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Owner Financing Will Put Money In Your Pocket

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By Robert Duplicki      Updated April 15, 2024

In the current housing market it may seem easy to sell property as there appear to be more buyers than available houses. But there are plenty of considerations that lead property sellers to offer owner financing. And market conditions always change. They may change by the time you read this. As you learn more about owner financing, you probably will find more reasons to consider using this flexible approach.


Whether you are selling a residential or commercial property, or advising someone who is, owner financing will put money in your pocket. How would you like to have buyers competing for your property, and sell it for your listed price? Although many buyers are concerned with price, the bigger issue is often whether or not they can obtain financing.

In today's market obtaining affordable financing has become a problem for more buyers. Offering to finance the sale of your property, will attract so many buyers who otherwise would assume that they could not qualify for a loan. Owner financing, also known as seller financing, will sell your property faster, and put money in your pocket according to the terms that you choose.

By providing owner financing, the property seller agrees to hold a note and mortgage. This does not mean that the seller is handing over money to the property buyer. The seller is still paid a down payment, and receives the remainder of the purchase price in monthly installments, or whatever frequency is agreed upon.

The note and mortgage you create through owner financing, can be sold as investments. This often happens when you obtain a bank mortgage to purchase a property, and at a later date your bank sells that mortgage to another bank. The same concept is available to a private person who holds a mortgage when selling a property. And based on your need for cash, you can sell the entire mortgage or only a portion of the payments.

If you need cash from your note soon after selling your property, then consider using a technique called a simultaneous closing.


By offering owner financing to market your property, you will experience numerous advantages such as :

  1. Receive the highest price by offering terms instead of requiring all cash.

  2. Access a much larger pool of potential buyers, by adding those people who do not want to deal with banks. By the way, just because you offer owner financing, doesn't mean that you have to sell your property that way. Evaluate the offers you receive, and decide what is best for you.

  3. Your buyer will pay no loan points and substantially less closing costs overall. So you as the seller will not end up contributing in some way to this cost. Instead, you can advertise no points!

  4. Close faster without a bank involved. By comparison, if your buyer does apply for a bank loan and gets turned down, you lose more time and money.

    A buyer who was pre-approved for a mortgage may have their mortgage denied by their bank prior to closing. For example, they change jobs so they no longer meet the requirement for consistent employment. Or the bank criteria for credit scores changes by a small amount, so your potential buyer no longer fits.

    Issues like these may stifle bank financing, while the buyer may still meet your requirements. So you can salvage the deal with seller financing.

  5. You can convert your mortgage into cash by selling all of it, or a portion of the payments. A simultaneous closing will speed up this process.

  6. Receive tax benefits. For tax purposes, seller financing is referred to as an Installment Sale. This allows you to pay taxes on your profit as you receive it, which is spread out over time. An installment sale can also be combined with a 1031 Tax Deferred Exchange for further tax benefits. If you sell the mortgage, or a portion of the payments, your gain must be calculated accordingly.

  7. Exert a greater degree of control over the marketing, financing and sales process. It's not a question of you being a salesperson. All you do is simply show the buyer a way to purchase your property. Owner financing provides that way. When the buyer sees a way to buy, the property sells itself. Running an ad that says "Owner Will Carry" gives you a big advantage over every seller unwilling to do so.

  8. There may be something else about your situation that makes bank financing tougher to get. Such as property issues. Is your house overimproved for the neighborhood? This makes it tougher to get comparable values for appraisals. Are there property defects that you don't want to repair?

    Are your prospective buyers applying for an FHA mortgage? FHA mortgages are subject to meeting tougher appraisal requirements than a standard appraisal.

    Do you own more land than meets conventional bank requirements? Has work been done to your property without required permits? Do you have an in-law apartment? Ths may be attractive to your buyer but fail to meet bank requirements.

    As you run into issues such as these, you may find that owner financing will solve your problems.


  1. Owner financing is easier to qualify for than meeting stringent bank requirements. A popular misconception is that owner financing is only needed by people with bad credit. On the contrary, many creditworthy buyers are simply unable to qualify for a conventional mortgage because they don't fit the lender's guidelines.

    Ownership of multiple income properties, self-employment, a short job history, difficulty proving income and other uses for their cash than making a 20% down payment, are all reasons why buyers seek owner financing as an alternative to the traditional lending market.

  2. Lower closing costs. No points, origination fees and underwriting charges that a buyer would face with a traditional lender. Also no reserves for principal, interest, taxes and insurance as may be required by a bank. And no private mortgage premiums (PMI) will be charged.

