"Door County Real Estate" by: Kevin Nordahl, REALTOR®

Owner Financing

If you’re like many people you have a love/hate relationship with your financial institution. When it comes time to finance for your residence signing some papers for the big payday is very exciting. But that is also the day the 15, 20 or 30 year noose becomes firmly wrapped around your neck. Owner financing can be an alternative if a seller is willing to entertain this option.

Owner financing may be a very good alternative for short-term lending situations. Let’s say you plan to make some major life changes in five years and the house you are currently looking at is something you don’t plan on keeping around much longer than that. Maybe you plan to purchase a house to refurbish and sell it again and you could use some extra money for the project. Or perhaps your bank has turned you down for a home loan saying that you need to establish credit for a couple of years. Maybe you don’t have much of a down payment and you need a little time to build equity. Owner financing is ideal in these types of circumstances. Here’s how it works.

First, negotiate the terms of your land contract. A land contract is the legal document used in owner financing. In order to accomplish this, you must ascertain if the seller will consider owner financing in the first place. Some owners who are not in a hurry to get their money will be okay with this suggestion. Second, be sure to incorporate language into your offer to purchase stating specifically what your owner financing terms will be. Elements to this negotiation include: the term (time) the financing will occur (eg. 3 years, 5 years, etc.); how much of a down payment will be made; how much will be financed; how much the payoff/balloon payment will amount to; what the interest rate will be and whether or not it will change during the term of the loan; also what happens in case of default and can you prepay without penalty? Your REALTOR® or attorney can help you out with these matters by using a mortgage calculator (found on most lending institutions’ websites) and using the correct legal forms for negotiation.

Owner financing is not for everyone. In many short-term scenarios banking in a down market is just as attractive as owner financing. It really depends upon the market and the seller’s willingness to negotiate. If a seller’s land is appreciating at a rate of 6-8% then taking owner financing at 5% doesn’t make quite as much sense as holding on to the property and selling it at a later date or selling it outright. Owner financing is very circumstantial. With mortgage lending rates at all time lows, banking your money with a financial institution and earning valuable points towards your superb credit rating is the way to go.

Finally, what happens when it all goes wrong? Let’s say you bank your money with an owner for your commercial property. When you have a bad month will that owner take pity on you? The answer is definitely not. By obtaining owner financing via a land contract you are asking the owner to be the bank. Details of default are written into your land contract. If you default and miss your payment you likely owe them interest, just like a bank. Here’s the kicker, if you default over an extended period of time, you lose your property back to the owner. That’s right. The owner retains the property and all rights to ownership and you get none of your money or down payment back. Owner financing is far different from renting. That’s something to think about.

Most lenders will tell you that people rarely keep a 30 year mortgage around for long. At some point situations change and buying down a smaller note in the final years becomes something many people end-up doing. Frequent moving also changes people’s long-term financial pictures when it comes to home lending. Be sure to talk with a financial planner or accountant before considering owner financing.

Kevin Nordahl is a life-long resident of Door County, a REALTORŪ and a member of the Door County MLS. He is a Past President of the Door County Board of REALTORS® and a Senior Sales Consultant at Coldwell Banker Door County Horizons in Fish Creek. He may be reached online at knordahl@doorcountyrealestate.com or by phone at (920) 493-4004.

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