Down thru the years in my real estate career, there have been times when OWC [Owner Will Carry] terms made perfect sense to me, and others in this career. Generally there are a few guidelines that a seller should follow when offering this type of financing to a buyer. Read More…….
I guess the first place to examine is on the buyer side? Why cant the buyer get a traditional bank loan or mortgage? Bad credit? Short on cash? Divorce? Recently Re-located to this area? Funds tied up elsewhere? To much revolving credit card debt? Medial emergencies?
I guess the next place is to examine is the sellers side? Money market accounts pay out about 1-1.5% return on your money invested. Short term CD’s are not much better on their rate of return either. How much of a risk taker are you with your home? How do you protect yourself? Is this a good deal for me?
SELLERS: How to protect yourself!
1] Your mindset. You need to think of yourself as the bank, or the mortgage lender. What do they require from a buyer in order to approve the loan. If you think like a banker, your well ahead of the traditional handshake scenario, with a potential buyer. Ask for a current credit report and review with your buyer. Ask for verification of employment. Ask for verification of income from that employment. Ask for proof of funds for the down payment. Make buyer aware that the mortgage will be recorded with your County Clerks office…making your loan in 1st lien position. If the buyer has a problem with any of these….don’t move forward with the transaction.
2] With the above satisfied, you should think about a prevailing interest rate on the mortgage. I have suggested to my clients over the years, to get 1% to 1.5% interest over the current 30 year fixed interest rate. Today the prevailing rate is around 4%…so I would suggest you ask for 5 or 5.5% interest rate on the note. I would also ask for at least 10-15 % down payment.
3] Another consideration, is how long will you be willing to carry the mortgage? My suggestions are always 5 to 7 years maximum. The note can be amortized over a 30 year period, but have a balloon payment in full at the end of the 5th or 7th year mark is a must. A hint: Have your local title company prepare an amortization schedule of the monthly payments to present to your buyer, for his approval, once you have decided on a balloon term limit.
BUYERS: How do they benefit? For one, they have a recorded instrument that allows them to gain equity in the home after closing. In a rising housing price market, the buyer will enjoy a value increase position or instant equity in the home value. By making on-time payment’s to you the seller, they are also building up a great credit history. The buyer can enjoy home ownership, just like the rest of us.
Trip wires to avoid as a seller: Be sure there is a late penalty due, if payment made 5 days beyond the due date. Never a %, just a flat fee of $25 – $50. Be sure buyer provides proof on homeowners insurance paid annually with you as a named insured. Be sure the property taxes are paid annually in the first month available to be paid, with written proof of payment to you. Allow the buyer a pre-payment clause. This allows the buyer to pay ahead on the mortgage, thus reducing the end balloon payment amount. Play fair! Generally allow NO improvements or remodeling of the home without your written consent as long as the mortgage is in place. Generally items like roof replacement, hot water tank replacement, etc are the buyers responsibility.
These are the facts and the tips needed when both buyer and seller agree to OWC terms. It can and has worked great for both my sellers and buyers over the years. If you as the buyer remember your obligations, and you as the seller remember your place in the transaction as the banker only…everything should go smoothly. Just remember: A handshake is great to meet a friend, but never to close a real estate transaction…put it in writing!