Owner financing is a useful tool in markets where traditional financing is either extremely scarce due to the nature of the underlying asset (e.g., poor condition, highly illiquid, non-income producing) or, when available, is only available under very prohibitive terms and conditions such as large down payments (many lenders require 50% down for undeveloped land), stringent credit score requirements and/or significant documented income.
What is owner financing?
With owner financing, instead of the buyer seeking funds from a third party (e.g., bank, credit union) to purchase the property from the seller, the seller takes on the role of the lender by extending credit to the buyer for the purchase price of the property, minus the down payment. The buyer and seller agree upon the terms and conditions of the loan (i.e., interest rate, length of the loan, prepayment penalties, down payment, who pays property taxes and insurance) and memorialize their agreement through legal documents such as a contract for deed or deed of trust and the buyer pays back the loan over time.
What are the benefits of owner financing for the buyer?
Here are a few of the many pros:
- Utilize the power of leverage: Given the flexible nature of owner financing, it will allow you to start investing in real estate now at monthly payments you can afford instead of waiting until you have enough saved for the entire purchase price. Whether it is buying a property now so that you can pay it off over time for retirement, or minimizing your upfront capital outlay so that you can invest in multiple properties that will likely appreciate in value over time, the advantages of the prudent use of leverage are well established
- The financing process is faster and easier: You avoid the lengthy, onerous application processes that you would typically encounter at a traditional lender. Loan officers from traditional financing sources will typically request a mountain of paperwork (e.g., proof of employment, tax returns, paystubs, bank statements) just to even consider you, and you still may be rejected. Even if you do manage to obtain a loan through a traditional lender, expect to pay hefty loan origination fees
- Ability to creatively structure a transaction: Traditional lenders usually have very rigid requirements for given asset categories making it very difficult to complete a transaction if the buyer and the asset don’t fit perfectly into the lender’s framework. Owner financing brings flexibility to deal structuring, allowing both parties to achieve their desired results. Interest rates, down payments, payment amount, length of loan, etc. are all typically open for discussion in owner financing situations creating the possibility of turning an average deal into a great one
- Purchase properties that are not (currently) financeable: Undeveloped land or single and multi-family homes in very poor condition are good examples of assets that traditional lenders will typically not finance due to a lack of ability to generate immediate income from the asset, difficulty in appraising the value of the collateral, or the perceived risk inherent in rehabbing / developing the property. Often, owner financing is utilized to allow a buyer to purchase a property now in order to complete items a traditional lender would require (e.g., surveys, title work, development, rehab) so that financing in a more traditional form can be obtained in the future
- Won’t show up on your credit report: It is unlikely that the seller will be reporting the loan to the credit reporting agencies, which can make it easier for a buyer to obtain other loans in the future
What are the cons of owner financing for the buyer?
While the pros typically outweigh the cons, there are a few items to be aware of and look out for:
- Higher interest rates: Given most sellers lack sophisticated loan underwriting infrastructure and/or don’t require traditional risk assessment items such as credit reports, income documentation, proof of employment, etc. to provide convenience and flexibility to the buyer, the seller will typically require a higher interest rate compared to traditional financing sources given the increased risk profile
- Prepayment penalties: Given the loan created by the seller is an investment vehicle, often loans will contain prepayment penalties. These penalties are designed to provide a certain level of investment return to the lender if the borrower decides to pay the loan back well before the due date. Be sure to ask about any prepayment penalties and read through the legal documents as they can be costly surprises that will limit your flexibility
- Balloon payments: As discussed earlier, often owner financing is designed as a short term funding source that will bridge the buyer through a phase of rehab / development in order for them to obtain a traditional form of financing later. Also, sellers don’t normally have the longevity of large lending institutions, so shouldn’t be expected collect on a loan for 30 years. This is where the concept of a balloon payment comes in. A balloon payment is simply a large single payment for the remaining portion of the loan due at a certain date. As an example, let’s say the monthly payments are amortized over a longer term, maybe 15-30 years, to minimize the buyer monthly cash outflow but the actual term of the loan is only 5 years. At the end of year 5 the buyer / borrower would need to have sufficient capital available to make the large balloon payment
- You still may not qualify for owner financing: Just because the seller isn’t a bank, doesn’t mean they won’t run a credit check on you or ask for references. You may not be immediately rejected if your credit is less than perfect, but you will still likely need to be able to demonstrate why you are creditworthy
Land Endeavor owner financing
At Land Endeavor we have created an owner financing program that is designed around our mission of providing affordable land. We believe becoming a landowner should be within everyone’s reach.
Our owner financing program contains the following benefits:
- Low monthly payments: We often have properties available for as low as $200 a month, so we have opportunities for any budget. Start building your investment portfolio today!
- No prepayment penalties: We will not charge you any fees if you would like to pay off your loan early
- Quick, easy process with minimal documentation: Our closing process is streamlined so that you can avoid the headache you would typically encounter when dealing with a traditional lender. No endless paperwork!
- No balloon payments: We finance the property for the full term. No need to worry about a looming large payment coming due
- Easy loan approval process: No need to wait to invest in real estate until you have the full purchase price. No credit checks or other verifications required for lower value properties with short financing terms. If you can afford the down payment, you are approved. For some of the higher value properties with longer financing terms, we may conduct a straightforward credit check
- No adjustable interest rates: We only use fixed interest rates in our owner financing programs so you will know what the payment is throughout the life of the loan
We have many properties available with owner financing. Check out our listings here.