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Owner Finance
Business

What is Owner Finance? EXPLAINED

The estimated reading time for this post is 170 seconds

Owner finance is when the transaction by which the property seller owner finances the purchase directly with the purchaser. In other words, you as a purchaser go to the seller directly instead of the bank, and you make the seller carry the note that the property is purchase upon.

To better understand this, let’s break this down further with an example. In this example, let’s say you are looking to buy a 10 unit apartment complex in an amazing neighborhood for 10 million dollars. Traditionally, you would go to a bank and talk to a commercial lender. To get the 10 million that you need, you would have to go through an underwriting process to see if you’re eligible for the 10 million dollars.

On top of that, they would also want to see the property’s profit and loss statement, and they will come up with a number called DSCR (Debt-service coverage ratio). The purpose of DSCR is to see how well the net income of this 10 unit building is going to cover the debt.

Basically, to be eligible, you need to go through all this process, which can be very tedious as it can take months and be very costly.

If you were to go for the owner financing route instead of the bank finance route, the process would be much easier. Not only will it be advantageous to you but the seller as well. It is advantageous for the seller because they will have the ability to defer their taxes and have a better income continuation.

It is advantageous because you can close the deal faster, and you also have the ability to negotiate the terms better as the banks will set the terms for you.

In conclusion, owner finance means that you talk directly to the seller instead of going through the bank.

Types of Owner/Seller Financing

Now that you’ve understood what owner financing means, let’s take a look at some of the different types of owner financing.

1. Free and Clear Financing

When a property is free and clear, this means that the property has no liens or encumbrance. This means that the seller and buyer have the ability to negotiate any terms they want to get the deal done.

2. Equity Financing

In this type of financing, the seller will only finance the equity of the property. Whereas the buyer would be responsible for paying off the seller’s encumbrance and liens.

3. Blanket Financing

in this type of financing, the seller would give the property to the buyer subject to the current existing mortgage. This means that the buyer would be responsible for paying off the mortgage through the seller. 

Combination of option 2 and 3 Financing

The combination of both options 2 and 3 means that the buyer would pay off the mortgage and finance the owner’s equity.

Conclusion

Owner’s finance or seller’s finance basically involves the buyer approaching the seller directly to negotiate the terms without the bank being involved. Typically going through this process would be advantageous for both the seller and buyer as the process to do so is much faster than the banks.

Typically, there are more seller finance methods by which a buyer may go through. Still, the 4 types listed above are usually what a buyer would expect if he/she chooses to go for the owner’s finance route to purchase a property.

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