Owner Financing Pros and Cons
The Pros and Cons of Owner Financing
Owner financing are typically seen in cases where an individual agrees to sell the property in exchange for a note where the buyer commits to abiding by the terms and pledges the property as collateral for the loan. Compared to a conventional loan, both parties normally negotiate directly and come to the agreed terms before closing. This results in a more flexible arrangement and quicker closing process.
Advantages to Owner
Owner financing is a good option for sellers who can afford to wait five years for their equity while looking to earn a monthly positive return of their money. Typically, the 8-12% earned is better than any bank.
The end buy becomes liable for the taxes and insurance on the property while the seller is able to collect monthly income with less costs, risk, and hassle.
Disadvantages to Owner
The main disadvantage to the owner is the inability to collect the equity in its entirety up front. There is still a risk that the buyer will become in default of the loan causing no income to be collected. If the buyer defaulted and left the property in need of repairs, it would become the seller’s liability.
Advantages to Buyer
Purchasing a property by owner financing may be the only way the buyer can achieve home ownership and is ultimately easier to refinance the property they are living in than making payments obtained through new financing.
Disadvantages to Buyer
If you are unable to improve your credit score or refinance the home at the end of the balloon period, than you run the risk of losing the payment as well as any non-refundable down payment invested. The interest rates are also higher than conventional loans for the owner to offset the risks.
Owner financing in the end has increased in popularity. This strategy allows the owner to reach within a large buyer pool that is otherwise considered unloanable in the eyes of banks. While this strategy has risks for both parties, owner financing can lead to a mutually beneficial real estate transaction.
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