Maybe you’re a highly motivated seller wondering why you’re not seeing any interest from buyers. You could be seeing a lot of interest and even have buyers who are ready to make the sale happen, but aren’t able to because they can’t get approved for a loan. The shoe could be on the other foot and you could be a buyer that’s excited and ready to pull the trigger on a purchase but you’re having trouble obtaining financing from a conventional lender.
One of the leading obstacles in the real estate transaction process is obtaining financing. Since obtaining a loan for land can be more challenging than a traditional mortgage for a home, this is a real issue that can come up in the land market.
No one wants to feel stuck. A legitimate solution to this problem can be owner financing, aka seller financing, if it’s done right. Owner financing is basically what it sounds like—instead of going to an actual bank for a loan, the property owner becomes the bank. There's no actual money given to the buyer. The seller grants the buyer permanent use of the land in exchange for payments that will eventually add up to the agreed-upon purchase price of the property (plus interest, servicing fees, and closing costs). This agreement frequently takes the form of a promissory note or land contract.
In some cases, owner financing may only cover a portion of the purchase price, while an institutional lender covers the remainder.
When it comes to vacant land, there are likely scenarios where the only way you’ll be able to buy or sell a property is through the option of owner financing. Like with many opportunities in life, if there was no risk involved, everyone would be doing it. Seller financing comes with some risk, but it also comes with the possibility of some big-time rewards.
If you’re the bank, you make the rules (within legal regulations of course). Offering to finance the purchase yourself means not only do you get to name the price, you get to name the down payment amount, interest rate, pay period schedule, the length of the repayment period, and whether or not you will add servicing fees and closing costs.
If you’re the owner and you bought the land for a great price, you can often recoup a large percentage of what you paid just from the down payment. You might try and work with the buyer and charge 5% down. You may feel you need to charge 10-20% down or more if it makes sense.
Since the seller gets to choose, interest rates can vary. Often times they may be double or higher than double what a bank would charge. Where a bank might charge a 4% interest rate, owner financing rates may be as high as 10%. The catch is many buyers are willing to pay it to make the deal happen. In many cases, they just want to know what the monthly payment will be, and if it’s affordable, they’re ready to buy. This works for both parties because the seller gets a higher interest rate and the buyer gets to purchase the land when they otherwise may not have been able to. The same goes for the payment schedule. Hopefully, an agreement can be reached that’s in the best interest of everyone involved.
One of the valuable benefits to the owner is owner financing creates streams of revenue. Sure, everybody would love a lump sum of cash to put in the bank, but having consistent money coming in every month isn’t bad either. Most people aren’t opposed to some added peace of mind, and it may not be as risky as it sounds. If a buyer defaults on their payments, you can repossess the property, keep the payments they already made, and start the process over.
If you list your land for sale with the option of owner financing, you’re instantly increasing your pool of potential buyers. Adding buyers to the mix will usually translate into increasing your chances of selling, especially if you’re flexible. Banks may decide not to lend to buyers whether it’s because they don’t fit the profile they’d like to see, the market conditions don’t support it, or it could be because they rarely give out land loans. When you’re open to owner financing, you give buyers that are victim to those circumstances an opportunity to buy land.
There are several straightforward reasons owner financing can make sense for buyers, many of which have already been hinted at above. A buyer could be turned down by a lender and get approved by the seller. This could be because the seller needs to sell the land quickly, has had success with owner financing in the past, or simply feels like you're trustworthy. Owner financing may allow you to buy property when otherwise it wouldn’t be an option.
Where an institutional lender will have fixed terms and practices that in many cases are non-negotiable, owner financing leaves it up to the seller. The seller may be willing to seriously negotiate in order to make the deal happen. This allows for the possibility of flexible and more favorable financial terms.
The closing process can be faster and cheaper with owner financing. There’s no waiting for the lender to perform due diligence during the closing period. Hopefully, the seller has already done their homework to get this far in the process, so you can get on your land quicker. Eliminating bank fees and appraisal costs are going to appeal to buyers as well.
There are some obvious reasons why some people don’t offer owner financing. It’s much easier if you own the land free and clear. If there’s still a mortgage on the property, you’ll have to get approval from the lender in order to move forward.
There’s always a possibility, good, bad, or no credit, the buyer will default on the loan payments. While this could have a couple positive implications, it could have a couple negative ones as well. If you have to go through the foreclosure process, this could take a considerable amount of time and incur added fees. These timelines and fees can vary drastically from state to state depending on if the property is in a judicial or nonjudicial foreclosure state.
If the owner financing covers a portion of the purchase price with a second mortgage and the buyer defaults on the payments, the seller will have to keep the loan payments current with the lender or risk foreclosure from the first mortgage.
The other side of the coin to the seller being ultimately responsible for the terms is that you could wind up with a higher interest rate, substantial down payment, or having to make a balloon payment at the end of the life of the loan. If terms are negotiable there’s always a chance they could end up in favor of the seller.
A wise landowner will still check out a buyer before he agrees to an owner financing deal. If your credit is risky enough or the research comes up with something scary, you may still be turned down. At the very least, it may cause them to charge a higher interest rate than if you posed less risk. Credit Karma is a great resource that allows you to check your credit score for free without taking a hit to your score.
As with the seller, a buyer should also make sure the property they're interested in is free and clear. If there is a pre-existing mortgage on the land and the lender finds out it sold, they may demand full payment of what’s left on their loan. If the payment can’t be made, it’s likely they will foreclose on the property.
In the real estate world, a note is a written promise to repay a specific amount of money at a certain interest rate over a stated period of time. Note Investor provided a few owner financing statistics from 2018.
- There were 91,605 owner financing notes created.
- 54% were residential properties, 15% were commercial, and 13% were land.
- The average Loan-to-Value for newly created land notes was 74%.
- Land accounted for 12,176 of the total number of notes.
- Texas, Florida, and California accounted for 43.3% of the notes.
- The average starting balance for residential notes was $195,062.
- Land made up 29% of the total dollar amount of notes at $7.37 billion.
If you’re in the market for land and would be interested in owner financing, take a look at our land for sale with owner financing. Or to learn more about buying land in general, check out our guide discussing how to purchase land.
The bottom line is owner financing can be an extremely powerful tool in real estate as long as the parties involved do their homework to reduce some of the risk. A landowner or buyer that’s inexperienced in owner financing may want to get a real estate attorney involved for protection. Rocket Lawyer is an excellent resource to find legal help and real estate document templates if you need them. If owner financing isn’t available and you're in need of financing options, you can find a lender near you in our lender directory.
For a deal to actually happen, as with most relationships in life, there’s got to be some compromise involved between the buyer and the seller. It’s a viable option whether your goal is to make more money, buy property, help people out, or produce stability in your life. Whether you’re looking to buy or sell land, it may be time to give owner financing some serious consideration.