Owner financing, also referred to as seller financing, is a method of financing a property in which the owner of the property holds the buyer’s loan.

Owner financing is also called seller financing, seller carryback financing or seller carryback (because the owner “carries back,” or holds, the financing). It works like bank financing, but the buyer repays the seller by making monthly payments over an agreed-upon period with a specified interest rate and terms. Seller financing is commonly used by investors to buy or sell properties, but it can be used by anyone.

Some sellers prefer the structure of a contract for deed because it can be faster and more cost-effective to regain title in the event of default.

Repayment terms vary, and in most circumstances, they’re determined by the seller but can be negotiated.

Owner financing terms

It’s up to the buyer and seller to determine the terms of the deal, such as the length of the loan, the amount of the down payment, the interest rate, and if there’s a balloon payment. Some sellers have specific terms in mind, while others are open to negotiating. However, you need to decide on four main factors.

Length of the loan

This is the period over which the buyer will repay the loan. It can be five, 10, 15, 20, or 30 years — or anything in between. While 30-year mortgages are sometimes used in seller financing, it’s more common to see shorter terms, such as five to 10 years, with a balloon payment at the end. Even if a balloon payment is agreed upon in year 10, the loan can be amortized for 30 years to keep the buyer’s monthly payment low and increase the interest collected by the seller.

Down payment

A down payment is the amount of money the buyer pays to the seller to show their investment and interest in the home. This money is applied toward the purchase price and the remainder of that price is financed. The average down payment for residential properties on seller-financed loans in 2018 was 19%.

In most circumstances, sellers require 10% to 20% down, although there’s no minimum requirement.

The seller takes on some risk by holding financing, and he or she may charge a higher interest rate to offset this risk.

Interest rate

Interest rates for seller-financed loans are typically higher than what traditional lenders would offer. The seller takes on some risk by holding financing, and he or she may charge a higher interest rate to offset this risk.  It’s not uncommon to see interest rates from 4% to 10%. 

How to structure a seller-financing deal 

Various owner-financing structures can affect the buyer’s security in the property and the process for regaining title if the buyer defaults.

Promissory note and mortgage or deed of trust. A promissory note and mortgage (or deed of trust, depending on the state) is the most common form of owner financing. This is the same structure a bank would use and is what people think of when they think mortgage.

The note outlines the amount the buyer borrowed and terms for repayment to the seller. A seller may offer owner financing to reduce capital gains taxes from selling the property. A seller-financed loan breaks up the gains over a period of time.

Some investors offer financing on properties when they’re ready to retire to reduce taxes and create residual income. If the buyer performs on the loan as agreed, the seller has created a passive income stream for many years.

Owner financing may also be a good option if the seller has trouble selling the property because it doesn’t qualify for financing from a bank. Using owner financing gives prospective buyers the opportunity to buy a property they may not have had access to without it.

Seller financing is an appealing option for buyers because it lets them purchase a property without having to borrow money from a bank.

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Getting to Closing

Contrary to those proclaiming that they’ll close on an offer right away, this isn’t possible. The truth is, it takes a while to close real estate deals. Today we’re diving into how long it really takes to buy a house (or any type of property, really).

These are generally the steps that are taken when it comes to closing. But depending on your schedule and if you’re willing to take some risks, you’re able to skip some steps. But for the purpose of this article, I’m just going to take you through all the steps of getting to closing.

1. Offer and Acceptance

This means that you made the offer and it got accepted. But you aren’t under contract until you have a signed agreement of sale from both parties and the deposit has been received. And by received I mean a third party representing the seller—like their attorney or real estate broker. Once this is done, the clock starts ticking.

2. Inspection Period

This is where you go into the property and verify it reflects what the seller told you about it. This is you doing your due diligence to ensure what you’re buying really is what you intended to buy. The inspection period plays into all types of investing: multifamily, commercial, single-family, etc. You want to make sure the property is in good condition, reflects the listing, is zoned properly, and so on.

The inspection involves a physical inspection, but also any other due diligence you need to do. This period lasts 15-45 days, with the norm being 30 days.

3. Title Search

This step occurs concurrently to step No. 2. A title search when a title company verifies that whoever claims to own the house actually does. This search will also make sure the deed is clean and doesn’t have any liens or encumbrances, as well as making sure the deed holders paid their taxes and so on.

All kinds of things come up in a title report, which shows how clean the title is. It will show a title commitment to you, the buyer. Remember that this stage is done by a third party (title company) where they do all kinds of investigating. This stage takes typically 30 days.

4. Bank Underwriting You

This stage is where the bank reviews your financials, tax returns, bank statements, etc. This is the bank approving you as a borrower. If you’re buying a single-family home that you’re going to occupy, this can also be called getting pre-qualified.

