Owner financing is a type of real estate transaction where the seller finances the purchase directly with the other party that is buying the property. This basically eliminates the costs associated with working with a bank or other lending institution.
Owner financing arrangements are common in instances where the buyer can’t obtain regular financing, or where they have a private arrangement with the seller. While owner financing can be advantageous in many respects, it can also create certain risks and responsibilities, especially for the owner.
As mentioned, one of the main advantages of owner financing arrangements is that there is no need to work through a bank or mortgage company. This allows the buyer to save time and costs normally associated with securing financing through a formal lending institution. Instead, they can deal directly with the seller and work out their own financing arrangement together.
Also, in an owner financing arrangement, the terms of the financing are usually much more flexible and negotiable than working with a bank or mortgage company. In fact, owner financing is often called “creative financing”, due to the fact that the parties can often create unconventional financing agreements that work for them.
On the other hand, owner financing is also associated with some risks and disadvantages for both parties. These can include:
- The seller may need to take on additional risk of default from the buyer;
- The seller may require a more substantial (larger) down payment than normal to help offset the risk;
- The buyer may need to take on higher interest than with normal bank rates; and
- The buyer still needs to obtain approval for the seller before they can close.
Thus, both parties should weigh the costs and benefits of working with an owner financing arrangement. This will help them to avoid legal disputes and conflicts later on.
While these home sales based on owner financing can be beneficial, they may be the subject of various disputes, including:
- Breach of Real Estate Contract: This can include issues such as failing to transfer the deed at the proper time after financing is finalized, destroying property, and other issues;
- Disputes Over Down Payments and Interest Rates: Interest rates can sometimes be lower for these types of arrangements, but they can also increase or balloon in the future. The buyer especially should be aware of the interest rate terms in the financing agreement;
- Default on Repayments: The buyer can sometimes be in a difficult financial situation to begin with (this is why they often enter into owner financing in the first place, rather than with a bank). They can sometimes end up defaulting on the financing repayments in the future;
- Rejection of Offer: The seller might reject the buyer’s offer, especially if a new buyer comes along with better financing options (i.e., they obtained a traditional mortgage, which can sometimes be connected with less frisk). Local and state laws might vary regarding the seller’s right to reject an offer;
- Disputes Over Appraisals: A good financing arrangement depends on a proper and accurate valuation of the home. If an appraisal is incorrect or fraudulent, it could lead to a legal dispute over the financing terms.
State laws may vary regarding home sales and owner financing arrangements. Also, specific legal issues may depend on the individual contract between the buyer and seller. This is because each agreement will be different and tailored to the needs of the party.
A common way that an owner financing contract is breached is where the buyer fails to meet the regular payments on the financing amounts. In many cases, the payments are structured in a similar way to any mortgage; the only difference is that the buyer will be repaying the seller instead of a bank or mortgage lending company.
With these types of arrangements, a breach of contract may lead to the buyer forfeiting their rights to the property deed (which will usually transfer once the payments are completed). This can cause the seller and original owner to lose profit on the sale because of the default. Here, a lawsuit might allow the seller/lender to recover their lost profits on the transaction.
Another type of breach of an owner financing contract is where the seller raises interest rates or monthly payments in a way that violates the original contract terms. Before the final closing process, the parties will usually work out the terms of monthly payment and finalize this into a contract. Unless specified, the seller usually won’t be able to increase the payment amounts without the buyer’s consent.
Owner financing disputes can be avoided through careful discussion and open sharing during the negotiation process. In most cases, the parties will each need to be represented by lawyers in order to avoid negotiation conflicts. Having their attorneys present can help the parties to reach a suitable agreement. Also, full disclosure of financial backgrounds and appraisal methods can help prevent fraud and misrepresentation.
Owner financing disputes can involve some highly technical real estate laws. It may be in your best interests to hire a real estate lawyer in your area if you need help or representation for an owner financing arrangement. Your attorney can provide you with legal advice so that you understand what your options and rights are. Also, if you need to file a lawsuit, your lawyer can represent you during court meetings.