  3. It is more likely that a buyer can negotiate terms more suited to their needs, including a lower down payment and a fixed rather than variable interest rate. While sellers have the final say in these negotiations, sellers are typically more flexible than a mortgage company.

  4. Owner financing can help improve a buyer's credit history. For those prospective buyers striving to improve their credit, a seller financed deal may be viable in situations that a bank would avoid. Otherwise, no bank financing could mean no home purchase, and a slower improvement in their credit history. A willing seller should recognize this as an advantage from a negotiating point in structuring the sale.

  5. While many buyers would find owner financing desirable, it can often be tough to negotiate unless the seller sees a way to meet their cash needs. A simultaneous closing may provide the answer for such negotiations.

  6. Fast and easy closings. No banks involved to drag their feet, ask for more and more information, add new stipulations, or even back out of the deal at the last moment.

While it may sound like some benefits are repeated for buyer and seller, the advantages from each viewpoint bring deals together. And based on your own circumstances, all the benefits will probably not be necessary to close a sale.


First, let me clarify some terminology. When a property is sold and the payment is made in installments, a note, which is a promise to pay, is written between the purchaser of the property and the person or business providing the financing. Details of how the financing will be paid back, are explained in the note.

A security instrument is used to pledge the property as collateral, to ensure payment of the note. In most states this security instrument is called a mortgage or a trust deed. Other formats of notes and security instruments can be used. For simplicity, I will use the term mortgage to represent all such security instruments.

If you are holding a mortgage, you are receiving a cash flow. When the time comes that you would rather have a lump sum of cash, I represent investors willing to pay cash for your cash flow. How much an investor will pay for your note depends on a number of factors.

Underwriting factors include the details of the note and mortgage, the features of the property which is the collateral for the mortgage, and the credit history of the payor. The payor or payer is the person(s) you sold the property to, that is making payments on the mortgage you are holding.

You will be asked to provide information about the property, such as the type (single family, multi-family, commercial), age, construction, current value, selling price and down payment made.

Questions about the note will include the original amount, monthly payment, interest rate, balance, date of the first payment, number of payments made, number of payments remaining and details of a balloon payment, if any. A note buyer will want to determine whether the "standard" note language has been amended in any way.

Before providing owner financing you should check the prospective property buyer's credit history. It will also be important for a note investor to know something about the payor's credit history and the timeliness of note payments to date. For more insights into this topic take a look at Have You Checked Their Credit?

For properties already sold using owner financing, details of the note have been established. For the person considering owner financing, the information pertaining to the note is about to be created. Terms of the financing are negotiable, yet if you might sell your note in the future, then keep in mind the preferences of an investor who will eventually purchase your note. You want to create a note that will be most desirable to such investors, in order to get the highest price when you sell the note.

The type of quote you receive for your note, should be based as much as possible on your needs. When you are selling a note, the first thing to consider is "how much cash do I need now?" Then ask yourself "would I prefer to receive some money now as a lump sum, and the remainder some years later?" Also, "would I prefer to receive some cash monthly, but less than the full monthly mortgage payments?" All these options can be arranged for, through various types of partial sales of the mortgage you hold.

If you don't need any cash from the sale of your property, than keep the mortgage you've held for starters, and enjoy the above market interest and payments coming to you. Holding a well-secured mortgage against your property can be a good investment strategy.

Additionally, the interest rate return from holding a mortgage, can be far better than what you might realize from other investment opportunities. Plus you can take advantage of the tax benefits resulting from the "installment sale" method.

Whether or not you choose to hold your mortgage for the long term, is really going to be determined by your current and future needs for the funds owed to you. Whenever you do decide to sell your mortgage, please contact me for a quote. I will do everything I can to make sure that you are satisfied with my service.

Why Are Notes Sold At A Discount?

All notes when sold are discounted. The time value of money is usually the stated reason. Simply put, today's dollars will have less buying power years from now. Even though the payments you would receive from the mortgage in say fifteen years, are the same amount as today, their value will be less. An investor buying your note now, will be paying you in today's dollars for payments they will receive n lower valued, future dollars. Therefore, they will discount the lump sum of cash that they will pay you now.

As the seller of the note, you may not relate to the time value of money as the reason notes are sold at a discount. However, this is the way many people in the note business think. Each industry has a way of doing business that their customers may disagree with. But industry standards are part of the reality that we all have to deal with.

Keep in mind that by selling your mortgage, you also pass along all associated risks. This includes the risk of late or missed payments, and even the chance of default by the payor, and a potential foreclosure process that the mortgage buyer would have to take on.

