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How You Grant Owner Financing For Your FSBO Home?

Feb 23, 2008
If your 'For Sale by Owner' property has a significant amount of equity that has accrued in the house, you may find that a very profitable advantage can be gained if you are a seller who is willing to provide owner financing. Of course, sellers always hope for a cash sale to a qualified homebuyer for the asking price or above, but in practice, most sales--FSBO or otherwise--don't work out that way. If you choose to provide owner financing for the sale of your real estate, you can come out substantially better than if the homebuyer goes through conventional financing arrangements.

If you have accrued significant equity in your 'For Sale by Owner' real estate, you may find it to your advantage to provide the homebuyer with a seller-financed first or second mortgage on the property. Sellers find that owner financing is beneficial because it allows the seller to charge more for the price of the house. Seller financing also allows the holder of the mortgage--the seller--to earn a higher rate of interest than could be gained by investing the money in a savings account or certificate of deposit.

By agreeing to finance a mortgage for the homebuyer of the FSBO property, the seller makes it possible for the homebuyer to %purchase% the house. There are many reasons why the homebuyer would have trouble obtaining financing, but usually they relate to credit worthiness. There may be other problems making obtaining a mortgage loan difficult. The seller who is nearing retirement age will appreciate having a regular monthly payment arriving from the homebuyer to repair the mortgage loan.

Seller financing may take the form of either a first or second mortgage. In either case, if the homebuyer defaults on the loan, the mortgage holder can suffer a loss. The first mortgage holder can impose a forced sale on the property, known as a foreclosure, but the second mortgage holder is unlikely to get anything at all from the forced sale. Because of the higher risk of loss, most second mortgage holders impose a higher interest rate.

Qualification of the homebuyer will be your responsibility when you do a seller financed transaction. You will want to ask the borrower for a financial statement and copy of their credit report in order to verify that they have the income necessary to make the mortgage payments each month. By documenting the details of the transaction and getting the legal papers signed at closing, you will be protecting yourself financially. Be sure to have an attorney look over the legal documents to make sure they are accurate and complete.

Since bankruptcy and foreclosure rates in the United States have become more common, you must accept that taking the house back from the homebuyer in the event of a default on the loan may be required. This procedure can be complex and sometimes costly. The danger of default on the loan is the largest single disadvantage for the concept of owner financing.

Accepting the risk of foreclosure proceedings in order to obtain the advantages of a larger purchase price on your FSBO property and the ability to receive interest earnings on the amount of the proceeds for the sale of your real estate seems acceptable to many sellers who choose owner financing.
About the Author
Tom Beaty offers California Real Estate information for buyers and sellers. Don't buy or sell without visiting this Blog or it could cost you: California real estate
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