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
Watch the video related to finance
Joe Knight, coauthor of the Financial Intelligence series, gives you a crash course in reading the numbers.
Lets say your house sells for 300K(and has a 220K mortgage). Lets say your buyer has 30K for a downpayment.
They get a loan for 240K and get the second loan from you for 30K. The 270K from the buyer is first applied to your mortgage and you would get 50K in cash at closing.
You should have a lawyer draw up and help you with recording the mortgage. The lender for the buyer needs to know the details of your arrangement.
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The importance of numbers and how it affects are daily transactions has been stressed in this clip. Very good learning tool approach.
Your decision to finance the buyer should also depend on how willing you are to take long term risk against the buyer's creditworthiness. As the financer, you will be making a credit decision on the buyer's ability to repay over time. In my opinion, banks are much better equipped to withstand default and late payments. Are you comfortable with that?
Lawyers will need to draw up a credit agreement and you will still need to run credit checks and property checks, buyer will still need mortgage insurance, etc.
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try the base housing at sheppard AFb. They may be able to help. the MLS (Multiple Listing Service) should have seller financing in the listing and a realtor can help you locate a property. Also, ask a realtor about possible lease/option purchases, or ask a seller to give you one. A GOOD realtor will explain this very good plan, but many of the not-so-good-realtors will say "it's not a good idea, blah blah blah", because a lease option will take a year, say, to complete the sale, and most realtors won't want to wait that long for a commission. A GOOD realtor will realize the opportunity to help you, and explain what a lease option is.
Why not just set the closing for November when they can take possession of the home they are buying? It's not very smart to let the previous owner's stay in the home. If something happens your insurance company may not cover it unless you specifically tell them you are renting the house out, then your insurance premium will be higher. Then what happens if the people renting the home they bought can't move on the date the are supposed to.
Just have your agent tell the sellers you'll set the closing for the week they can take possession of the new home. Most buyer's want to move in a day or two after closing at the latest, they will most likely not find another buyer to let them rent the house back.
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Consult an attorney. Here's how that works in a general sense. Instead of taking cash for the sale of the property, you carry the debt for the buyer. So you are both the seller and the lender. Here in California we use notes (written promises to pay) backed up by collateral in the form of a Deed of Trust securing the note. There is one important preliminary point. You have to get enough cash from the buyer (either the buyer has it or borrows it elsewhere) to pay your own obligations so that you can convey the property to the new owner. Example: let's say you owe $100,000 to your bank, you are selling the property for $200,000, and your transaction costs (closing costs, commission, transfer taxes etc.) are $10,000. You could structure the deal this way:
Buyer pays you $110,000 and gives you a note secured by a deed of trust for the remaining $90,000. If the note is drafted properly, you could sell that note at a discount to an investor who buys deeds of trust. Watch out. If the buyer is getting that $110,000 from a lender, the lender might demand that your loan be subordinated to theirs. They would hold the first note and you the second. This is the order in which you would get paid if there were to be a foreclosure. Owner financing can be a great way to sell a property, everyone can win, but you have to do it right. Consult your attorney and CPA.
It might also be possible to do an installment sale that could have tax advantages for you, but then your money is tied up in that property for a while. Again, consult the appropriate legal and financial advisers regarding these options.
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Excellent Job!
Start by calling 3 different Real Estate Agents. Ask each of them to give you a Comparative Market Analysis for your home–make sure you ask for a REALISTIC selling price, not what the home should be listed for. Ask them to help you figure all your costs associated with selling. Good agents will do this with you.
Once you have all that information, you can make a better decision regarding what to do.
You won't be allowed to sell your home and finance it for the next owner without paying off your mortgage (there is a section in your mortgage called the "Acceleration Clause" which prohibits this).
You trigger the Acceleration Clause by missing payments or transferring ownership.
Start by getting a professional opinion of value, and then go from there. After hearing all 3 agents present their opinions, you will also know which one is the most professional–so you know who to call when you decide to sell.
Good Luck.
EDIT: Actually, a Licensed Real Estate Agent's opinion of value is admissible in a court of law. It is not NECESSARILY worthless. But, that is why I suggest getting three opinions. Appraisers make mistakes too: this is firsthand experience speaking! So, why pay for an appraiser when Realtors will do the work for free?
Honestly, if you do as I suggest, you will be out no money, but you'll get a little quality time spent with some Realtors.
This is a good video to watch to find out about some of the key concepts surrounding the need to become finance literate.
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Until you have a signed purchase agreement, any promises made by anyone, ESPECIALLY by the bank, should not be taken as concrete. Short sales are extremely touchy situations, and the banks usually don't approve them. If they do, it takes months and months. It seems they would rather have them foreclose than to take a huge hit against what is owed.
We just made a deal in writing with the seller (Estate sale) and are just waiting back from the apprasier. The deal is done, contingent upon the appraisal coming back fine. My realtor specializes in short sales but steered us away from all of them due to the back and forth flip floppy behaviors by some banks. If you've got six months to sit and wait, a short sale might be in your favor. If you're trying to get the tax credit, I'd steer clear. My agent told us we needed a signed purchase agreement by no later than mid October to secure the tax credit without pushing it. Because the actual closing can take up to a month. And once you're in a purchase agreement, you can't back out just because it went past the 11/30 deadline.
If it were me, I'd try to find something else. Did you put an EMD down on it?
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