Owner Financing Property

Perhaps you own a piece of property that you want to sell. If you're like most, you would just like to sell, take your cash, and move on. However, perhaps you should consider "owner financing" your property--that is, letting someone buy your property on payments. Before you owner finance anything, consider some of the advantages and disadvantages, as well as ways to best protect yourself.

Advantages:
1. You spread out your tax burden. If you're making a profit, selling by taking payments can allow you to spread out the taxes you'll pay.
2. You can make money on top of money. If you sell your property and finance the purchase, you can charge interest, which lets you make money in addition to your initial sales profits.
3. You create a larger buyer's pool for your property. By offering owner financing, you can sometimes pick up possible purchasers who otherwise would not be able to buy your property (e.g., someone starting out with no credit, or someone who's got a poor credit history preventing them from getting a loan, but who now can make payments).

Of course, there are some disadvantages as well:

1. You don't get your money up front. This is pretty self-evident, of course, but bears stating. That means if you owe money on your property, you can't pay off the mortgage (and thus, owner financing in such a case will be an imperfect solution). Also, if you need the money from this sale to finance something else, owner financing may not be for you.
2. You will create a long-term relationship with the buyer. You'll be a bit like a landlord, which means you'll be making calls if someone's payment is late, or if you find out the buyer has let his insurance on your property lapse.
3. What if the buyer stops paying? With owner financing, there's always the risk that your buyer, for whatever reason, will stop paying. This means you might have to go through a costly foreclosure procedure, and take back a property that you no longer wanted to own.

STILL INTERESTED? If so, below are some tips to help protect you if owner financing the sale of a property.

1. Do it right and have an attorney draw up the necessary paperwork. Do not attempt to draw up papers on your own. In North Carolina (and probably most other states), the law is very specific about what has to be done to owner finance property. For example, many of my clients had drawn up their own documents that they called "lease/purchase" documents, which stated that if one payment was missed, the buyer could be "evicted" and all payments kept as rent. They believed this was better than a traditional mortgage document, which would take two to three months to foreclose on in the event of a default. Unfortunately, in North Carolina, those documents are not enforceable, and when the debtor stopped paying, my client lost its attempt at an eviction, and eventually had to hire me to sue the people to get out. We got them out--after the debtors had lived in the house rent-free for more than a year.

2. Do your own due diligence on the buyers. Do they have bad credit, or do they perhaps just not have much credit yet because of their age? Are the people going to pose a risk? Run a credit check on the potential buyer through one of the credit reporting services.

3. Shore up your collateral. Offering 100% owner financing is a great way to sell your property. However, if a buyer has little invested in the property, you'll carry more risk. Although it is not always possible, when owner financing, try to get some money down. This of course will reduce the risk that if you foreclose on the property you will incur a financial lost. But more importantly, when a buyer has invested money already into the property, he is less likely to default in his mortgage to begin with.

4. Protect your investment. For so long as you are financing the sale, think of the collateral as "yours"--because one day, you might have to foreclose on it and sell it at a public auction. Therefore, it is in your best interest to make sure the collateral is taken care of.
a. Have your attorney draw up requirements that the debtor will keep the property insured and list you as the mortgagee on his insurance--and make sure that the insurance company mails you proof of the policy annually. You don't want to know how many properties I've seen mysteriously burn down right before the owners were to lose them at foreclosure. Being listed as a "mortgagee" (and not an additional insured) on the policy means your mortgage will be paid off (and you'll get your money) if the property is destroyed--even by an act of the insured!
b. Make sure the property taxes are paid on time. If you find out the debtor is not paying his taxes, it may be an early indicator of trouble.
c. Put in the agreement that you may remedy problems and charge the costs back to the loan balance. If, for example, the debtor fails to pay taxes, or allows a huge hole to open in the roof of a house, you have a self-interest in remedying the problem. If the debtor refuses to remedy the problem, place in the agreement that you can either foreclose or fix the problem and charge the costs to the loan balance.

5. [Advanced] Understand anti-deficiency laws. In North Carolina, the law provides that owner-financed mortgages are non-recourse. This means that if the debtor default, the seller can only foreclose on the property and cannot seek a personal judgment against the debtors. This can be a disadvantage if the sale of the property brings less than what it is owed (e.g., you're owed $90,000 but the property only brings $60,000 at a sale and you don't want to bid any higher to get the property back). First, you need to understand the limitations of the anti-deficiency laws. Second, if you don't like this, in North Carolina you can circumvent the laws by creating a separate entity to finance the property. For example, perhaps I own the property and sell it; however, I can structure the sale so that, though Wesley Deaton sells the property, the buyer is financing the sale with "Wesley Deaton, Inc." This is a bit tricky, and you'll need to seek good counsel so you don't create undesired tax implications (and violate any specific state laws regarding licensing of lenders). However, if you're very concerned about this issue, then setting up an entity lender is an option.

If you'd like to learn more about owner financing property in North Carolina, give me a call at 704-735-0483 to set up a consultation, or email me at wldeaton@vnet.net