With the fallout of the U.S. recession that began at the end of 2007, credit standards have tightened making it more difficult for many home buyers to secure a home loan. In some cases, borrowers have the income to cover their note and cash for a sizable down payment, but are still unable to secure a loan through conventional means for various reasons. In these circumstances home buyers must often resort to high interest rate loans, come up with large down payments exceeding 20%, or forgo purchasing a home altogether. Buyers often tend to give up at this point. However, there is an additional option that is available to buyers given a willing seller. This option is owner financing.
In the early 80’s interest rates reached a peak of 18%, making homes in their target price range unaffordable for many buyers due to the high interest payments, which required creative financing options to purchase a home. Many sellers resorted to offering owner financing at lower interest rates in order to get their home sold. In this environment owner financing often made sense to both sellers and buyers and as a result, owner financing was a common occurrence.
In today’s market the playing field has changed. Interest rates are at low levels that have not been seen in decades, housing inventory is sky high, and home values are low. On the surface this seems like the perfect time to buy a home. However, the number of qualified buyers is down significantly due to the tightening of credit standards and the overall loss of people’s net worth due to the global economic meltdown. As a result, many of those who need to sell their home are not able to secure a buyer and many of those who want to buy a home are not able to secure financing.
Although circumstances have changed since the early 80’s, the need of a buyer and seller to come up with creative financing options exists. The combination of continued tight credit standards, low home values, high inventory, and a struggling economy will only exacerbate the need for creative financing in the coming years.
Austin Texas REALTOR® Brian Talley of Regent Property Group LLC was recently faced with a financing challenge while working with a client he was helping find and purchase a home. Brian explained, “My buyer was a doctor with 20% cash down and income to cover a note for a house they targeted to buy. They were preapproved to purchase a home but after securing a purchase contract for a home they loved, the bank decided the buyer was too high of a credit risk and rejected the file. Since the buyer had 20% cash down, we suggested that the buyer and seller consider owner financing. At first the seller was hesitant to take this path, but they needed to sell so they entertained the option. The buyer really liked the house and was willing to consider owner financing. I connected both of them with a local third party Austin attorney and title agent that specializes in owner financing. He explained the process and risks to the buyer and seller, and both decided that it made sense.”
Brian Talley went on to say, “The buyer offered a slightly higher price than the list price and a 20% down payment for a 2 year balloon loan. The sellers would net a large amount of cash after paying closing costs to help them find alternative housing in the short term. Once the buyer refinanced the home within the next two years the seller would receive the balance of their equity from the sale. They both decided to proceed with the sale via owner financing. Not only did the seller get the home sold only 7 days after the buyers initial conventional loan was rejected, the seller received a higher price for the house, paid less in closing costs, and got the home sold after sitting on the market for months. Regarding the seller risks, if the buyer were to default on the loan then the seller would get the house back via foreclosure and the seller would get to keep the 20% down payment on the home. The seller could then put the house back on the market with the chance of making even more money on another sale. Meanwhile, the buyer was able to purchase the house they wanted at a fair price and can now take the time to sell an asset to come up with the cash to refinance. It was a win-win.”
While not all circumstances are right for owner financing, it is a viable option that can be considered in today’s market. With the prospect of increasing interest rates and a struggling economy in the future, the need for owner financing should only increase. Unfortunately, many buyers and sellers are not aware of this option or may not understand it. Simply understanding this option is a good start. The first step is to connect buyers and sellers with a qualified professional and/or attorney that has experience handling owner financing transactions. Once the process and risks are understood, buyers and sellers will be prepared to exercise this option if the right circumstances present themselves.
About the Author: Austin Luxury REALTOR® Brian Talley of Regent Property Group LLC, an expert in Lake Austin homes for sale and Austin luxury homes for sale.
Keith Munsell 
