What To Consider With Owner Financing

Q: I’ve got an investment property that the renter is interested in buying. They are not able to get a typical mortgage because they don’t have conventional credit. However, they pay their rent on time monthly.

I am considering offering them owner financing, but am not sure where to get the documents written up. Also, the house has a mortgage in my name. If I do sell them the house, what will my lender do? What do you recommend?

A: There are several important legal issues that you need to address before you actually go to the closing, and you’re going to need the help of a good real estate attorney. So find one now, even before you start talking about the sales price with your tenants.

Most likely you’re going to end up selling the property to these buyers on an installment basis. That means, they’re buying the house over time, almost like lay-a-way.

The buyers will start by paying you 5 to 10 percent of the sales price. The property remains in your name, and you not your buyers will make the monthly mortgage payments on your mortgage, insurance and real estate taxes. This ensures that the necessary payments are made.

The installment contract with your buyer will include certain provisions that will pay you interest on the amount owed by them along with payments for all of your costs associated with the ownership of the home.

When the time comes to transfer title to the home to the buyer, they will pay off whatever remains on the installment contract. You’ll use part of the cash they pay you to payoff your current mortgage.

Installment purchases sound easy, but there are some risks. Again, you need a good real estate attorney to draft up these contracts and make sure you’re protected, so find one with experience with installment sales contracts.

Q: Can a buyer cancel the contract without any penalties if the mortgage commitment was delivered after the date set forth in the contract? The mortgage commitment was late because the sellers agent was slow to set up the appointment for the appraiser to see the property.

A: In general, many contracts, but not all, provide a certain amount of time for a buyer to obtain a commitment for financing for the purchase of a home.

If the buyer is unable to obtain the commitment within that time period, the buyer must notify the seller in writing by the date set forth in the contract. If a buyer fails to notify the seller within that time, the buyer waives his right to terminate the contract. And if the buyer then fails to close on the property, the buyer risks losing the money he has put down as down payment for the home – or even more, depending on the seller’s damages.

If the sellers real estate agent intentionally failed to allow an appraiser into the home, you, as the buyer, may have the right to sue the sellers agent, or even the seller, for bad faith in abiding by the terms of the contract. However, if the sales agent failed to get the appraiser in on time and it was due to tardiness by the appraiser or scheduling problems, you should have requested an extension of the financing contingency.

If you obtained the financing commitment after the date set forth in the contract for the financing contingency and now want to terminate the contract because the commitment did not arrive in time, you probably will not be able to do that.

If you now have your financing commitment you will probably have to close. If the lender turned you down for financing, you should talk to a real estate attorney to determine whether the actions of the seller caused you harm.

This will probably center on why the appraisal was held up. If the seller’s broker did not act maliciously and did not try to interfere with your ability to obtain financing, you may be the one on the hook for the sellers’ damages.

April 9, 2004


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2 Responses to What To Consider With Owner Financing

  1. Randy says:

    what if the person that you financed from files bankruptcy and you have been in the house for 7 yrs ? what is your options towards the lender??

  2. jimmy says:

    If you are a seller and live in Texas, DO NOT sell your home as owner financed. If the buyer defaults or simply refuses to pay payments, then good luck to get your home back in a month or two or three… all the while you pay mortgage payments while the buyer staying at your house for free. Texas laws protect the buyers who default on their payments far more than the sellers. This actually happened to me and it took me 6 months and exuberant amount of attorney fees to get my house back. Not to mention another $6K to repair and clean up the mess they left behind.
    So my advice to all you considering to sell your house this way: DO NOT! Rent it. That would be a lot better option.

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