An owner contract is an agreement between a property owner and a buyer. The owner agrees to be the lender and the buyer agrees to purchase the property and repay the owner on an agreed upon schedule. The agreement is a written contract. This form of lending is referred to as owner carry-back financing and does not involve a bank or other lending institutions.
A well written owner contract can benefit both the seller and buyer of a property. The buyer benefits because there are usually no loan origination fees and the interest rate can be negotiated. In addition, the buyer can benefit by negotiating a lower down payment, avoid costly mortgage insurance, and pay fewer fees associated with most large lenders and banks.
The seller can benefit from an owner contract because owner financing increases the number of potential buyers, which may lead to a higher selling price. In addition, once the contract is in place, the seller also has a steady residual income. Sellers can expect to collect anywhere from 10 to 20 percent of the total selling price up front, but this is negotiated during the creation of the agreement. A friend or family member may agreed to little or no down payment and this is perfectly acceptable.
There are some risks to owner financing. Because this type of financing involves a legal contract, it is important to have specific protections in place to make sure that each party understands what they are agreeing to and what the consequences are for breach of contract. It is highly recommended that a real estate attorney is retained to complete the contract process.
Many owner contracts include a balloon payment in 5 or 10 years. Make sure that you understand what a balloon payment is and how it can effect your contract if you can't make the payment. Paperwork and tracking payments can also become an issue. Make sure that you have a formal process in place with a third party where payments can be made and recorded.
As a seller, you should make sure that the loan you give is secured by the property. In addition, it is a good practice to require a basic loan application if you do not have a personal relationship with the buyer. This way you can run credit checks, check background information, and clearly identify who the person is that you are lending to.