There was a topic about owner financing recently, here to share my experience with it, again it is case by case, I'm not encouraging anyone to do that, if it was possible I would rather have the cash with me to do anything I want to.
After we moved to another state, we tried to sell our house for 8 or 9 months with no single offer even with a couple of price reduction, our house price double the local average housing price and it was the beginning of the housing decline, you can imagin how hard it was to sell. So we tried two terms Rent-to-own with two different families, either of them worked out, then after one family saw the ad online the wife contacted me and asked me if I could do owner financing, at that point I had no idea what's owner financing, but we definitely wanted to sell the house, so I made the arrangement to let them see the house first since I figured before talking anything else the buyer had to like the house and want to buy it first. It turned out the buyer liked it (no surprise, it was a model home).
Now I had to explore what's owner financing.
1. Pre requirement: the mortgage has to be paid off before providing owner financing. since you are transferring the deed, title... to the buyer, your current mortgage company would not let you do that since they can no longer take the property back from you if you stop paying mortgage.
2. Closing cost, and closing: it is negotiable, we did not provide any closing cost to buyer, but it is very little compared with the closing cost with mortgage company. The closing attorney prepared the documents and did the closing for us not much different from regular closing.
3. Agent fee: no agent involved to either side, so no agent fee to be paid, but if buyer used an agent I would be happy to pay the agent the normal buyer agent fee since we definitely wanted to sell the house.
4. The rate and term: normally the rate is higher than the market rate since the buyer can not get the loan from bank, but how much higher is depending on the negotiation between buyer and seller, we did 6% for 15 years, but 7% or 8% is not an unheard thing, we tried to create a win-win situation to both parties, 6% return for us is ok from investment point if the buyer pays it on time (so far the buyer is very impressive), 6% rate for buyer is not that bad to enable them to own a house.
5. Down payment: they put down 20k which is less then 20%, we could not find a company to offer PMI to owner financing, so asked buyer to pay extra $200 each month for that reason, and they agreed and even said they will continue that extra $200 for the whole term of the loan since they said that way they could pay off the loan in a little over 13 years instead of 15 years.
6. Tax: The monthly payment interest portion is considered as an interest income, like the CD interest from bank, which is taxable, but the principle part is not taxable. buyer will report the interest part as their mortgage interest on their tax return, and seller reports the interest part as income.
7. Selecting buyer: we had no other buyers, so saying trusting the buyer is more accurate. Our buyer has his own business for over 20 years and the business is not high tech related but is also recession prove, and we checked their business registration with the state. We had a lot of email discussions and I got the sense that the buyer is normal, reasonable, decent, educated working person, I trusted my sixth sense. But to be very sure I still checked their credit and see no single later payment to their house (they just sold their house in another nearby town for better schools for their two kids, and their own house is more expensive than ours), I also see some loans with their business which I care less.
8. Reason they could not get loan: banks gave out loans to small business owners before the housing market crashed, but tightened the rules after that, that's why with the same business they could get a mortgage before but not now.
9. Risking factor: no difference, buyer stops the payment, but we figured that the worst case is they stop payments right after they get house, and we pay lawyer with the down payment to get the house back, the longer they pay the mortgage the loss to us is smaller, also we escrow the ins and tax to make sure those are paid every year. So far they are very impressive and email me every month to let me know after they transfer the mortgage payment to my account.
Mentioning about the house price, I'm sure I will not be able to sell for the price I sold to the buyer at this market, so even I said I would rather get the cash now I still feel lucky to be able to sell the house and not at a loss.
Later on if they can find a loan from bank they can do refinancing and pay us the rest of the loan balance, but I have the impression they will not do that, they want to pay off the loan quickly. But if they do that it would not hurt me, or I would rather them do that so we get the cash in one time.
