How to Sell Your House Quickly!
Owner Financing Real Estate and other Creative Transactions
You, as a homeowner, can act as the bank and finance the purchase of your home or property. Read on to understand the different approaches to providing owner financing. One or more approaches may appeal to you if you want to sell quickly!
To understand owner financing, it is important to review how a standard loan is used to purchase a property.
When a house is sold, the seller transfers the property deed to the buyer at the closing. The buyer’s lender gives the buyer cash to pay the seller. In return, the buyer signs a promissory note for the lender. The buyer also provides a security instrument, known as a mortgage or deed of trust, which pledges the property as collateral for the loan. If the buyer stops making payments, the deed of trust allows the bank to foreclose on the property. To complete the transaction, the buyer has the property deed (i.e., deed of title) recorded in his name and the lender has a lien recorded on the property through the deed of trust.
In this option, the property owner, or seller, acts like a bank by providing financing to the buyer. If the seller owns the property free and clear (there is no mortgage), the seller can accept a promissory note from the buyer for all or part of the purchase price at a negotiated rate of interest and loan term. The note is secured by the property in a deed of trust that is signed by the buyer. When the transaction is complete, the buyer has the title recorded in his name and the seller has a lien (mortgage or deed of trust) on the property. If the buyer stops making payments, the seller may foreclosure on the property and get the property back just like a bank.
Benefits: This option provides a great deal of flexibility.
- All the sale terms, like interest rate and length of loan, are negotiable between the seller and buyer.
- Closing costs can be minimized.
- No lengthy loan qualification process is necessary.
Qualifying for a home loan in today’s market is challenging for many potential buyers. Thus, providing financing may help an owner sell their property quickly because the potential pool of buyers is expanded. Similar to a bank, potential buyers are pre-qualified to ensure they can afford the payments. The seller’s interest in the property is secured with a deed of trust in the event the buyer stops making payments.
This is a viable option when there is equity in the property and the owner wants to avoid large capital gains taxes when they sell. Taxes are only paid on the amount of cash received in payments during the year. Seek tax advice from an accountant.
A wraparound mortgage is where the seller deeds the property to a buyer subject to the seller’s existing loan. The buyer signs a note to the seller that is secured by a deed of trust on the property. At the closing, the buyer receives title to the property and the seller receives a second mortgage, which is junior in position to the existing first mortgage. The second mortgage “wraps” around the first. This is also known as an All-Inclusive Trust Deeds (AITD).
For example, if the property sales price is $100,000 and the seller owes $80,000, the buyer may put $10,000 down and sign a note for $90,000. The seller collects on the $90,000 note (with principal and interest) and continues to pay his underlying mortgage of $80,000, pocketing the monthly difference.
The wraparound mortgage may also “mirror” the terms of the first mortgage. In the above example, the seller pays $20,000 down and signs a note that is the same as the balance and terms of the seller’s underlying $80,000 loan.
Benefits: The benefits of a wraparound mortgage are similar to the basic owner-carry transaction. Additionally, a seller can capture additional monthly cash flow without requiring the buyer to secure a bank loan. The buyer pays not only the first mortgage held by the seller, but pays monthly on the second mortgage to the seller. This is cash is the seller’s pocket. The seller only pays taxes on the payments made throughout the year, not on the entire loan amount.
Disadvantages: Although the property deed is transferred, the first mortgage stays in the name of the seller. If the buyer quits making payments, the seller must make payments to the bank to prevent foreclosure. However, the seller may foreclose on the buyer via the deed of trust for the second “wraparound” mortgage and get the property back.
Installment Land Contract
Another form of owner financing is an installment land contract (ILC). In this option, the seller keeps the deed to the property. The buyer makes monthly payments to the seller and in return receives equitable title to the property. When the buyer fulfills all the payments, he receives the deed to the property. Typically the seller signs a deed that is placed in escrow with a title company to ensure that the buyer will get title if the seller disappears.
Benefits: An ILC is just like a car purchase – a buyer purchases a car using bank financing (seller). They drive and maintain the car and have all rights of ownership as long as they fulfill the monthly payments. The bank (seller) holds the car title for security until the car is sold and/or the debt is paid off. An ILC works in the same fashion. Another advantage is that an ILC may be the only way a seller has of selling an otherwise hard to sell property that may not conform to traditional lending guidelines
Disadvantages: An ILC normally requires a lower down payment because the buyer does not receive title.
If the buyer defaults on the loan payments, the seller is entitled to have the escrow agent return the escrowed title to them and to gain immediate possession of the property. However, foreclosure proceedings could be required because of the buyer’s equitable interest in the property.
A “lease purchase (or lease option)” is the abbreviated form of the term “lease with option to purchase.” A lease purchase contract combines a basic lease (like a rental lease) with an option to purchase contract within a pre-determined period, usually 2 to 3 years, at an agreed-upon price. The tenant buyer pays an option fee that is credited to the purchase price. The tenant buyer pays rent, and an additional rent credit that is also credited to the purchase price. During the term of the lease, but before the option expires, the tenant buyer has exclusive right to buy the home under the terms to which both parties have agreed to in the option contract. If the option to purchase is not exercised, the buyer forfeits both the option fee and any rent credit.
Benefits: There are many benefits related to this option.
- Sellers can realize positive cash flow.
- It provides the largest market of buyers.
- Seller faces minimum risk because the title remains in their name until the option to purchase is exercised.
- No commissions or fees to pay.
- No landlord responsibilities – tenant buyer takes responsibility for most maintenance.
- A non-refundable option fee.
Disadvantages: A tenant buyer may choose not to exercise their option to buy. However, if they do not buy, the seller retains the option fee. Option fees are usually 3.5% to 5% of the sale price, but can vary.