What Does Owner Finance Means And How It Works?
When it comes to buying real estate, especially in terms of residential property, it is important to have adequate knowledge on all the possible options that could benefit you as the buyer. One such option is Owner Finance. Let us assume that you are a novice when it comes to buying real estate and you do not know what this term means.
For starters, what is an Owner Finance transaction? Simply put, when Owner Finance is used for buying a property, instead of the buyer applying at a bank or lender for a home loan, the seller gives the buyer a loan directly for the property. This means that the seller is carrying part or the entire purchase price in a mortgage with their bank or lender. In a traditional purchase, the seller receives the full purchase price at settlement, usually within 4 to 6 weeks after contracts have exchanged.
In an Owner Finance transaction, settlement does not take place until the end of the term, which can be anywhere from 2 to 30 years down the track. The owner takes on the role of the loan institution or bank. This agreement is also very well received for real estate that is free from any previous loan and has a clear title.
In an Owner Finance agreement, both the seller and the buyer come to an agreement with the financing settlement, the repayment plan and the interest rate. There is no need for the seller or buyer to be afraid of being scammed since everything will be done legally, with all agreed terms documented clearly into the contract, before signing and exchanging, for the protection of both parties.
Even though Owner Finance may sound too good to be true, especially for the buyer, there are actually fringe benefits for both parties. Buyers no longer need to deal with financial institutions and all the application, processing and services fees that they entail. There is also no need to deal with pre-qualifying for bank requirements. You can even arrange for the interest to be fixed for the period of the term, this way the repayments remain the same for the entirety of the deal. This way, both parties know the exact amount required for the repayments for the length of the term. The buyer will not have to qualify like he would when applying for bank finance, the sellers main concern will be can the buyer easily afford the monthly repayments on the property? An Owner Finance arrangement can be set up and moved into much quicker than purchasing a property the traditional way.
Sellers gain benefits from implementing Owner Finance as well, such as being able to charge the buyer either the full or a much elevated price for the property, since the seller is providing flexible terms of sale. None of the seller’s hard earned equity will be given away to a real estate agent in fees and commissions, as there is no real estate agent involved in this type of transaction. The installment plan calls for the seller to receive a stable income each month of the installment contract. The seller can also, if he so chooses, charge a higher rate of interest than banks, rewarding himself with extra cash flow from offering the flexible terms of sale. This also means that the seller will receive a steady monthly income based on the payment plan until the amount is paid off. Another benefit that the seller can take advantage of is to command a higher interest rate be paid than what he is paying, as a reward for the flexible terms of sale being offered. When offering flexible terms of sale, such as Owner Finance, the selling period is abbreviated, no matter what the economy is like, due to the inviting terms provided for a buyer.