Is Owner Financing A Good Idea For The Seller In Pasco County?

Homes for sale in Pasco County generally sell with ease. However, when the market is down, and you find your home sitting longer than expected, it may be time to consider alternative methods to sell the property. In situations where a home isn’t selling, real estate agents recommend reducing the price to attract more interest. While this may in effect garner more interest in the property, it is a tactic that can eat away at your profits and leaves you on the short-end of the deal. A better approach would be to attract a whole new set of buyers by offering owner financing. With owner financing, Pasco County, FL, sellers can attract buyers eager to buy a home, but short on the requirements to obtain traditional financing. There are rewards and risks to such an arrangement, and it is important to consider each before deciding if owner financing homes in Pasco County, FL, is the right approach for you.

What Is Owner Financing?

When you owner finance a property, you take on the role of the bank to help a buyer purchase the home. In an owner financed deal, you as the seller carry all or part of the entire purchase price of the house. With this arrangement, you receive a downpayment upfront and monthly payments directly from the buyer. Most owner financed deals are short-term arrangements lasting between three to five years. At the end of the term, the buyer pays what is known as a balloon payment. In theory, three to five years should be enough time for a borrower to build enough equity in the home and improve their credit situation to qualify for traditional financing. Owner financing deals involve two documents:

  • Promissory Note – The promissory note is a legal document signed by the buyer and seller that outlines the terms of the sale. Details contained in a promissory note include the loan amount, repayment terms, interest rate and penalties for late payments or default. The note also specifies details regarding the balloon payment at the end of the term.
  • Deed – A deed is a document that specifies who has legal rights to the property. Also listed on the deed is a legal description of the property. The deed is public record and gets recorded with the county register of deeds.

Types Of Owner Financed Arrangements

Owner financed deals come in many varieties. If you wish to finance the full amount of the loan for the borrower, you enter into what is known as an “all-inclusive” mortgage arrangement. With this arrangement, you finance the full amount of the loan minus the downpayment. A land contract is where you give a buyer equitable title to the property. Under a land contract, the buyer receives shared ownership in the property and only receives full title once they make the final payment. Another popular owner financing option is the lease purchase. While buyers may have their pick of homes for rent in Pasco County, not many of them offer the chance to own the home at the end of the lease term. With a lease purchase, you agree to rent the property to a buyer, with the agreement that you will sell it to them at an agreed upon date in the future. Depending on the market and how slowly homes rent, Pasco County, FL, sellers may find that the lease purchase strategy gives them the opportunity for a quicker sale.

Benefits of Owner Financing

Owner financing offers several financial benefits that make this nontraditional approach to selling a home ideal.

Smart Investment

When you owner finance a home, you have the opportunity to make more money than you would with the traditional approach to selling a home. In an owner financed deal, you have complete control over the terms of the loan including interest rate, downpayment and sales price. Thus, even if the market is down, you can still charge a premium as there will always be buyers who need nontraditional financing options.

Quicker Sale

In a crowded market with so many homes for sale, Pasco County, FL, sellers can set their home apart from the competition with this strategy. Taking the owner financed route allows you to sell your home quicker because you won’t need to deal with the bank to close the deal. You may find this option ideal if you have a property that hasn’t garnered enough interest for a traditional sale. Offering owner finance terms opens you up o a whole new pool of potential buyers.

Monthly Income

When the buyer makes the mortgage payment, the money goes directly to you. The money you receive is spendable income that you can use in any manner you choose.

Lump Sum

Should you decide you want to receive the full amount of the loan as a lump sum payment, you could sell the promissory note to an investor. The investor would pay you the total amount of the loan, and take over financing for the borrower. With this approach, you receive the full amount of the loan and can walk away from the property with no further obligation.

Downsides To Owner Financing

While the benefits of this nontraditional approach to selling are significant, there are a few risks involved that you should consider.

Buyer Defaults

There is always the chance that a buyer stops making payments and defaults on the loan. When the buyer defaults, you will need to foreclose. The foreclosure process varies from state to state. However, it is a complicated and lengthy process that requires the assistance of an attorney to navigate successfully. During the process, you won’t receive any income from the property, and you are still on the hook for the mortgage and taxes. You are even responsible for any repairs on the property. Add to that the legal fees and court costs and foreclosure can get expensive.

Administrative Hassle

Another aspect to consider is the administrative work required to structure this type of deal. You will need to collect payments, keep up with taxes and insurance payments, and ensure that the property is well-maintained during the term of the loan. There are servicing companies that can handle this for you; however, they will charge a fee, which could cut away at your profits.

Property Damage

Should the buyer default on the loan, you may not get the property back in the best condition. The buyer may have altered the property by tearing out walls, adding on to the home or installing additional fixtures. In some cases, you may be faced with outright vandalism. Although you can’t guarantee that no one damages the property, you can lessen the likelihood by carefully screening your buyers. You can also require a sizeable downpayment. Buyers who pay a significant downpayment will have more of an investment in the property and might be less inclined to damage the home.

Tax Implications For Owner Financing

When you sell property with owner financing, you can report the sale as an installment sale on your taxes. The advantage to this is that you won’t be forced to pay for the gains on the sale up front. With an installment sale, you can spread out the gains over several years, thus allowing you to make smaller tax payments each year. If you claim the income from the sale all at once, you may find yourself in a higher tax bracket and be subject to additional taxes. When you take advantage of an installment sale, you can keep your adjusted gross income below a certain threshold to avoid certain tax penalties.

Owner financing is a smart strategy in a variety of situations. Whether you are looking to sell your home quickly, get monthly income, or earn higher returns on your investment, it is a tactic that can get you excellent results. Although there are some risks involved in this type of arrangement, you may find that the benefits far outweigh them. Carefully evaluating the pros and cons of owner financing can help you determine if it is an arrangement that will work best for your situation.

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