Seller’s Toolkit: Owner Financing

 

In today’s buyer market, it is becoming more and more essential for seller’s to differentiate their property in order to facilitate a sale in a reasonable time frame.  There are many different ways in which to posture your property to stand out in a crowded market.  The simplest way is to price your property comparatively lower than your competition.   Often however, this is not the most attractive option for a seller not in the immediate need of selling.  So what then, are other some viable options for a seller looking to stand out?  The most valuable, yet underutilized tool in a seller’s toolkit to help differentiate their property is owner financing.

 

 

(This is how you stand out) 

 

 

Often, this option is looked at with trepidation by sellers.  Largely, this is a concern based in a lack of understanding of the process, and what this option means for seller’s.  The question is what are the advantages and potential pitfalls of owner financing?   Let’s look at the advantages and disadvantages of owner financing.  While this may only be a cursory look, it should be a benchmark for sellers to help determine if a more in depth look at owner financing should be considered.

 

First and foremost, let us start with a disclaimer.  We here are at Georgia Country are not lawyers and any advice we give should not be construed as legal advice.  As a seller, don’t necessarily take any advice or commentary we may give as the gospel.  Getting any advice, whether good or not, is not an excuse not to do the research yourself.  Make sure you discuss these options with your real estate professional or your attorney before you act on any opinions we may share.  Also, bear in mind we are focusing on owner financing land and not homes.  While most of these principles apply to either, there are some variables that also should be considered when owner financing a home that are not being covered here.

 

The Advantages of Owner Financing

 

So what are the advantages of owner financing?  There are several.  The first and most important advantage is ease of acquisition for a buyer.  Buying land is quite a bit different from buying a home in several perspectives.  One aspect is obtaining financing.  Land is generally not as easy to obtain financing for as a traditional home.  Land is usually viewed as an investment purchase much similar to a second home by lenders.  As such they tend to have different guidelines than for primary residences.  They tend to be a bit tougher to qualify for and quite often involve substantially more paperwork.  They also often tend to require substantially greater down payments and have higher interest rates.  This provides a great advantage to owners willing to finance their land.  As an owner providing your own financing you can alleviate a huge amount of the paperwork and difficult requirements for a buyer to purchase your property.  This means you have just increased your prospective buying pool dramatically.  The more potential buyers you have, the more likely you can sell and sell more quickly than your competition.

 

A second advantage of owner financing is interest income.  As an owner financing your land you will be charging interest on the amount you finance for the buyer.  This income is above and beyond whatever capital gain you may have realized at the sale of your property.  Interest rates will be negotiated between the seller and buyer, but for unimproved land 8-10% in the current market would not be an unreasonable expectation for a seller.  This interest income in conjunction with a principal amount will provide a steady monthly income for a seller.  This can be extremely helpful for many seller’s, particularly those with fixed incomes.  In addition, most typical notes on unimproved land are from 10-15 years.  Unlike 30 year amortizations on homes, you will likely be able to receive all your payments in your lifetime.

 

Another potential advantage of owner financing is the ability to spread out a capital gain tax debt.  If you own a property where you anticipate a large capital gain by owner financing you would not be required to pay the entire tax in the year of closing.  You may instead pay the capital gains tax as you receive it in payments.  While this requires some more difficult accounting at the end of the year, it will prevent you from seeing those huge tax debts in a single year.   

 

Disadvantages to Owner Financing

 

 

(For those who don’t remember, this is a pitfall)

 

What then are the disadvantages to owner financing?  The biggest primary disadvantage is the concern of foreclosure.  Many buyers fear this in large part because they have no idea how to begin the process and what negative impact it will have on them.  Fortunately for individuals choosing to owner finance in Georgia, Georgia is probably the most friendly State in the Union for a lender to recoup their debt.  Georgia is a non-judicial foreclosure state.  This means one does not have to go to court to foreclose.  This is a massive advantage for an owner needing to foreclose on an unpaid loan.  Foreclosure in Georgia is a relatively simple process that any real estate attorney in Georgia can inform you about and perform for you.  Usually the cost should run you somewhere around $500-$1,000.  In most cases, the borrower has more than offset these costs by their down payment as well as any monthly installments they have made.  If they don’t pay, you foreclose.  Any funds they have paid to you remain yours and the property reverts to you after foreclosure.

 

A second potential disadvantage is not receiving all of your proceeds at closing.  Really this is an issue which must be decided by a seller before listing their property.  Some sellers will need the entire sum either to pay off an existing debt on the property or to use for a down payment on another property.  However, it has been my experience that many land owners do not have debt on their property.  This really becomes a question for each seller as to what they will need to do with their proceeds.  If a seller must have their entire proceeds at once then owner financing is not for you.  If this is not the case, owner financing is a viable option with many benefits.

 

A final disadvantage is accounting.  It is more difficult to handle the transaction that is done with owner financing.  Not egregiously more difficult, but more difficult nonetheless.  An owner should certainly consider how they intend to handle the accounting of the payment of the debt before they decide to owner finance or it could be a problem down the road.  Most accountants can easily assist you in this matter, and it usually I not too much of an irritation as long as you plan ahead.

 

In the end, owner financing is not for everyone.  It is however an extremely valuable tool that is too often discarded by seller’s before the even look into its many advantages.  Any landowner who has decided to sell should look into their current situation and determine if it is a possibility for them.  If so, offering owner financing can make your property stand out in a crowd.

 

 

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About Ryan Brashear

Ryan Brashear has been a licensed REALTOR® for 14 years specializing in land, farm and acreage sales in the CSRA. He is co-owner and Vice President of Brashear Realty Corporation as well as co-owner of Brashear Development Corporation. He has served as a Past President of the Greater Augusta Association of REALTORS® and is currently serving as a Vice President of the Georgia Association of REALTORS®.
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2 Responses to Seller’s Toolkit: Owner Financing

  1. marie karr says:

    My husband & I bought our 1st home 2years ago from his grandfather who let us do owner financing. We really want to get out of the house & find something else but since we did owner financing (& have been making monthly payments to his grandfather) how do we get out of the house? Are we able to sell or should his grandfather be responsible for taking us off the contract & then him try to sell?

  2. If your your husband’s grandfather owner financed a house for you, he is in the same position as any other lender. If you sell your home, he would be paid off and you would receive any equity remaining. Your grandfather has no responsibility for the home unless and until he forecloses against the property. If he should foreclose, then the property will revert to him if he is the successful bidder at the foreclosure sale. If the property is foreclosed then you will not receive any equity unless a bidder other than your grandfather bids in excess of what your grandfather is owed. It is unlikely that there even will be other bidders.

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