Comprehending Owner-Financed Real Estate Deals

A typical process for purchasing commercial real estate properties involves the buyer finding a property that they like, selling it to the seller, and getting a mortgage from a bank.

There are instances when the traditional process may not be possible or where the seller and buyer decide to avoid getting a bank involved.

Another option in these situations is to explore owner-financed real property deals. This is where the seller finances the buyer, not a financial institution.

The owner-financed process is a compelling but complex alternative to traditional processes. This can lead to some confusion. To determine if owner-financed deals are a viable option, it's important to fully understand them.

Understanding The Basics

Owner financing, also known as seller financing, is basically the financing of the sale of a property by the owner.

These cases are where the seller acts as lender and sets the terms of the loan. The agreement will typically be in the form a promissory notice, which will contain the loan amount, interest rate and repayment period.

Many buyers choose to buy seller-financed deals as they may not be able to qualify for traditional mortgages. Owner financing can be a good option for both buyers and sellers.

They are not available for all situations. This means that the seller cannot secure third-party financing or the property is subject to unique challenges or attributes that make it difficult for bank financing. In reality, seller financing can be a good option in many situations, including institutional transactions.

Take A Look At The Pros And Cons

Like any other commercial real estate deal there are pros and cons for each side of an owner financing deal.

Seller-financed deals are known for their speedy closings. It's possible to save weeks, if not months, on searching for lenders, dealing directly with underwriters, and filling out required documents before closing because you are not getting a bank involved. Buyers can save money on traditional bank fees and costs upfront.

Although speed is a benefit for many, it is important not to let your due diligence slip by in favor of time. This is especially true when it comes to appraisals or environmental assessments.

Buyers complain about how much time and money it takes to obtain environmental reports and tax return documents (to prove income) and have an appraisal done. These steps are necessary to protect both the buyer and the lender.

A seller can also benefit from owner-financed deals that provide income. The seller can earn predictable income by arranging a promissory note for payments over a period of time.

The seller can reclaim the property if the buyer defaults on payments or is unable to pay the loan. The loan income is lost and the foreclosure can often be costly.

This can be an issue if the property is in dire need of repairs or updates to make it more marketable. Seller financing is not recommended for any use that permanently alters the asset's nature.

As an additional benefit, the seller may be eligible for tax benefits. It is important to discuss your tax situation with an expert to understand the details, especially if this type of deal is new to you.

View The Contract

Before finalizing any owner-financed transaction, it is important to speak with a lawyer.

Seller financing can often be a fast-paced transaction that closes quickly. A seller financing transaction does not require lengthy underwriting or document review, as would a bank mortgage. Therefore, a lawyer should be retained in order to ensure that nothing is missed.

A structure different to a traditional mortgage is not unusual in an owner-financed deal. The seller may amortize the payment over a longer period, usually between 15 and 30 years. They will request a balloon payment sooner than usual, usually within 5 to 7 year.

These terms are crucial for buyers. Buyers must feel confident that they can refinance the property in the time period specified by the note.

Sellers should also have good contract terms. A seller may want to offer the possibility of selling the loan to a third-party. This option could provide the seller with a lump-sum or regular monthly income prior to the deal's maturity.

Although it may seem simple on the surface, there are many things to consider before you look into any owner-financed deal.

It is crucial to understand that the income and appreciation of your investment will determine whether or not it succeeds. Do not make a poor investment just because it offers good financing terms.

You will be better prepared to make the right decision when it comes time to decide on the right product for you.