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Owner Will Carry

Updated: Jan 22, 2021

What does it mean? As indicated “Owner Will Carry” (OWC) means that the existing property owner (seller) will carry the loan. Essentially, they act as the lender.

Is Owner Financing a good idea?

Owner Financing can help sellers sell faster and help buyers get purchase property, even if they would be unable to secure a traditional mortgage. ... The risk is a buyer could stop making payments at any time and a seller would end up going through the foreclosure process.

How does this work?

Owner financing can also be called seller financing, seller carryback financing or seller carryback (because the owner "carries back," or holds, the financing). It works like bank financing, but the buyer repays the seller by making monthly payments over an agreed-upon period with a specified interest rate and terms.

Who holds the Deed?

The buyer, signs both a promissory note (promising to repay the loan) and either a mortgage or a deed of trust (allowing the seller to foreclose if buyer fails to pay). In return, the seller signs a deed transferring title to the buyer. Because buyer holds the title, they can sell the property or refinance.

Advantages of Owner Financing

Owner financing can be a good option for both parties in a real estate transaction:

Pros for Buyers

  • Faster closing: No waiting for the bank loan officer, underwriter, and legal department to process and approve the application.

  • Cheaper closing: No bank fees or appraisal costs.

  • Flexible down payment: No bank or government-required minimums.

  • Alternative for buyers who can't get financing: A good option for buyers who are not able to secure a mortgage.2

Pros for Sellers

  • Can sell "as is": Potential to sell without making costly repairs that traditional lenders might require.

  • A good investment: Potential to earn better rates on the money you raised from selling your property than you would from investing that sum other ways.

  • Lump-sum option: The promissory note can be sold to an investor, providing you with a lump-sum payment right away.

  • Retain title: If the buyer defaults, you keep the down payment, any money that was paid, plus the house.

  • Sell faster: Potential to sell and close faster since buyers avoid the mortgage process.

Disadvantages of Owner Financing

Although owner financing can be beneficial to both buyers and sellers, it also has some legal, financial, and logistical disadvantages:

Cons for Buyers

  • Higher interest: The interest paid will likely be higher than what is paid to a bank.

  • Will still need seller approval: Even if a seller is game for owner financing, he might not want to become a lender.

  • Due-on-sale clause: If the seller has a mortgage on the property, his bank or lender can demand immediate payment of the debt in full if the property is sold. This is because most mortgages have due-on-sale clauses and if the lender isn't paid, the bank can foreclose. To avoid this risk, make sure the seller owns the house free and clear or that the seller’s lender agrees to owner financing.

  • Balloon payments: With many owner-financing arrangements, a large balloon payment becomes due after so many years. If a buyer can’t secure financing by then, they could lose all the money they’ve paid so far, plus the house.

Cons for Sellers

  • Dodd-Frank Act: Under the Dodd-Frank Wall Street Reform and Consumer Protection Act new rules were applied to owner financing. Balloon payments may not be an option and might have to involve a mortgage loan originator depending on the number of properties the owner-finances each year.

  • Default: The buyer could stop making payments at any time. If this happens and they don't just walk away, the seller could end up going through the foreclosure process.

  • Repair cost: If seller does take back the property for whatever reason, they might end up having to pay for repairs and maintenance, depending on how well the buyer took care of the property.

What Sellers Need to Know

Sellers Needn't Necessarily Finance the Sale for Long

As the seller, at any point, sell the promissory note to an investor or lender, to whom the buyer then sends the payments. Many sellers are afraid of selling with owner financing but do not know that the note they hold is something that can be sold to someone else. This could happen the same day as the closing, so the seller gets cash right away."

In other words, sellers don't need to have the cash, nor do they have to become lenders. Be aware, however, that they will likely have to accept less than the full value of the note in order to sell it, thus reducing their return on the property. Promissory notes on properties typically sell for 65% to 90% of their face value.

Since seller financing is relatively rare, we add the words "seller financing available" to the text to alert potential buyers and their agents that the option is on the table.

We prepare an information sheet that describes the terms of the financing, along with a general explanation of what seller financing is since many buyers will be unfamiliar with it.

Seek Out Tax Advice and Consider Loan-Servicing Help

Since seller-financed deals can pose tax complications, engage a financial planner or tax expert as part of your team for the sale. Also, unless you’re experienced and comfortable as a lender, consider hiring a loan-servicing company to collect monthly payments, issue statements, and carry out the other chores involved with managing a loan.

The Bottom Line

While it's not common, seller financing can be a good option for both parties under the right circumstances. But there are risks for both buyers and sellers that need to be considered. To allow the process to run smoothly, it's always prudent to enlist a qualified real estate attorney.


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