If you are a Seller looking for opportunities to sell your property in today’s difficult market or a Buyer trying to avoid the hassles of dealing with a bank; owner financing is a vehicle to explore.
This is a method of financing in which the Seller takes the position of the bank. If the seller owns the property “free and clear” (no debt or little debt) he may choose to offer a Purchase Money First Mortgage. The buyer receives the deed and signs a promissory note for the amount owed.
Another type of installment sale is called an Agreement Of Sale. This method is utilized when the property sold is encumbered beyond the down payment amount. For instance, take a home that sells for $300,000, and has a mortgage of $200,000. The Buyer would need a minimum down payment of $200,000 to clear the mortgage. In the event the Buyer does not have $200,000 for the down payment, Buyer and Seller can enter into an agreement of sale. This is a contract between parties in which the buyer (vendee) and seller (vendor) agree on price and terms (interest rate, payment amount of principal and interest, duration of loan and balloon payment). The buyer makes payments to seller and seller makes payments to the bank. A word of caution: Most mortgages now have due on sale clauses and if the bank gets wind of the sale, can accelerate the note and make it due and payable.
The state of Hawaii treats both instruments the same as far as buyer and seller rights and responsibilities.
If you enter into a transaction utilizing an installment sale it is important to set up an escrow when you pay off the loan. This allows the buyer to obtain a Satisfaction Of Mortgage from the seller that is recorded. Believe me. You do not want to go look for a seller years later when you go to sell. Some buyers and sellers choose to set up and maintain a collection account. Collection agents send regular bills to the Buyer that include the loan payments, real property tax, and loan fees. This is an option and costs money to set up and maintain.
Installment sales have benefits for both parties. The seller receives additional income by way of interest. If this is investment property, there may be tax advantages. The buyer avoids paying loan origination fees, lengthy processing, and overall negative experience of dealing with banks.
The negative risk to the seller is if the buyer defaults on the loan. A prudent seller requires a credit report and financial statement from the buyer to approve.
The final method is Lease With Option To Buy. This is an agreement to rent the property for a specific period for an agreed upon amount and later have an option to purchase the property for an agreed upon price. It is actually two instruments combined. The lease not only specifies rental terms but also the portion that may go towards the reduction of purchase price. The Buyer usual pays an additional premium for the option whether they exercise it or not.