Services

...buyer, the seller provides an alternative to bank financing.

Why agree to “Be the Bank” and offer financing terms?

Using the phrase “Owner Financing Available” in for sale ads will attract more buyers. It gets their attention in a market flooded by oversupply from foreclosures. Buyers can avoid the expense of a bank mortgage and strict approval guidelines. In exchange, sellers can get a better sales price or sell the property quickly.

Of course sellers don’t want to jump from the frying pan into the fire by trading a house that won’t sell for a buyer that won’t pay.

Here are 7 tips for sellers considering an owner carry-back:

Tip #1 – Review the Buyer’s Credit

How buyers have paid bills in the past is a good indicator of how timely they will make future payments. Always review the buyer’s credit prior to accepting a promise to pay.

Sellers can obtain a signed authorization from the buyer to pull credit through a reporting agency, or simply ask the buyer to obtain a copy of his or her report for review. Most note investors prefer credit scores above 675. If the scores are lower it will likely reduce any offers to purchase the note after closing.

Tip #2 – Get a Down Payment

The more money a buyer puts down, the more “skin” they have in the deal. The greater the equity, the lower the likelihood the buyer will stop paying.

When people have little to no equity, they are more likely to default or just walk away from the home. Few sellers want the hassle of taking back a property through foreclosure, so increase the odds in your favor by requiring a down payment.

Tip #3 – Verify Affordibility

If a buyer can’t afford the monthly payments it soon results in late payments or worse, no payments. Buyers should be willing to share their job history along with how much money they make each month. Paycheck stubs or tax returns can help

verify the income.

A common gauge of affordability is to keep the housing expense around 27-30% of income. The monthly housing expense is a combination of the principal and interest payment plus 1/12th of the annual property tax and insurance bills (known as PITI). If a buyer makes $2,000 per month than the PITI should be no more than $540 - $600 using this rule of thumb.

Tip #4 – Set Valuable Terms

The terms include interest rate, payment amount, and the due date for payment in full. There are also late fees, default clauses, requirements for insurance, and other standard provisions.

While the terms can be whatever the buyer and seller agree upon, sellers that charge 2-4% above the standard mortgage interest rate increase the value of future payments. The buyer still saves on the expensive loan fees and the seller is compensated for having to wait for payments. Charging a below market rate means the buyer is unlikely to refinance in the near future. It also results in a higher discount should the note be sold.