2) Buying Land with Owner Financing
A buyer who purchases land through owner financing essentially uses the seller as a “bank,” making payments over time to cover the cost of the property. If the buyer fails to pay, the seller can foreclose on the property.
- Poor credit is not a problem : Buyers who are most attracted to this form of payment have poor credit, thus receiving a traditional loan may be difficult if not impossible. “The buyer can get into a land purchase with a lot less money upfront,” explains Weidenhaft. “In most cases, if you’ve got the down payment, you qualify.”
- Down payments are typically lower than banks would require: Reneau says they’re usually between 5 and 10%.
- For the seller, it ensures regular payments: Assuming the buyer makes reliable payments, the seller can count on a steady income over the life of the financing, which is attractive to some sellers.
- For the seller, there can be a higher return: “Generally speaking, the interest rate the buyer will be paying is much higher than what the seller would earn with another investment, such as a CD instant payday loans online Kettering, OH [or, Certificate of Deposit],” Weidenhaft says.
Cons of buying land with Owner Financing :
- Higher interest rates : In exchange for taking on the risk of owner financing, sellers charge higher interest rates, ultimately collecting more on the property than they would have with alternate forms of payment. “We’ve seen, in the end, it’s usually a lot more costly than if the buyers had saved the money or gotten their credit scores up instead,” Reneau says.
- Financing documents may place buyer at risk: Since a seller is not regulated by agencies the way a bank or farm credit is, the terms of the financing may create more risk for the buyer. “Be very wary,” warns Walters. “Always have your own attorney review the owner financing documents before signing off.”
- Risk of inaccurate accounting : The seller is the “accountant” for this type of financing, so the onus is on that individual to keep track of payments, interest rates, the loan schedule, and the terms that were agreed to. “There are some major potential drawbacks,” warns Reneau. “ You’re relying on that owner to maintain a good accounting system. For example, if you get a bonus and pay in advance, does the owner know how to handle that? We see a lot of cases in which the owner financed and there were discrepancies on the balance and payment schedule.”
Owner Financing Tip: “At the end of each year, it is always a good idea for the buyer to request a statement from the seller reflecting the total payments received for the year, the amount that was interest, the principal payment amounts and the remaining balance,” Weidenhaft says. “The buyer can then reconcile that with his records. It is much easier to find and correct an error that occurred in the previous year than trying to find one that happened five to ten years ago. These statements may be critical if the seller’s records are inadequate or if the seller becomes incapacitated or dies.”
- Different set of rules for foreclosure : While banks have a set schedule and warning process to follow before foreclosing on a property due to late or missed payments, individual sellers don’t have to follow the same regulations. Each state has its own guidelines for the process. Reneau says in Texas, if a buyer is more than 15 days late on a payment, the seller can immediately start the foreclosure process – even without first notifying the buyer.