If you’re thinking of selling your house using owner or seller financing, make sure you read our 2021 ULTIMATE GUIDE to Owner Financing to learn the ins and outs of this house selling strategy. Owner financing can be a safe, secure, simple way to sell your next property without having to worry about a buyer going to a bank and determining whether they’ll lend the funds to a would-be buyer. There are benefits and drawbacks to owner financing so make sure you research any opportunity thoroughly.
Owner Financing Defined And How You Can Use It To Sell Your Home
Buying a home can be an exciting new step in life as you move up from a rental or into a larger home to accommodate your growing life. It’s a time full of possibilities and dreaming as you look from one house to the next and see yourself living there. But the one question that every potential buyer has is, how will they pay for it?
Most people have heard of bank financing, where you get a mortgage loan from a bank or mortgage lender and you pay it off over time. But there’s also seller financing (also called “owner financing”) that you can get as well. So maybe you’re wondering, “what exactly is owner financing and how you can use it?”
Owner financing is when a house buyer skips the step of going to the bank to get a mortgage and instead the owner/seller of the house acts as the bank. In other words, the buyer will still pay a monthly payment but instead of paying that mortgage payment to the bank, the would-be buyer will pay the ‘lender’, which is the homeowner in this example.
It’s very similar to getting a loan from one individual to another, but instead of getting a large sum of money up-front, the owner is letting you purchase their property by making payments directly to them over time. You pay the owner of the house month by month, according to an agreement you create together. Over time you’ll pay down the principal; arrange seller financing for a long enough time period and you’ll pay off the house and own it outright.
How Can You Use It?
You can use owner financing to sell a multi-family property, single-family home, duplex, townhouse, condo, or even bare land in any real estate market. When you find a property you want to purchase you simply go to the owner and ask them if they’d consider owner financing said purchase rather than waiting for you to see if you can qualify for bank financing.
Owner financing is surprisingly common and used in a number of different ways – from first-time homeowners with bad credit, to real estate investors who cannot or do not want to use their own credit to acquire an investment property.
That brings us to our next step. How does one calculate the principal and payments?
How To Calculate An Owner Financing Mortgage
Most people think that a formula is what they need but we know the information you really need when you ask that question so that’s what we’ve written below…
When you buy a house the traditional way, you go to the bank and get a mortgage. They give you the money for the house and you pay it off.
But not everyone wants to go to a bank or financial institution. Some potential buyers may have even been rejected by their financial institution because they started a new job or started a new business.
With owner financing or seller financing, you bypass the bank, and instead, the seller simply continues owning the house while you pay the seller (just like you’d pay the bank). And when you’ve paid off the agreed price of the house, you own it!
So if you plan to sell a home using owner financing, you’ll want to structure an agreement with the seller, you’ll want to know how to calculate owner financing mortgage. So here’s how to do it:
First, Figure Out The Terms Of The Agreement
You’ll need to agree on the terms, such as the selling price of the house, the down payment, the interest rate of the loan, the length of time that you’ll pay it off, minimum monthly payments, and who is responsible for what while you’re living in the house.
Second, Make Sure It’s A Win/Win
This is the key part of structuring a seller financing agreement and calculating it correctly: you need to make sure it’s a win for both you and the seller. Look at the terms and ask yourself the following questions:
- Is the sale price of the house fair?
- Can I afford my monthly payments?
- Does the seller benefit from the amount of each monthly payment?
- Will I be able to afford any additional costs (such as repairs) that I am responsible for?
Asking yourself simple questions will help you know if you’ve calculated affordably. And don’t just think about today; consider your circumstances in the future, too. Will your income increase? What happens if you lose your source of income? What happens if the seller wants the house back?
Third, Write Everything Down Into An Agreement
Write everything down into a simple contract. It’s always a good idea to have an attorney review the agreement since a few hundred dollars in attorney fees can save you tens of thousands of dollars in hassles, misunderstandings, and even lawsuits in the future.
Seller financing is a great way to buy a house without having to go to the bank and these three simple steps will help you figure out how to calculate owner financing mortgage in a way that will work for you and for the seller, both and in the future.
So now that we have covered the basics of owner financing, we will refine the process a bit further and make several suggestions to ensure the process goes smoothly,
6 Tips for Using Seller Financing
There are many ways to sell your house. You could list it on the market and see what sellers will pay. You could work with a real estate buying company (like what we do here at Sunrise Home Buyers) and get a fair all-cash offer, or you can consider owner financing and “be the bank” to sell your house to a buyer and collect payments over time.
Owner financing is a valuable but under-used strategy to sell your house. It’s where you, as the property owner, agree upon payment terms with a buyer to pay you regular payments (just like a mortgage). Here are 6 owner financing tips for sellers in Edmonton…
Don’t JUST Focus on the Sale Price
Price is just one component. Of course, you’ll want to find a price that is fair for both of you but there are other considerations as well (which could benefit you more than the asking price).
Consider The Timeline of the Transaction
Think about the timeline you want to be paid in. Banks might offer 5, 10, 15, 20, and 25-year mortgages. Do you want to accept payments over that period of time? Your buyer will want to find a timeline that works for them, too: they might not want to be paying you 25 years down the road!
Don’t Forget About the Terms of the Deal
The terms of the deal are one of the most important yet most overlooked parts of the deal. The terms might include things like how much down payment you want if there’s an early repayment penalty or a late payment penalty, and most important – how much interest you charge.
