Owner financing can provide a quick solution when you need to sell your home fast, or it can turn into a nightmare. Knowing your options before you advertise your home for sale can be helpful.
As a general rule, there are two situations where owner financing is needed. Either the home itself does not qualify for conventional financing because of some problem. Or the potential buyer does not qualify for financing for some reason.
In the first case, you may find it financially difficult to repair the problems with the home, and choose to sell it “as is”. Your potential buyers will probably fit into one of these two categories: investors or occupants. Investors have a wide range of experience and cash available.
In either case, requiring a down payment is a good way to identify the better risk. Be wary of any “investor” who can’t raise a down payment. How will he pay for repairs?
Make sure that the buyer is able to meet any code requirements and that you agree on major modifications.
The third case is one where a potential buyer can’t get financing. The pivotal question is “why”? It’s obvious there’s a credit problem. The big question that affects you is whether or not it’s an ongoing problem. Divorce, accidents, and job loss can cause a temporary problem that can be overcome. But if the buyer is getting evicted from his rental because he lost his job, how will he make a house payment?
Because so many individuals default on owner-financed homes, many legal and financial professionals will advise against owner financing as being too risky. But owner financing can also be an advantage to you by spreading out the sale income over several years.
However, being cautious with potential buyers can alleviate a lot of that risk. It helps to be honest with yourself about the condition of the house. Is it a dilapidated rental that the last tenant trashed? If so, then cleaning and painting can at least improve it to the point that you can sell it to someone else. If your potential buyer is an occupant, it may be reassuring to check out their current residence. Does it appear clean and well-kept? Will the current landlord give them a good reference? What about a former landlord? (The current one may say anything to get rid of them!)
You can find owner financing agreements online or in many office supply stores. Read through the standard agreement—you may want to make changes. If owner financing appeals to you, you may be able to sell your home more quickly and at a higher price. By being prepared for the possibility, you can protect yourself from problems.