By creating a note, you as the property owner have the advantages of owner financing. versus other property sellers unwilling to so. You also have the desire and likely need to sell your property. The note buyer is not in the same position. So they start their evaluation of a note from the perspective of an investor.

All investments involve risk, so in determining the discount required to purchase a note, how does that note compare to the risks of other notes, and to the risks of other investments? The higher the risk, the greater the required return. The interest rate of a note typically does not meet the required return.

As the interest rate is fixed, there is the risk of the note declining in value as market interest rates rise. Even if the note payor makes all payments, they may allow the collateral to deteriorate. This typically becomes more likely as they experience more dificulty making the mortgage payments, and approach default. The note investor may eventually have their own need or desire to sell the note, and face a liquidity risk, which will be contributed to by the other risks mentioned above.

The encouraging news is that most note buyers do so as a business. So they have the experience of evaluating, pricing and managing a number of notes. This provides a valuable resource to you as a note seller, which your bank will not do.


Consider beginning with the end in mind. By structuring the note and mortgage terms in a way that are attractive to a potential note buyer, you maximize the price you will be able to sell your mortgage for. That same approach will personally benefit you as well, if you decide to hold the mortgage for awhile before selling it.

A down payment of 5% may be acceptable, but often is not. The higher the down payment, the greater your protective equity. Equity is the amount left over after subtracting the loans from the value of the property. The greater the down payment, the greater the protection against future loss, should the property buyer's financial strength weaken.

Owner financing often includes a higher interest rate than current conventional bank financing. Something in the range of 2% to 4% higher should be considered. The rate you actually charge will be based on what you can negotiate with the property buyer, along with the other mortgage terms in your negotiations.

To make the note and mortgage more appealing to a note buyer, the property buyer should have a FICO score of at least 600, the higher the better. Note buyers take their evaluation a step further, and review the details of the property buyer's credit history. Such an approach will be beneficial for the property seller as well. This analysis should be used in determining the amount of the down payment, and the interest rate that you are willing to accept.

Keep in mind that even with a lower FICO score, there may be mitigating factors which improve the financial outlook for the prospective buyer. A review of their credit history may find a picture that looks better than the score produced by the FICO formula.

Perhaps the history contains inaccurate information which your buyer has failed to dispute. An improved track record of making payments may not yet have caught up with the reporting system. Your buyer's income may have increased recently. Once again, owner financing offers much more flexibility to you and your buyer, than trying to get a bank loan.

A 30 year mortgage is the most common term, and often will be the one your property buyer is looking for. From the perspective of the note buyer, the further out the final payment is due, the less the note is worth in cash today. This goes back to the comments on the time value of money. One way to deal with this issue is to include a balloon payment in the mortgage.

A balloon payment is a large payment due at the end of the payment schedule, with the due date set earlier than under the full amortization schedule. This allows the property buyer the benefit of lower monthly payments based on, for example, a 30 year term, while paying the property seller the full amount due years sooner.

A balloon payment in seven to ten years is a desirable time frame for a note buyer. Something short, like a 2 year balloon, makes it less likely that the property buyer will actually be able to make the balloon payment. If you decide not to sell the mortgage, and prefer to continue receiving payments past the balloon due date, this is something you can negotiate in the future.

Balloon payments can be viewed as a creative tool used to structure owner financing. Stepped payments are another creative financing tool. For more information on these tools I suggest What's Better, A Balloon Note Or Stepped Payments?


In order to implement requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Loan Origination Rule came into effect on January 10, 2014. If a loan will be secured by a property that the borrower will use for residential purposes, then the person who arranges the loan is defined as a “loan originator,” and must have a mortgage originator license. But this may not apply to you, and if it does a mortgage broker could help you.

To see how this applies in your situation, refer to this flowchart. For additional information you can read DODD-FRANK AND SAFE ACT CONSIDERATIONS


Owner financing will put money in your pocket when it best meets your needs. That can take place at the start of a transaction, when you are selling or buying a property. It's not the ideal answer for every such transaction, but there are many opportunities when owner financing gets the job done very well. Selling the note later will also put money in your pocket. A partial sale of the note is often ideal.

Further Reading

Puzzle Pieces Fitting Together

Note Solutions For You - Part1 - Owner financing mistakes to avoid and note solutions for simultaneous closings. Plus more insights about the Dodd-Frank Act.

Three Air Balloons Over A Field With A Blue Sky Background

What's Better, A Balloon Note Or Stepped Payments? - How to use balloon notes and stepped payments as part of seller financing.

Three Clocks Showing The Same Time

Simultaneous Closings - How to sell your note as early as one month after the property is sold, by starting ahead of time.


Photo By Executium On Unsplash


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