Selling a house or other Austin, TX real estate with owner financing may be unfamiliar territory for many, but anyone who plans to sell property against the current background of tough lending conditions may want to brush up on the basics.
Understanding the concept of owner financing is easy: the seller assumes the role of a bank and finances the buyer’s purchase.
The decision to provide owner financing, however, can be much more difficult; although providing owner financing could mean the difference in being able to sell a house, it could also mean a great amount of risk for the seller if the buyer eventually defaults on the loan.
As the U.S. struggles with a sluggish real estate market, owner financing presents a way for buyers and sellers to close deals that might not be possible with conventional financing.
There are some deals that just simply cannot get done (with conventional lending) because the credit markets are too tough for a particular buyer to qualify or because the type of transaction is perceived to be too risky.
There could also be a situation in which a buyer may not have sufficient capital for a down payment. Partial owner financing, in that case, can help fill in the gaps in closing a deal.
In addition, the benefits of owner financing can appeal to sellers who are trying to unload property. Closing a deal on a house, for example, may take considerably less time with owner financing than with conventional financing. While a conventional lender will scrutinize the collateral property to determine the level of risk, a seller who is already familiar with their property can form his or her own risk assessment relatively quickly.
Owner financing may also be an attractive choice for investment, potentially offering high rates of return. A seller can negotiate an interest rate that the buyer will pay them that is more favorable than would be available for other sorts of investments.
Furthermore, seller financing can provide some tax benefits by spreading out a large gain over time (check with your accountant or CPA).
If the seller structures the loan as an installment sale, there can be certain tax advantages to the seller as well in terms of the timing of recognition on the capital gain. The seller would need to discuss the details with a tax advisor.
Seller financing can be used to pay for a property either in full or in part. The terms of a full loan look similar to those of a conventional loan; however, a seller has a great deal of freedom in setting the terms, such as the interest rate and the duration of the payment period.
For instance, a seller might wish to provide owner financing as a short-term arrangement of five years, after which the borrower is expected to refinance the loan, presumably with conventional financing.
While sellers can be more flexible than banks in considering prospective buyers, they should nevertheless think like a bank when reviewing potential buyers. Examining documents and reports such as tax paperwork, proof of employment and credit history is prudent in determining a buyer’s ability to pay off the loan.
A seller who provides owner financing will need to get the mortgage recorded in accordance with the specific execution and acknowledgement requirements of the State of Texas. Sellers should also work with a title insurance company to perform a title search and purchase title insurance to secure the right priority for the mortgage.
A title insurance company can also serve as a good resource for understanding how much it will cost to record the mortgage. In Texas, the cost to record a mortgage or deed of trust is minimal, consisting of a basic administrative fee added to an amount that varies according to the number of pages.
Generally, the overall cost to seller finance will depend on how many documents are involved and how sophisticated those documents need to be. The size of the property and the intensity of due diligence procedures factor into these costs.
If it’s a simple scenario, such as a small little residential deal, it might be under a thousand bucks. If you provide seller financing for a sophisticated apartment building or strip center it can be multiple thousands of dollars. If you’re in the Austin, TX area, Forte Properties is your #1 choice for owner financed home transactions.
Documentation is perhaps the least of a seller’s worries. For most sellers, the initial decision to provide owner financing can be the most significant hurdle they encounter.
Documentation-that’s not a big deal. It’s done all the time, there are a lot of good lawyers that do it. It’s deciding to do it, and deciding on how to manage the risks inherent in providing owner financing when you’re a casual seller-that’s the biggest difficulty. Again, if you are interested in owner financing whether you are a home buyer or seller, Forte Properties in Austin, TX can help you every step of the way.
In most cases, sellers prefer to have cash instead of a promise by the buyer to pay them later. In addition, sellers who consider owner financing need to understand the risk that the buyer might not pay you in whole or in part, or might have financial distress situation arise down the road, where after a year or two the payment stream to you is disrupted by their financial distress.
Because sellers do not have the same resources as conventional lenders, financing a buyer can be even more intimidating. While banks can absorb the risk of nonpayment by spreading it across their entire loan portfolios, an individual seller isn’t typically able to do that. Furthermore, it’s more difficult for a seller to choose the best loan terms in accordance with the perceived risk/return.
There’s no science to that because you’re not a conventional lender. Because of the serious risks involved with seller financing, sellers should do their homework ahead of time and decide whether it is an option within their level of risk tolerance. Preferably, a seller should make this decision early in the process of selling a property, well before any offer is on the table.
You need to decide that up front so that you can package your materials in contemplation of what you’re willing to do relative to seller financing.
Lawyers who are familiar with financing and financial documents can be critical resources in the time preceding and immediately after making the decision to offer owner financing. A lawyer can help a seller understand the ramifications of owner financing and design the appropriate paperwork.
Sellers just need to be prepared for what happens if the deal goes south. Sellers can then adjust the language and terms in their loan documents accordingly, such as setting a higher interest rate that’s reflective of the higher risk, or requiring personal guarantees and other forms of credit enhancements.
