Board Topic: what is owner finance
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what is owner finance

Posted by: adignyc Jun 1 2004, 09:02 PM
I was just wondering what is owner finance?and how does this work .Any info will greatly be appreciated.Also is it possible to have this type of financing on a piece of land .Thanks in advance

Posted by: loanuniverse Jun 2 2004, 08:05 PM
adignyc:

Owner finance is when the seller accepts part of the compensation for the property in the form of a promissory note.

Normally, if the buyer does not have the purchase price in cash at the moment of purchase, there will be a need for a third party to the transaction {a lender}. This lender will usually require a lien on the property in order to secure its position {a mortgage}. However, the buyer and seller can come to an agreement where the seller is willing to accept all of his payment or a portion of it in the form of a note.

Owner financing can either be for the full purchase price or it might just be for a percentage of the purchase price. When sellers do owner financing, they usually require a mortgage on the property. When a third party lender is involved the seller's mortgage is usually subordinated to the lender's.

In commercial real estate, it is very rare to see 100% seller financing. It is more common to see the seller willing to finance a small portion of the purchase price in order to make the transaction easier to the buyer. That way the buyer will have an easier time qualifying for a regular commercial loan from a lender. {lenders like to see a cushion that is why they have maximum loan-to-values}

I think this works better with an example:

Lets say you are interested in buying a 6-unit apartment building for $400,000. However, you only have $30,000 in cash. A mainstream lender is willing to lend up to 80% of the purchase price, but that still leaves you $50,000 short. You negotiate with the seller and make your offer contingent on a $50,000 loan secured by a second mortgage on the property. This means that at closing you only have to come up with $30,000 out of pocket and the seller gets $350,000 in cash and a $50,000 note.

There are a lot of subtopics regarding seller financing. Anywhere from the secondary market for notes to pricing of the notes. I think that the most important thing that you have to consider from the point of view of a buyer is to weight the benefits of owner financing against what you might be giving away in terms of pricing when evaluating it as a source of financing.

Good luck

Posted by: adignyc Jun 3 2004, 03:09 PM
Thank you . biggrin.gif
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