Always Protect Your Investment
Even if you enter into an agreement with someone who is completely trustworthy, things could still go wrong – so make sure you protect yourself. Never forget Murphy’s Law. For example, make sure you have insurance and the other person does as well for the various situations that could occur. And consider including a clause that retains the ownership of the house in your name until the house is fully paid.
Have a Plan if Things Don’t Go as Planned
Most of your owner financing agreement will be built around the “ideal plan” – of what would happen if everything goes perfectly. But sometimes things happen outside of our control, so building contingencies allow you to make better decisions if the unexpected happens. For example, what if the buyer no longer wants the house, or can longer pay, or wants to pay early, or wants to use the house in a different way than expected? Or what if your circumstances change and you no longer want to sell or you need to sell even faster? Agree to the contingencies with your buyer ahead of time and the arrangement will be so much smoother.
Always Hire Legal Counsel
No matter how you ultimately structure your owner financing deal, make sure you work closely with an attorney who can help you. A poorly worded agreement could end up hurting you; an attorney can help.
So….what’s not to like when using seller or owner financing to sell a home? Well, there are some precautions you need to take. And if the process seems downright daunting to you, there’s always the option of selling your home to Sunrise Home Buyers.
But if you aren’t feeling intimidated yet and owner-financing still interests you, read further to learn some of the potential pitfalls of seller financing.
5 Disadvantages of Buying a Home via Owner Financing
When a seller wants to sell their home, they could wait for buyers to come up with bank financing, but there’s another option as well: they can offer owner financing (also called “seller financing”) in which the seller acts as the bank. The buyer simply pays monthly payments to the seller until the house is paid off.
For many people, owner financing is an excellent alternative because it allows buyers to get into a home that they might not have the credit to purchase, plus it gives the seller a steady cash flow if they don’t want or need a large amount of money from the sale of the house.
But is owner financing right for everyone? It may not be.
#1. Seller Financing Can Be Harder to Get
Bank financing is the most common way to sell so some owners might not be aware of owner financing as an option to sell their house. (However, we do owner financing and it’s very common at our office so give us a call at (587) 982-7576 to talk to us about our owner financing options).
#2. There Are Fewer Options When Buying A Home
Because it can be harder to find an owner willing to do owner financing, that might mean you have fewer potential houses to choose from when buying, or it might mean that you have to look at more houses before you find one that the owner is willing to sell through owner financing.
#3. YOU Decide The Terms For Any Agreement
Owner financing comes with many more flexible terms than you might normally get at a bank. However, this can also be a disadvantage because if you are not familiar with all the possibilities you may overlook a term or you may create a term that does not give you an advantage.
#4. You May End Up Paying More
With traditional bank financing, the interest rate is set by the bank. Owner financing may have higher interest rates (depending on the other terms of the contract) and you might end up paying more for the house. But consider that you might be better off in the end if it means you can purchase a home that you couldn’t otherwise get into.
#5. Can The Homeowner Be Trusted?
With bank financing, you work with a bank and they are professionals who have a code of conduct and industry regulations to follow. But with owner financing, it’s just an agreement between you and the owner so make sure you are comfortable with the owner first before making an agreement with them.
The Owner Financing Process – Step By Step
Buying a house can be costly, which is why many buyers go to the bank to get a mortgage. But a bank mortgage isn’t right for everyone.
If you want to sell a house but aren’t interested in selling to a buyer needing bank financing, seller financing can be a great option – it’s where the seller “sells” their property but instead of paying the seller one lump sum payment (through a mortgage from a bank), they simply pay the seller monthly payments (like mortgage payments) until they’ve paid the full purchase price.
To the buyer, it’s just like a mortgage; to the seller, it’s a regular amount of money every month. It can be a win/win arrangement. But what is the process for owner financing in Alberta?
Complete Your Due Diligence
Read up on owner financing and ask questions of people who know about it. Learn everything you can about owner financing, including your local laws. Every state, county, and city may have its own regulations about mortgages, real estate loans, owner financing, and legal agreements. You should always consult with a lawyer.
Ask Sellers Whether Owner Financing Is an Option
While you’re looking at houses to buy, ask sellers if they’d be interested in an owner financing scenario. Often, people will say no. However, you may find sellers who are interested (or at least interested in learning more).
Be Ready To Explain How Seller Financing Works
You will probably encounter sellers who might be interested but don’t know a lot about seller financing, so be prepared to explain it to them and help them understand why they may want to consider it. Be prepared to have that conversation because not everybody knows what seller financing is.
Be Prepared to Look For the Right Partner
Chances are, you probably won’t meet a seller who is open to owner financing the sale of their home right away. Expect to ask more than one seller, and likely even more than once. But if you keep trying, you will eventually find someone who will want to do that deal with you.
Put the Agreement in Writing
When you find a seller who is open to owner financing, create the agreement and buy that property!
Still Not Sure Whether Seller Financing Is Right For You?
We hope you feel much more informed about how to sell (or buy) a home using seller financing. But there is another way to sell your home without the hassle of the traditional home selling process that requires cleaning up, cleaning out, and finding a qualified buyer who can secure bank financing. You can sell your home to Sunrise Home Buyers! For a quick and hassle-free sale of your home on the date YOU CHOOSE, selling to Sunrise checks all the boxes!