YMMV o' course -- but in our NW AZ market, properties are frequently offered with, among other terms, OWC which means Owner Will Carry (also called Seller Carryback, Seller Financing or Land Contract).
Owner financing can be a GREAT way to buy a property!
- No loan costs! Escrow length will be lessened because there is no lender involved. The seller is your bank.
- You can buy a property that a bank can't/wont finance (perhaps due to the age or type of the property-pre-HUD or singlewide mobilehomes or properties with ‘issues' like repair or permit problems or nonconforming types like a rezoned commercial area with homes)
- In rapidly appreciating or declining markets where appraisal would be an issue, you can typically bypass the appraisal (but do have your agent do a CMA so you are not overpaying!)
Owner financing can be a GREAT way to sell a property!
- No appraisal contingencies!
- No fallthroughs or delays from comatose loan processors.
- No arrogant underwriters.
- Your transaction can close fast.
- And YOU collect the interest!
Then again . . .
Owner financing can be a TERRIBLE way to buy a property!
- Terms may be more advantageous for the seller. Owners don't carry on properties for their health (generally-investors who can afford the cost of a default and reclaiming the property might) and you can expect to pay a much higher interest rate and larger down payment than if you got conventional financing. Also, owners do not like to carry for long periods or with too-low monthly payments. They want you to be in as risky a loss position as they are in order to agree to finance you. And who can blame them?
- Your payments generally do not appear on a credit report. So you will most likely not be rebuilding poor credit UNTIL you have paid off the property and/or can show that you pay timely.
- There are setup and servicing fees that have increased dramatically in recent years.
Owner financing can be a TERRIBLE way to sell a property!
- The risk and cost of a default rests on you. You will need to remove the squatters, reclaim the property and repair it after it's been ‘lived in'.
- If you don't insist on impounds for taxes and insurance, you may end up on the hook as the property taxes are still your responsibility until it's paid off. And should that property burn to the ground and the buyer didn't pay those insurance premiums . . . OUCHIE
When selling an OWC property:
- Either require a credit report or employment/income statement from your buyer.
- Insist on impounds for taxes, insurance and any assessments that have been assumed.
- Offer a home warranty.
- Consider an ‘introductory' rate (interest only or low rate) for a short term to a buyer with a LARGE down, incentivizing buyer to refinance in X years (if the property will qualify)
- Receive a significant late fee for payments not on time.
- TALK TO AN ATTORNEY about the tax/legal implications of owner financing and the remedies for default. Protect yourself. Some owners have made a career of making seller-advantageous deals and reclaiming/reselling after default-over and over-keeping the interest and DPs.
But most owners just want it to go-and STAY-AWAY!
When buying an OWC property:
- There are five major negotiating points:
Price - Interest rate - Down Payment - Term - Monthly Payment
Be ready and willing to compromise on at least three of those terms. You will probably not create a win-win if you ask the seller to discount by 30% with 5% down and 4% interest for 30 years!
- Show evidence that you can be trusted to pay the seller! If you have good credit, pull your report or show your FICOs. At least be prepared to disclose your employment or source of income. Yes it IS the seller's business!
- If the property is ‘theoretically' financeable, don't expect the seller to offer a low interest rate because if they are offering the property OWC, they WANT to earn the interest.
Personally, I love to buy with the seller as noteholder. If you offer the seller a decent down and decent monthly payments short term, you can often get a below bank interest rate and often other good terms as well.
PS. There are often occasions that owner financing is not LISTED as offered, but if you make your offer strong, research the encumberance level of the seller and ask for it . . . well, it has been known to happen . . .