Owner Financing vs. Cash Offer

This week we’re taking a closer look at owner financing versus cash offers for sellers who own their property free an clear.

The real estate market has continued to boom even as the country faces a global pandemic. This is great news for property owners, even if COVID-19 has presented other issues for landlords and homeowners. If you’re thinking that now might be a good time to sell your rental property, chances are you’ll be fielding at least two types of offers.

Cash Offer

All cash offers typically made by other investors are a great option for sellers needing to quickly liquidate their asset without a lot of headaches. These offers may come with an inspection contingency, but it’s typically for informational purposes only. Unlike a buyer using conventional or FHA financing, you have to worry about appraisals either. If you need a lump sum of cash quickly, a cash offer is definitely the way to go.

Owner Financing Offer

If you’re not strapped for cash and you own your property free and clear, owner financing might be a better option. For starters, the investor may be able to offer you more with an owner financing option, than all cash offer. It is important to know that if an investor is making an offer on your house, even an all cash offer, he or she is still most likely using a lender. It may not be a traditional bank, but they are likely leveraging money from private or hard money lenders. These are individuals or groups who front the money to investors for six to twelve months in exchange for a reliable, fixed rate of return that’s secured by hard asset—your property. That means that if the investor skips town halfway through the renovation, they will own the property. For these lenders, it’s a relatively low risk investment strategy. If you own your property outright, accepting an owner financing option would make you the bank. In other words, at the end of the term, you’ll walk away with all the principal and all the interest.

Regardless if you sell to a investor who plans to renovate and sell your property or add it to his rental portfolio, you will need to consider how long you want to have your cash locked in the property. If you’re simply tired of dealing with tenants, but like the monthly cash flow, look for an offer that pays principle and interest monthly with a balloon payment a few years down the road—perhaps when the new owner refinances with a traditional bank. If you think you’ll need to access your cash sooner, negotiate for a balloon payment at the end of twelve 12 months. A residential re-developer will be looking to improve your property and sell it for a profit in under a year. In this scenario, he might pay you interest-only payments while the property is being upgraded. Once the property sells, you’ll paid your principle at closing.

If you decide to take the owner finance offer, you’ll be protected with the same security instruments that bank gets. First, you’ll be in first lien position on the Deed of Trust when the sale is recorded on the title. That means, you get paid first when the property sells. Second, just like a bank requires all borrowers to carry insurance on the property, you’ll want to be sure that your buyer has secured at least one full year of property insurance and that you are listed as a loss payee on that policy. Once again, if anything happens to property during the renovation period, you’ll get paid first.

Interested in selling your property? Give us a call at 267-435-9999 today!