Andre Carvalho • October 5, 2022

What Is Owner Financing?

Frequently Asked Questions on Owner Financing.

Owner financing, also known as seller financing, occurs when a buyer finances the purchase directly through the seller instead of obtaining a conventional mortgage from a lender or bank.

Pros and Cons for Sellers and Buyers

Pros for the seller:

• Faster selling: This approach offers the potential for a quicker sale and closing, as buyers avoid the mortgage process.
• Selling “as-is”: You can sell without making costly repairs that traditional lenders might require.
• Reduced tax burden: This method allows you to spread out capital gains taxes over time.
  • Installment Sales. Publication 537: https://www.irs.gov/publications/p537
  • First $40,400 of Capital gains is free. IRS code 409: https://www.irs.gov/taxtopics/tc409
• Good investment: Earn passive income consistently, potentially at better rates than other investments.
• Lump-sum option: Furthermore, you can sell the promissory note to an investor for an immediate lump-sum payment.

Pros for the buyer:

• Quicker closing: There is no waiting for the bank loan officer, underwriter, and legal department to process and approve the application.
• Cheaper closing: This approach eliminates bank fees or appraisal costs.
• Flexible down payment: Additionally, there are no bank- or government-required minimums.

Cons for the seller:

• Buyer default: The buyer could stop making payments at any time, requiring you to foreclose and take back the property.
• Repair costs: In case you take back the property, you might need to cover repairs and maintenance, depending on the buyer’s care.

Cons for the buyer:

• Seller approval needed: The seller must be open to accepting payments over time.
• Balloon payments: On the other hand, many owner-financing arrangements require a large balloon payment after five or 10 years, which could lead to losing all money paid and the house if you can’t secure financing by then.

How Owner Financing Works

When using owner financing, the buyer signs a promissory note to the seller, outlining the loan terms, including:

• Repayment schedule
• Consequences of default
• Interest rate

Typically, the loan is amortized over 30 years with a final balloon payment due after only 5 or 10 years. The idea behind this structure is that the buyer will have enough equity in the home or have improved their financial situation within that time to qualify for a mortgage.

Legal Disclaimer

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.