With selling real estate in so much turmoil these days, all kinds of rare financial situations are cropping up so that someone will purchase a home that needs to be sold. Short sales and foreclosures are common now, where they once were very unusual in the marketplace. Also, "Owner will carry note" has become another phrase you might see on real estate ad listings. It's basically seller financing, and can refer to lease/rent-to-own agreements, land contracts and contracts for deed. Seller financing is often for a temporary period of one to five years, after which the buyer obtains traditional financing to conclude the transaction and obtain the title to the property.
"Owner Will Carry Note" Defined
"Owner will carry note" means, simply put, the owner of the home will finance your purchase and serve as the bank. Whatever loan he has in place on the home will be his responsibility to pay, and you will make a monthly payment to him. However, one needs to be extremely cautious when entering such an agreement, because the terms will be established by the owner, not a bank. Consider hiring a licensed real estate agent or real estate attorney on this type of purchase.
Why Would A Homeowner Do That?
In a tough real estate sales climate, many people have to put traditional selling ideas aside. Some people have a home they simply cannot pay for because they are upside down on their loan (they owe more than the home's current value). This kind of seller just needs to be out of her month-to-month payments. But not every buyer can qualify for a loan these days, and many people are willing to take on a riskier buyer than a bank would. Or some sellers may own more than one home and want to get out from under properties they were not able to flip (fix and resell) during the housing boom. Whatever the motivation, a seller who is offering to carry the loan for a buyer is, for some, a way into a house they could not qualify for through a lending company or bank.
Protecting The Seller/Owner
Hire a real estate lawyer in any and all cases of carrying a note for your purchaser and in concluding the sale. Whatever money it costs in the short run is more than made up for in the long. Too many questions about this kind of financing need answers, and a lawyer and professional real estate agent will be valuable. Many people who carry a note will set up an escrow account that has strict conditions; for instance, if the monthly payment is not received each month by a certain date, the ownership of the home immediately reverts back to the original owner, any principal that the buyer has paid is forfeited to the seller and the sale is null and void. It may seem like a harsh tactic, but it is one that will protect a seller from late or skipped payments by the buyer.
Protecting The Buyer
Buyers should hire a real estate lawyer for protection. Or they can use the same attorney as the seller. There is nothing adversarial in this negotiation, and terms and conditions can be put down in writing that will keep this unusual loan arrangement from becoming a problem. The main concern for the buyer is that the home seller will continue to pay the bank on the note while the buyer pays the home seller.
As an added bonus to a private sale, a buyer may save money in points and closing costs that will not be necessary. Buyers just need to be clear about the interest they pay on the loan and make sure it is in line with common lender percentages for someone with their credit and financial history.
Use Good Instincts
Usually a buyer will obtain a home loan and not have to be involved with the seller again. But with a seller carrying the loan, the buyer will be involved on a month-to-month basis. Make sure you do some research on the seller and take into your account your feelings about the person.
The seller should also obtain a credit report of the buyer, as the home is still in the owner's name and the mortgage payments are still the owner's responsibility. Do not look the other way if you find out about past problems the seller or buyer has had.