July 20, 2024


Mad about real estate

Owner Financing: Buyer Beware!

If for some reason you don’t qualify for traditional home financing, owner financing may seem like an answer to prayer. While many experts caution the seller against problems with owner-financed sales, the buyer may also be at risk.

Why is the seller willing to finance? Is he a professional real estate investor who uses these deals as a source of cash flow? An individual seller looking to improve the tax consequences of the sale by deferring income? Or a scam artist unloading a problem property to an unsuspecting victim?

Traditional financing commonly includes various home inspections. These may include pest inspections, roof inspections, heating/cooling inspections, or structural inspections, which are customarily paid for by the seller.

When offering owner financing, the seller often does not provide these inspections. An unscrupulous seller may know there is a problem (perhaps from a failed prior inspection). 
There may also be financial liens against the property for unpaid taxes or mechanics liens for home improvements. Make sure that your sales agreement provides that the seller clear any liens against the property in order to deliver clear title at payoff.

Read the terms of the sales agreement carefully. Most are drafted to favor the seller. Pay special attention to clauses which may restrict pet ownership or improvements to the property. You should be able to make reasonable changes without permission, but it is customary to require written permission for major structural changes. If you anticipate a major remodeling project, it may be easier to negotiate permission before or at the contract signing, rather than afterward.

You should also carefully read payment terms and late charges. Many professional investors are well-aware that seller-financed buyers are at high risk for default and impose significant penalties for late or missed payments. Some may sell the same house over and over, anticipating that buyers will default.

It may also be helpful to know what rights you have under the law, and make sure that your sale contract doesn’t have terms that cause you to sign away those rights. While sellers may draft a contract that gives them all the advantages of renting with none of the responsibilities, many states have ruled that contract buyers have equity rights early in the transaction and traditional rental rules (like eviction) don’t apply.

Before considering buying a seller-financed home, you need to honestly analyze your situation. Are your credit problems in the past, or ongoing? Can you really afford to buy a home, especially a fixer-upper with deferred maintenance issues? What steps do you need to take to make sure that you don’t end up in foreclosure?

Follow these steps and you, too, can enjoy the advantages of home ownership.