Why NOT Finance it Yourself?

By Wolfgang O
Homeowners and real estate investors themselves often ridicule the very notion that they should finance a home themselves. One good reason not to finance is if you need the money right away, whether to successfully move into your next home, or whether you want to fund the next deal. If that describes you, then you really can't consider owner financing as an option.
 

But anyone else is liable to give the exact wrong reason: risk. Owners think that financing a home sale is a huge risk for them, but it's not really true. In fact, they don't even have to be overly worried about the credit of the purchaser, because they retain ownership of the house until they've been paid off. The important thing for the owner to do is to structure the deal in a way that makes sense for them. This generally means making out well on the interest value of the home loan, getting as short a deal as possible, and having all of the cards, legally speaking, should the deal sour and the seller be forced to evict.
 

For example, if you're selling a home valued at $100K, a reasonable monthly payment might be about $1,250. It would take a buyer about 7 years to pay off the value of the home, and another 2-3 years to pay off the interest. During the entire ten years, you have a great source of income. Should the buyer ever fail to pay, you have the ultimate threat-- the ability to take away their primary residence, and the loss of all of those previous payments. Any buyer is going to give an arm and a leg in order to be able to make their payments.
 

Becoming a money lender might make you a little uneasy, but remember that loaning out money is the primary way that banks generate an income for themselves. You can earn more money, more safely, from a financed home sale than you could in the stock market, especially in this day and age. You're also helping some other poor family get on their feet by eliminating a barrier in the path to home ownership. It's definitely a win-win. By eliminating the middleman of the bank or lending institution, you can soak up some of the extra dollars that suddenly become available in the deal.
 

 

 

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