Owner Carry Financing – A Good Choice in Tough Markets

Owner carry financing seems to have been absent for the past decade or so. With low interest rates and easy qualifying, there really wasn’t any need for it. But the single family residential real estate scene has changed.

The subprime lending collapse in the fall of 2008 has put residential mortgage lending into unknown territory. As a result, single family real estate investors may be in a difficult position if they want to sell their property.

It’s no longer just a matter of trying to get a good price in a down market. As foreclosures and unemployment increase, real estate industry experts are predicting that fewer people will have credit scores good enough to qualify for traditional mortgage loans.

But investors who want to sell can exercise another option: owner carry financing. If an investor is willing, this can create a revenue stream that’s extremely low maintenance. Unlike managing a rental property, there are no property management hassles.

When you use owner carry financing you’re selling the property to new owners. But you get to create the terms. If you’re selling to buyers who could not otherwise qualify for a loan, you can charge a higher than market interest rate to mitigate your risk.

You can also charge a higher than market price for the property. Buyers who could not otherwise buy a home are often willing to pay a premium price for the opportunity that you offer.

This type of sale can also reduce your tax liabilities. Instead of receiving your profits in a lump sum and paying taxes on them, you’re receiving your profits in smaller monthly cash flow amounts. Your tax liability is based on the smaller cash flow.

And if the new buyers default on their payments, you have the option to foreclose. So in a worst-case scenario you get your property back. At that point, you can sell it to a new buyer.

By offering owner carry back financing, you increase your pool of potential buyers. Buyers with damaged credit will appreciate the opportunity to buy a house that traditional lending would not let them qualify for. And they won’t have to pay the additional closing fees that are added onto a conventional loan (appraisal, points, etc.).

Being willing to offer owner carry financing puts you in the driver’s seat, even in a down market. It’s a low risk, low maintenance way to get your property to create a positive cash flow.