner financing when the seller carries the first mortgage, selling with owner financing using rent to own and selling with owner financing using rent with the option to buy. There are a million variations on the theme and I am not going to touch on creative financing on this page. I plan to write a creative financing page soon and will provide a link when it is ready.
Selling with owner financing using Real Estate Contracts
The basic description of a real estate contract is when a buyer gives you a down payment and agrees to make regular payments in accordance with a written agreement. The agreement should state the terms, interest rate, length of the agreement, purchase price and a large number of covenants regarding remodeling, refinancing, what happens if the buyer doesn’t pay, what happens if the buyer pays and you don’t release the property, and what happens if the buyer wants to sell or pay you off early. A real estate contract is a complicated legally binding document and should be written by a competent professional.
One of the things about a real estate contract is although the buyer gets possession and occupies the property, the legal title or deed stays in the seller’s name. The deed does not pass to the buyer until the property is paid in full. This gives the seller a little more control but also some liability. It does not give you the right to take the property back without agreement of the buyer or legal action. You can’t get mad and change the locks, because the buyer has legal rights and probably an equitable interest (part ownership) of the property. Disputes must be resolved by legally binding means, either agreement with proper documentation or the foreclosure process. If the buyer abandons the property, you probably have the right to secure the property to protect your interests. That is why the contract must be written properly. The rights and obligations of buyer and seller should be clearly defined in the contract. In some states, if the buyer has no equity in the property, you may be able to get the contract voided without doing a full-blown foreclosure. That is for your legal counsel to recommend and a judge to decide.
Selling with owner financing and the Seller carrying a first mortgage
This is how banks and mortgage companies typically finance property for buyers. You basically take the place of the bank. The buyer gives you a down payment and regular payments that include an agreed upon interest rate and receives title to the property. This process requires two legally binding agreements, a note and a mortgage. The note is the loan document and the mortgage is a document that states; if you don’t pay the payments, we can take the property as security for the note.
The buyer receives title to the property and on the surface, this may seem less desirable to you as a seller than a real estate contract. Any judgments or liens against the buyer attach to the property and are an issue if the buyer signs the property back to you to prevent foreclosure proceedings. Most likely, you will have to proceed with foreclosure and the foreclosure sale might wipe out the liens.
This might be a good time to mention mortgage and lien positions in title issues. You have heard the term and may have a second mortgage. Do you understand what they mean when the talk about first or second mortgages? It is important if you are going to provide owner financing. A first mortgage is exactly what it sounds like. It was placed in public record (also called recorded) first and it is first to be paid after the property is sold through the foreclosure process. The IRS is always first and state tax liens are always next regardless of the mortgage position. In the absence of government tax liens or assessments, the mortgage or judgment that was recorded first is the first to be paid and if the property sells for enough, the second, third and forth parties get paid in accordance to their position until the money runs out.
It is better to be first. There is a wonderful technique for acquiring property at a discount by buying a second mortgage on a property that is in foreclosure but that is for another page.
Selling with owner financing using Rent to own
Don’t use this method unless you are a crook. This is the method used by crooks and people that have no idea what they are doing. The buyer rents the property and gives you a small or no down payment and you give them credit towards the purchase of the property from the rent. Don’t do it! You have all the potential problems of owner financing and little or no legal recourse against the buyer. If you do this for a very short term to allow the buyer to gain equity, you might escape unharmed. I bet you don’t.
When you give the buyer credit, you give him an equitable interest, which could force you to foreclose in stead of evict and you probably have a taxable event. You probably owe capital gains tax on money that you will never receive! I highly recommend that you do not use this method.
If you are a crook, this is a good way to cheat a buyer out of a down payment and an above market rent. If you are a crook, you know more about this than me and I bet your not talking.
Selling using owner financing using Rent with the option to buy
This is one of the methods that knowledgeable professional real estate investors use to help people buy properties. Many people in my area confuse this with rent to own and use the term interchangeably. This is inaccurate. When you rent with the option to buy, you have two agreements, a lease and an option. The lease agreement handles the terms of the rent and the option gives the renter a specific legal right to buy the property in accordance with the terms of the option agreement.
If you are smart, you will use separate documents for the lease and the option. Do not mention the option in the lease and make the option contingent upon complying with the terms of the lease and make sure there is a clause that says if you have to evict the renter, the option is null and void and his rights to purchase the property are forfeit. The advantage of this method is while the buyer has the right to purchase the property, you have not given him an equitable interest and you should be able to avoid the foreclosure process. If he doesn’t pay the rent, evict him from the property. This sounds harsh but remember that you must protect your assets and if he had paid the rent properly, he wouldn’t have a problem.
As I read this page it sounds very negative about selling with owner financing, but remember, I am trying to alert you to some of the dangers. I am not trying to sell you a seminar on late night television. There are many ways to help a buyer or acquire property using creative financing, but that might require another entire web site, not just a page on this one.
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