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It is well known that Owner Financing tends to sell properties faster, especially in cases where the properties or the potential buyer do not conform to conventional lending/mortgage requirements. Seller offers to hold the mortgage note (owner-financed mortgage) and receive monthly payments from Buyer in the form of a bank.
The problem with this approach is that sellers sometimes don’t want to collect the small monthly payments, but instead want to cash out immediately after closing to buy another property, or for a variety of other reasons. Owner financing has many benefits, but sometimes they aren’t enough to help close a deal.
Basically, this is how an owner-financed real estate mortgage note works:
1. The seller sets the sales price at exactly the appraised value and states “Owner Will Finance… No Bank Qualifying!” advertises.
Interested buyers go through a pre-qualification process to determine the best prospect.
2. The seller and buyer agree on the structure and terms of the note to be made (the note buyer may make some suggestions) and sign a real estate purchase contract.
3. At closing the seller first creates the mortgage and immediately thereafter sells/assigns the mortgage note to the note buyer.
4. The seller receives the down payment of the buyer and the sale proceeds of the note. In a seller-financed note purchase, the note buyer normally covers all closing costs and costs for appraising their property.
Example:
Let’s say the seller owns a property that’s appraised for $100,000, but because it’s not a conforming lot, he’s having trouble finding qualified buyers. Buyers don’t seem to commit to the purchase and those who do, don’t get their mortgages approved by the bank.
The seller has the home listed for $90,000, expecting to realize $80,000-85,000 after incentives and costs are paid. But even this price is not attracting genuine buyers.
This is where a note buyer can step in. The seller would be advised to make a $90,000 note, with the remainder ($10,000) being the down payment. Interest can be 8%, term 360 months, payment of $660.39 monthly (principal + interest).
The note buyer will purchase this note for approximately $80,000 in cash immediately after the real estate closes. Add the down payment to this, and the seller gets a total of $91,000 (minus closing costs for the real estate transaction).
Shortly after the real estate closes and the new note is entered, the note buyer purchases the note and the seller receives his money. A perfect example of how an owner-financed mortgage makes the sale of real estate possible. And there are no hidden fees or costs other than regular real estate closing costs that have to be paid anyway. The note buyer typically covers all closing costs for the note purchase.
This approach attracts a good number of buyers and within a few days the seller may have his cash.
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