Own Finance: Definition, Example, Advantages & Risks

Finance

Own Finance: Definition, Example, Advantages & Risks

What Is a Finance Majors? Coursework, Careers, and Job Outlook

What Is Own Finance?

Own finance is a transaction in which a property’s seller finances the purchase directly with the person or entity buying it, either in whole or in part.

This type of arrangement can be advantageous for sellers and buyers because it eliminates the costs of a bank intermediary. Owner financing can create much greater risk and responsibilities for the owner, however.

KEY TAKEAWAYS

  • Own finance is sometimes called “creative financing” or “seller financing.”
  • Typically, this type of financing is disclosed in the advertising of a property when owner financing is an option.
  • Own finance requires that the seller take on the default risk of the buyer, but owners are often more willing to negotiate than traditional lenders.
  • Own finance can provide extra income to the seller in the form of interest.
  • Sometimes, Own finance is known to help a property sell more quickly in a buyer’s market.

 

Understanding Owner Financing

A buyer might be interested in purchasing a property, but the seller won’t budge from a $350,000 asking price. The buyer is willing to pay that amount and can put 20% down—the $70,000 they gained from selling their prior home. They would have to finance $280,000, but they can only get approved for a traditional mortgage of $250,000.

These loans are common when the buyer and seller are family or friends or are associated in some other way outside the deal. The seller might agree to loan them the $30,000 to make up the difference, or they might agree to finance the entire $280,000. In either case, the buyer would pay the seller monthly, principal, plus interest on the loan.

Owner financing is for just a short period, in many cases, until the buyer can refinance to pay the owner in full.

Advantages and Disadvantages of Owner Financing

Owner financing is most common in a buyer’s market. An owner can usually find a buyer more quickly and speed up the transaction by offering financing, but the seller must take on the buyer’s default risk.

The seller might require a larger down payment than a mortgage lender would compensate for the risk. Down payments can range from 3% to 20% with traditional mortgage lenders, depending on the type of loan. Down payments can be 20% or more in owner-financed transactions.

On the upside, these transactions can offer the seller monthly cash flow that provides a better return than fixed-income investments.

Buyers typically have the greatest advantage in an owner-financed transaction. The general financing terms are usually much more negotiable, and a buyer saves on bank-assessed points and closing costs when they make payments directly to the seller.

Requirements for Owner Financing

An owner-financing deal should be facilitated through a promissory note. The promissory note outlines the terms of the arrangement, including but not limited to the interest rate, repayment schedule, and the consequences of default. The owner also typically keeps the property title until all the payments have been made to protect himself against default.

The owner can fully manage some do-it-yourself transactions, but assistance from an attorney is generally advisable to ensure all bases are covered. Paying for a title search can be beneficial as well to establish that the owner/seller is, in fact, in a position to sell the property and that they can eventually release the title in exchange for financing some portion or all of the deal.

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