Owner Financing, also referred to as seller financing, is a legitimate and effective way to sell real estate in an economy where conventional financing is relatively difficult to obtain. Residential Austin lease-options exceeding 6 months (formerly the favorite of investors) and contracts for deed were both restricted by changes to the Texas Property Code made in 2005. Because these changes impose severe penalties on sellers if strict, burdensome rules are not followed, sellers have moved away from lease-options and contracts for deed. Thus only a few types of owner financing remain practicable:
- The traditional owner finance, used when the property is paid for.
- The wraparound mortgage, which involves giving the buyer a deed and arranging for the buyer to make monthly payments to the seller so the seller can in turn pay the existing lender.
- The land trust, which involves deeding the property into a trust as a “parking place” of sorts until a credit-impaired buyer can obtain financing.
Example of How Owner Financing in Real Estate Works…
An owner advertises his or her house for sale, either on their own or through an agent. A buyer makes an offer, and they agree upon a sales price of $175,000 with a 10 percent down payment of $17,500.
Rather than requiring the buyer to obtain a bank loan, the seller carries back the balance of $157,500 in the form of a note and mortgage. It could also be a note and deed of trust or a real estate contract, depending on the customary documents for that state. A title company is often used for the closing and a real estate attorney will draw up all necessary legal documents.
The note spells out the terms of repayment. In this case they agree upon 8.5 percent interest at $1,211.04 per month based on a 360-month amortization. The seller doesn’t really want to wait a full 30 years for payments, so the note requires payment in full, known as a balloon payment, within five years.
Because the buyer is making payments to the seller rather than an institutional lender, the legal arrangement is called a private mortgage, seller carry-back, or owner financing. The seller has the same mortgage rights as a bank, so if the buyer does not make payments, the seller can foreclose and take the property back.