This series of articles was conceived after realizing how many people in Oklahoma have questions about seller-financing in real estate transactions. Whether we are talking about contract-for-deed transactions, rent to own, or lease with purchase options, many people are interested in either buy, or selling, real estate without using conventional bank financing.
In this series, we are going to discuss what it means to seller-finance a deal; the reasons that buyers and sellers may prefer this type of deal structure; and the different versions of this type of deal structure that may exist.
What does “Seller-financing” mean in a real estate deal?
The terms “seller-financing” and “owner-financing” both refer to the owner/seller of a property agreeing to allow the buyer to make payments over time. The word “financing” is used to refer to the purchase price being financed over time.
As in all real estate transactions, there is an agreed purchase price that must be paid by the buyer to the seller. The buyer may borrow that amount from a bank, and deliver it to the seller. Or, as we are discussing here, the buyer may “borrow” it from the seller and make payments back to the seller in order to ultimately own the property in the end.
Why would a Buyer of real estate want the Seller to finance the purchase price?
There could be many reasons why bother sellers and buyers may prefer to do an owner-financed deal.
For buyers, the obvious reason is that they don’t have to submit loan applications to different banks, hoping to get approved by one. Banks also have a process called “underwriting” which means they decide if a borrower is qualified based on documentation the borrower provides.
Traditional underwriting at a bank is typically very conservative and is very hard on self-employed individuals and small business owners. Additionally, traditional underwriting does not look favorably on inconsistent patterns of cash flow, even if a borrower possesses other assets.
Therefore, a Buyer may love the idea of avoiding the loan application process with a traditional bank in favor of negotiating with the Seller on the terms of a payment plan.
Why would an Owner/Seller agree to finance the purchase price of real estate in Oklahoma?
Just as the Buyer may prefer to avoid the banks, the Seller might also want to avoid losing the deal because the Buyer can’t get approved with traditional financing. Some pieces of real estate just can’t be financed with conventional financing. There are reasons a bank won’t finance certain properties, regardless of the buyer’s credit profile. For example, the property could be of an unusual type or have some other odd feature that makes conventional financing not possible (or not affordable). In this type of situation, the Seller may recognize that if he wants to actually get this thing sold, he may need to assume the role of the bank and finance the purchase.
Sometimes the Seller may believe the Buyer to be worthy of financing, even if a bank does not. The Seller may see something in the buyer that the bank is incapable of seeing, such as how good the Buy could be at operating the property. For the Seller, they may be willing to bet on the Buyer’s success and have confidence that the monthly payments could be serviced on time.
Then there is there is the investment aspect of seller-financing. Owners of real estate, being used to the monthly cash flow from the rental income, may want to keep the monthly income coming in after they exit the deal. For these types of investors, they may prefer to carry the loan for the buyer, and collect the interest and fees associated with it. These types of Sellers may even want to maximize what they can make by charging an origination fee, as well as a prepayment penalty in case the Buyer ends of refinancing the property with a conventional loan.
Hire a Real Estate Attorney to prepare owner-financed transaction documents
As you can see, there are many reasons why parties to a real estate transaction may prefer owner-financing, as opposed to conventional financing from a bank. If you are a buyer or seller and would like to consult with an attorney to have these documents prepared, you may call our office at 405-607-7799 to schedule a consultation.
In our next article, we will discuss the different types of contracts that can be used in seller-financed transactions.