Also known as seller financing, owner financing is a situation in which the owner of an asset functions as both the seller and the lender who makes it possible for a buyer to acquire that asset. This approach is most commonly employed with the purchase of real estate, but can also be utilized with any type of purchase where financing is required to complete the transaction. There are several benefits associated with seller or owner financing, as well as some potential drawbacks.
The general perception of owner financing is that this method is only used when the buyer is not able to arrange a bank loan or mortgage from a lending institution. That is not always the case. Property owners may choose to offer this form of financing as a means of creating a steady flow of income that will continue for a number of years. For example, a retiree may choose to sell his or her larger home by offering the buyer the opportunity to make a relatively small down payment, then pay the balance at a competitive rate of interest over a period of twenty years. If the retiree already owns a smaller home, then the income generated from those monthly installment payments can provide the resources to pay for household and other expenses.
Should the retiree desire, this owner financing arrangement could also provide the down payment and the resources to make a mortgage payment on a smaller home that becomes the retiree’s primary residence. Assuming that the installment payments made via the seller financing are greater than the mortgage payments made on the new property, the retiree builds equity in a new home without using the monthly disbursements from a pension fund or other retirement plan. This allows the retiree to easily sell a home that is now too large and costly to maintain, purchase a smaller home that is more energy efficient, and still have access to a major asset that can be converted to cash should the need arise.
For buyers, an owner financing strategy often means the ability to purchase assets in a more cost-effective manner. In the case of real estate, owners often provide the financing without requiring a large down payment, while also offering an interest rate that is comparable to or even lower than the rate that the buyer could command elsewhere. This means the buyer may be able to pay for the property in a shorter period of time, ultimately paying less for the real estate than would have been possible otherwise.
Both buyer and seller should take care to create a owner financing contract that complies with all provisions required by local regulations and laws. Typically, the contract should be reviewed by an attorney or real estate professional who is well-versed in those laws, and can make sure that both parties understand their rights and responsibilities under the terms of the contract. Doing so helps to minimize the potential for misunderstandings to arise at a later date, possibly endangering the working relationship between the two parties, and lead to unnecessary expense for one or both parties.