If you’re buying a rental property and not an FHA-mortgaged home, the bank is unlikely to begin this process until you’re under contract. They won’t want to spend their time on you until they know you’ve landed a deal.

This process can take anywhere from 45-90 days. It all depends on the bank and their process. In most cases, the bank won’t outright tell you it could take 90 days, but be prepared for it.

5. Bank Underwriting the Deal aka Appraisal

This is where you get loan approval. This doesn’t necessarily cost you a lot of money since it’s an application fee. But if you’re buying a commercial building, it will cost you more. Depending on the bank, they may do environmental impact studies (such as a Phase 1 Analysis). They may also send out an inspector to do a thorough inspection. (FYI, this will cost you.)

Usually, this process takes about 30 days. What some investors do in this stage (if they want to close the deal fast) is underwrite the deal before they’re pre-approved by the bank. This can then tighten the timeline.

Note: If you’re buying a small multifamily property, some investors don’t like to do this step (since money is coming out of their pocket) until the due diligence period is over, instead of letting the steps overlap. 

6. Cure Period

This phase has a lot to do with what has taken place in the earlier steps. Maybe the property didn’t appraise for what you thought, the bank found you owe a contractor $10,000 for work done two years ago, or the property isn’t zoned correctly—whatever it may be. This stage uncovers things that need to be cured, hence the name.

This period needs to factor in all the potential issues with the property, the seller, or you. The cure period can affect any of these steps at any time. Depending on the issue, it could increase the timeframe for closing.

In Conclusion…

After all is said and done, the timeline to close on a property amounts to 60-90+ days. I’ve seen a lot less and a lot more. As of this writing, I’m undergoing a deal that has so far taken eight months to close. There were environmental issues and the is bank taking its sweet time.

Though the norm is 60-90+ days, be prepared for it to take longer. Or, I’ve given you ways to condense this timeline if you wish. But now you know the reality of closing a real estate deal.

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If I gave you the choice between getting $100 today or $1 per month for the next 30 years, which would you take? Most of you would want the $100 right now, but if you do the math, $1 per month for 30 years is $360, which is more than three times the lump sum of $100. Still want the $100?

Some of you reading would take the $1 a month, whereas others would take the lump sum. It all comes down to personal choice. The same principle this question demonstrates is true for home sellers. Many homeowners who own their house free and clear would rather take the cash and move on. However, for a large number of sellers, the value of getting monthly payments outweighs the need for a large lump-sum check.

Let’s look more closely at why owners might choose to sell via seller financing rather than just getting cashed out.

4 Reasons Property Owners Might Choose to Sell via Seller Financing

1. Monthly Income

Perhaps the most common reason sellers would prefer to sell via seller financing is to get monthly income. As in the $100 or $1 per month example I used, a lot of individuals would simply prefer to steadily receive checks each month instead of one lump sum. This is especially true for older sellers on a fixed income who need stable monthly income to survive and pay the bills. A $100,000 chunk of money would last only so long for a seller, but if that income were financed over 30 years, the money would last them much further into retirement.

2. Better ROI

Many homeowners choose to sell with seller financing because the interest they get from the financing is greater than they would likely get elsewhere. For example, if a homeowner were to sell a home for $100,000, they could put that money into a certificate of deposit at the bank and receive 1.5% annual percentage yield, or they could seller finance their home and get 6%, 8%, or more. Many seasoned real estate investors understand this concept and eventually move their portfolio from a “holding” phase to a “selling” phase, using seller financing to avoid the hassle of being an owner, while still collecting monthly income by carrying the contract. Therefore, some of the best possible candidates for seller financing are other real estate investors who are changing their strategy. (On a side note, this is another reason making friends with as many local real estate investors as you can is so important. When they are ready to get out of the landlord game, they may choose to sell to you and carry the contract in the process.)

3. Spread Out Taxes

Anytime you make money, the government wants its share, and when you sell real estate, it’s no different. This issue may not be as important for homeowners, because of the IRS rule that allows homeowners to avoid paying taxes on up to $500,000 in profit from selling their primary residence, as long as it meets certain specific criteria.

However, real estate investors are not so lucky and are must pay taxes when they sell. For example, if an investor spends 30 years
paying off a rental property mortgage and now owns the home free and clear, and he decides to sell the property for $100,000, that investor would need to pay taxes on that gain, which could result in a hefty tax bill.

Therefore, many investors choose to sell using seller financing rather than getting a lump sum, to spread out most of those tax
payments over the life of the loan on the seller financed property. You see, the IRS has special tax rules for installment sales, such as ones using seller financing, so the seller may need to pay only a small portion of that tax bill each year while the loan is being paid off. Be sure to talk to a CPA for more details on this.

4. Can’t Sell Otherwise

Many properties simply are not sellable to a typical bank-financed borrower because they are in such poor condition. Seller financing can allow the seller to unload such a property without needing to fix it up first.

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