Considering Selling Your Property Owner Financing?
So we’re assuming you have a property you’re debating selling (or buying for that matter). You might be interested in seeing what other selling avenues are possible, besides the ‘Traditional Sale,’ and have heard the term “Owner Financing” or “Seller Financing” and that piqued your interest. Let’s talk about that traditional method we just mentioned…
The ‘Traditional Sale‘
Everyone knows of the ‘Traditional Sale’ in real estate; you go out and find a real estate agent, they give you advice on what to fix, and what to keep. They then list your property and it is now “on the market.” Days, weeks, or months go by, and then voila – you finally (hopefully) find your end-buyer. Then you schedule closing, which usually takes 30-60 days, and then you (again, hopefully) get a large check from the closing attorney after you sign the closing documents.
By all means, this is a great method to sell if you aren’t in a rush and don’t mind a few headaches. In face, this method option often nets you the most cash, UNLESS… you sell to a savvy buyer like us who can sometimes pay over market value. Anyways, back to the good stuff :).
What MOST people, and real estate agents, surprisingly, do not know, are all of the other possible ways to sell a house. You don’t always have to list it on the market, pay agent fees, wait several months, deal with showings, etc. You can find a buyer to purchase your house on terms (we’re just going to use the word ‘terms’ to make this easier to understand). Now, what exactly are “terms?”
Buying or selling a property on terms is exactly what they sound like; the seller and the buyer agree to a specific set of terms and sell the property according to those…you guessed it…terms! The terms may include down payment amount, monthly payment, duration of payments, and interest rate. It can go even more in depth to specify if the payments are principal and interest, principal only, or interest only. Or, maybe the payments are just interest only until 12 months, and then they’re principal and interest…you get the point. There are a thousand ways to sell on terms. The main two are Owner Financing (also referred to as Seller Financing), and Subject To.
This is when the property is fully paid off, or free and clear, as we like to call it. This is where the seller and buyer are the most flexible when it comes to which terms are to be fulfilled. Generally, the seller and buyer just agree on a down payment, monthly payment, and length of term. Then, once agreed on, the buyer and seller enter into an agreement and the title company will open escrow, just like any other property purchase.
Before the property is actually sold, there will be a promissory note which is a legal document, often drafted by closing attorney, that states the amount in which they are owed (those terms above that we just mentioned) – this document is aimed at protecting all parties of the transaction. Consider this a fancy, official and legal IOU. Once the property is officially sold, instead of the seller walking away with the full purchase price amount in their bank account, they will walk away with the down payment paid by the buyer. The seller, in this case, now is a first position lien holder on the property they just sold. Much like Bank of America, or Wells Fargo would be if you were to go out and get a mortgage with them.
Existing Mortgage in Place – “Subject To”
It’s not always as cut and dry as just coming up with terms like when you’re dealing with a ‘blank slate’ in the free and clear scenario above we just mentioned. Oftentimes, there is an existing mortgage in place. So, what do we do in this scenario? In a Subject To transaction, the buyer purchases the property “Subject To” the existing mortgage or existing debt. The existing mortgage would remain in the seller’s name, and the buyer would make payments on their behalf until the loan is fully satisfied – whether that’s from a future sale or it gets paid monthly until the loan balance goes to $0. Again, the title company will make sure all paperwork is set in place so that all parties are properly protected.
Risks of Selling A Property “Subject To”
You might be saying, isn’t there risk to the seller in this case? Yes, the seller must have some trust in the buyer as they are going to be making payments on the property on the seller’s behalf. For example, when we buy houses, we put what’s called a Performance Deed in place to even further protect the seller. We have never defaulted on a loan before, but this is just for extra protection and peace of mind. The Performance Deed states that should we ever default, after 31 days (or another specified duration), if no payment is still received, the original seller would have the property deeded back into their name.
How are payments handled?
This is ultimately up to the seller and the buyer, however, it is recommended to use a Servicing Company. A servicing company is a third party company that ensures every party in the transaction gets their payment, and gets it on time! We use WestStar personally. They administer the late fees, so the seller (or party receiving payments) isn’t scrambling at the 1st of every month, contacting the buyer wondering where their money is. Let the servicing company handle all that!
Ask Us Any and All Questions!
If you’re debating selling your home in one of the avenues mentioned above, reach out to us for any help or guidance. As experts (nerds, really) in creative financing and giving sellers legitimate top dollar for their properties, we’d love answer any questions you may have. We may even be able to purchase your home for above-market price! Even if we aren’t the best buyers for you, we can walk you through any options or even help structure a deal for you. Consider it a ‘Thank You’ for reading this far :). Happy Selling (or Buying)!