As the popularity of owner financing has increased, the Texas Association of Realtors has witnessed an increase in the use of its promulgated “Seller Financing Addendum”. If you are considering a Austin, TX purchase involving owner financing (either as a buyer or seller), you should consult Forte Properties. They have a team of real estate professionals in various facets of the real estate market and are very familiar with the Seller Financing Addendum and all other documents required when buying or selling homes with owner financing.
Forte Properties is a full service real estate company that specializes in Owner Financed homes in Austin, TX and surrounding areas. We are your #1 choice when you need to choose Owner Finance professionals to work with in Central TX.
Visit us online at:
http://www.GreatHomesTexas.com or
http://www.AustinOwnerFinancedHomes.com
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Short animation of new features for Google Finance
If you have outstanding credit and equity in your home to cover the installation and loan fees you should have no problem.
You're welcome!!
I'm getting a divorce….when you get the answer to this let me know!!!! I am in the same boat with low (fair) credit score and not much equity in my home. I also do not have family to help me. I have to get my husband's name of the loan note for our home.
you can still form a corporation – it would just be private, not public – so long as there are less than 25 stockholders, you can even do it as an S-Corp I think and make sure you put a provision in that if anyone wants to sell their shares, they have to offer them to all other existing stockholders first and kept 55% of ownership for yourself, so you never lose control of the company
lots of books out there on forming your own corporation in_______state
not expensive either
you may need an accountant who can handle corporate tax returns (Fed and state)
Good finance video… good concept
The importance of numbers and how it affects are daily transactions has been stressed in this clip. Very good learning tool approach.
This is a good video to watch to find out about some of the key concepts surrounding the need to become finance literate.
If you're applying for a loan and if it is a big amount, banks and even the SBA may consider other factors aside from your business credit:
- A business plan explaining what the business is
- Your background and experience in the business — in my experience, this is KEY in the eyes of the bank because they want to make sure that you know what you are doing and that you can make the business work. If you don't have any experience with the business, have someone on board that knows the business to give banks assurance that someone will guide you
- Your credit factors because it shows your dependability and how well you handle credit. They will do a credit check on you and poor credit history may be frowned upon, or even reason for the disapproval of your loan application
- Your collateral. Banks, even SBA guaranteed loans, want the borrower to show collateral. They want to be guaranteed that somewhere somehow they can get payment from you
- Condition or terms of loans. Banks would want to know three important things: "How much money are you requesting? What will it be used for? and For how long will it be needed?" Banks oftentimes prefer to approve loans for items that can be identified, has lasting value, and can be repossessed and sold if things fail.
- Your equity — banks and SBA will not give 100% of what you need. In fact they want to see that you are invested in your business as well. If you cant show them equity, then your chances of getting the loan is slim to none.
Read SBA's loan guarantee program http://www.sba.gov/services/financialassistance/sbaloantopics/7a/index.html
I am a business major too, and all I kept hearing from everyone is how hard accounting was, so I went into it expecting a really bad class. But, I ended up getting A's in both financial accountings I took. It is not hard, but it can get confusing. My best advice is make sure you understand the basic concepts from the beginning, because everything else you learn really builds on it. It is not so much about math and formulas, it is mostly addition and subtraction, the key is know what to add and subtract from. If you are confused the with basic principles, than it will be very confusing, but if you stay up on everything from the beginning you will be fine.
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the type of loan you are referring to is called an 'over advance' = when teh lender allows a loan for more than the car's value.
Overadvance loans were always set aside for people with better than average credit. Now, they are all but gone for everyone. Lenders are not too keen on giving 100% loans, much less overadvances. If you have gold-balls credit, never been late, good job and residence history – you MIGHT get a 110% loan. Maybe.
but that is a good thing. Why would you want to bury yourself deeper and deeper in a car that is depreciating faster than you are paying for it. Overadvance loans are one step on the road to financial disaster.
Keep your car. Pay it down, pay it off, then drive it til the wheels fall off. You will be miles ahead financially if you do.
MLaw is right. Start with whoever has the first mort
We have a new website up. It is a business dictionary with all sorts of other cool financial tools. subjectmoney com
Harvard Business make some great videos. Very insightful.
Dropping jewels of wisdom…’nuff said.
twitter.com/#!/westpointinvest …Gives daily financial advice
I work for a bank that does purchace deals with self employed borrowers. What you want is called a stated program. The two key factors of the loan is credit and property value.
You can't go 100%, but you can go 90%.
It is going to be almost impossible to find a 100% stated program out there any more because of the economy. 50 lenders went out of business of went bankrupt earlier this year, so guideline got pretty stiff.
There is another program available called bank statement program or reduced doc.
There are 18 different points that determin what the loan program and rate will be. Email me directly and I can go over options with you and tell you what we have.
The question for hard money is not "how much equity" it's "what is your equity as a percentage of the value?"
Hard money will never go above 75% of the value of the property, so if your value is $320k, and have $80k equity, you're already at 75% and hard money won't touch it. If the value os $160k and you have 80k of equity, hard money will loan you up to $40k if you find the right one.
Talk to brokers in your area about their hard money programs.
Great speech, true words, good captivity, definitely increased my knowledge!
Excellent Job!