It is well known that Owner Financing sells properties quickly, especially in cases where the properties or potential Buyers do not fit the traditional loan/mortgage requirements. Seller offers to hold the mortgage note (owner financed mortgage) and receive monthly payments from Buyer as a bank would.
The problem with this approach has been that sellers sometimes don’t want to collect small monthly payments, but instead want to collect soon after closing to purchase another property, or for many other reasons. The benefits of owner financing are many, but sometimes they are not enough to help close a deal.
Basically, this is how an owner-financed real estate mortgage note works:
1. Seller sets the sale price exactly at appraised value and announces “Owner Will Finance…No Bank Qualification!”
Interested buyers go through a prequalification process to determine the best prospect.
2. Seller and Buyer agree on the structure and terms of the note to be created (the buyer of the note may provide some suggestions) and sign a Real Estate Purchase Agreement.
3. At closing, the Seller creates a first mortgage and shortly thereafter sells/assigns the mortgage note to the buyer of the note.
4. The Seller receives the initial payment from the Buyer plus the proceeds from the sale of the promissory note. In a seller-financed note purchase, the note buyer typically covers all closing costs and the cost of their own property appraisal.
Let’s say the seller owns a property that has been appraised at $100,000, but because it is not a conforming lot, they are having trouble finding qualified buyers. Buyers do not seem to commit to the purchase and those who do, do not get their mortgage approved by the Bank.
Seller has the house listed for $90,000, expecting to get $80,000-$85,000 after incentives and costs are paid. But even this price does not attract real buyers.
This is where a note buyer can step in. The seller would be advised to create a promissory note for $90,000, the rest ($10,000) would be the down payment. The interest can be 8%, term 360 months, paying $660.39 per month (Principal + Interest).
The note buyer would purchase this note for approximately $80,000 in cash shortly after the real estate closing. Add to this the down payment and the seller gets a total of $91,000 (less the closing costs of the real estate transaction).
Shortly after the real estate closing and after the new note is registered, the buyer of the note makes the purchase of the note and the Seller gets his money. A perfect example of how an owner financed mortgage makes a property sale possible. And there are no hidden fees or costs other than regular real estate closing costs that need to be paid anyway. The purchaser of the Note generally covers all closing costs for the purchase of the Note.
This approach attracts a good number of buyers and within a few days, the Seller can have their cash in hand.