As a real estate investor, you’re always looking for the cheapest way to finance a property. Banks don’t always provide the best interest rates. Plus, you’re stuck jumping through a ton of red tape hoops before securing your loan.
What if there were a way to cut out the middleman completely? Sure, you could use cash, but you tied it all up in your last property.
How do you make deals with your friends? Do you shake on it?
Owner financing is the “shaking on it” of the real estate world. You can deal directly with the owner by trusting an owner financing real estate agreement.
How does it work? Scroll on to find out.
1. Owner Financing Real Estate: How Does It Work?
Even if you’re a real estate investor, you may not always have the cash to close on a property. With your other properties, you might have the cash within a few months.
In these cases, you might consider owner financing. It’s a good alternative to traditional mortgages if you can afford it.
The seller has to be willing to enter the agreement. This kind of an agreement takes trust. Why? Because it’s not backed by a large bank corporation or the government like traditional loans.
Don’t worry, it’s not just your word against theirs. You and the seller record a mortgage with the public records office. You both sign a promissory note containing the terms of the loan.
The seller will likely keep the title to the house until the loan is paid off. This reduces risk for the seller.
Owner financed mortgages are generally short term. You know you will have the money soon and you’re going to pay it back quickly. Thus, the interest rates on owner financed mortgages are higher than traditional mortgages.
2. Disadvantages of Owner Financing
If you aren’t able to pay the loan back quickly, owner financing isn’t for you. The interest rates are just too high. It would be better just to get a traditional mortgage and go through the hassle of the paperwork.
The owner should own the house free and clear of any other lender. This means they’ve paid off their mortgage entirely. If not, their lender might pass the debt on to you in what is called a “due on sale” clause of a mortgage contract.
You often have to pay most of the money before five years or you lose everything. Why? Because most sellers will include a balloon payment clause whereby a seller requires a payment more than two timesthe loan’s monthly payment.
There Are Advantages of Owner Financing
If you need to flip that property now and don’t have time to wait around for a bank, go for owner financing if you can. Closing with an owner financing real estate agreement takes much less time.
Because you’re not getting a corporate institution involved, you’re not paying much in fees. You’ll avoid appraisal costs as well.
Owner financing really is advantageous for investors who are able to pay off the mortgage quickly.
If you’re a real estate investor and you’re caught with a balloon payment, check out our real estate loans today.