Owner financing is not really a new concept, but it is not usually a go-to solution when it comes to real estate. Times have changed however, and owner financing is becoming more available in online real estate listing sites such as Austin-based Easy Road Home. For buyers and sellers of real estate, owner financing is a whole new ball game, and there are no time-worn traditions to uphold. In other words, there is lots of room for negotiation.
Aside from state laws against usury and standard financial regulations, the terms of an owner financing agreement will depend on what the buyer and seller can mutually live with. In general, the details that should be included in the agreement are the down payment, amount financed, interest rate, loan term, and monthly payments. Most sellers entering into an owner financing agreement require a down payment of up to 30% of the purchase price. The higher down payment is thought to discourage buyers from defaulting on payments because they have already invested a sizeable amount in the property.
While owner financing agreements can take any form, the most common types of agreements include lease purchase agreements, land contracts and promissory notes.
Lease Purchase Agreements
Also known as rent-to-own agreements, lease purchase agreements entitle the buyer to take possession of the property as a lessee for a monthly consideration over a designated period of time. At the end of the lease period, the buyer pays the purchase price less all the monthly payments remitted to the seller and receives the title in return.
Also known as an installment sale agreement, land contracts is an agreement by which the seller simply divides the purchase price less down payment (if any) plus interest by x number of months over a certain period of time. The resulting amount is the monthly payment the buyer will make to the seller, who will only transfer the title to the buyer once the full purchase price plus interest has been paid. Many land contracts have a balloon payment at end of contract, although this is not required.
Also known as real estate lien note, promissory note on mortgage is literally a promise by the borrower to pay in writing. It should include the debt amount and interest rate as well as the monthly amounts over a certain period of time. The seller holds the title of the property as security to oblige the borrower to fulfill the promise. The note is a legal binding document in the US, and the seller may be required to produce it during foreclosure proceedings.