Seller/Owner Financing – Is it truely Win-Win deal?

Last week, my investor mentor and also my current client called me up and asked about owner financing. I told him it is a very detailed topic which I cannot explain over the phone and need to talk to you in person. Later I met him and had an elabroate discussion on it. He liked the idea but don’t like the complication involved and plan to research more before doing it.

In the past, I was also approached by one of my tenant asking for owner financing on the house they lived in. I made a consicious decision to stay away from it after some research. I didn’t like what I heard and read, especially some complications involved in the state of Texas. Recently, I read an article about this very topic titled, “Know the risks of seller financing” at inmannews.com and thought it might help other investors out their if I can share my acquired knowledge and research on the owner financing.

First of all, What is owner/seller financing?
To simply put, its like the seller/owner acting as a mortgage lender to help out the tenant who won’t qualify to buy a house otherwise. For that very reason buyers are willing to pay high interest rate and high price for the property. From the landlords perspective, it might seem easy to sell the house to the tenant and get monthly mortgage payment but if things doesn’t work out or buyer defaults on the loan, thats when the problem starts.

Is it surely WIN-WIN or WIN-LOSE?
It might seem that way but one will know only at the end of it. For Seller/Investor, it is always good you get to sell a house at premium price and get paid high interest. For buyers/tenant who get to own the house and make changes to house since they will own after the pay off the amount and they get to have the house without worrying about mortgage company and credit problems.

At the sametime, if things didn’t go as planned and buyer walk away, its the landlord/seller who will be on trouble. Landlords can even lose their house if the contract was not put in place properly. They have to foreclose on their own house and get it back on their name.

Does the law in Texas allows Seller/Owner Financing?
As per my research, Texas law does allow seller refinancing for homeowners and investors with caveat after SAFE Act . The SAFE(Secure and Fair Enforcement for Mortgage Licensing) Act went into effect during 2008 timeframe, the law that institues the National Mortgage Licensing System and Registration NMLSR, contains a caveat that could effectively eliminate the ability for sellers to offer most types of owner financing to buyers in Texas as of April 1, 2010.

The Safe Act requires that anyone originating mortgages must be licensed and registered through NMLSR, Nationwide Mortgage Licensing System and Registration, which means anyone offering seller financing must also be licensed. The law provides for an exception for a seller’s financing of his/her homestead or to a direct family member. Meaning if you are homeowner, you can do seller financing for anyone or to your direct family member. Other than the two exceptions above anyone who originates a mortgage loan or provides seller financing without being licensed will be committing a misdemeanor.

This means that Investors that own multiple properties and like to seller finance for people who have less than stellar credit, or even people with good credit, can no longer provide this service without being a licensed RMLO, Residential Mortgage Loan Originator.

But Dodd Frank Act which was signed last year 2010 proposes a different mortgage origination rule which only takes effect in Jan 2013. The DFA definition of mortgage originator exempts an individual (or an estate or trust) that provides mortgage financing for no more than 3 properties in any 12 month period, but only if the financing meets certain rules like loan is fully amortizing (no balloon mortgages allowed), The seller determines in good faith and documents the buyer has a reasonable ability to repay the loan and few more. Read more about it at realtor.org and noteinvestor.com websites.

Do I have Tax Implications?
Yes for sure. You cannot claim any property taxes paid under your tax return after executing the contract/agreement. Also you need to show your installment payment in your tax return and how much interest you are getting apart from return of principal and pay proper taxes for it.

Where do I start?
1. Talk to investors and people who have done seller/owner financing and gather as much information possible.
2. You can wait for a year or two to monitor how the tenant pays the rent and make a decision accordingly.
3. Run credit report on the tenant Social security before making the decision to see whether the tenant doesn’t have lot of collection or charge offs.
4. Hire a real estate attorney to draft your contract. This is very important because an attorney knows the current rules and regulations and can put together the agreement to safe guard both parties.
4. Hire a Real estate Loan originator to originate your loan if you are an investor. They usually charge around $400 for helping out.
5. Finally, make sure you clearly explain all the rules and limitations to your tenant about seller financing. They will be responsible for paying property taxes, insurance and keeping up the house. If they don’t pay it, you have chances of losing your home. That’s the risk you are taking by doing seller financing.

To conclude, Seller/Owner financing is a good option whether you are a homeowner or investor ONLY if you do it right by following the law and putting the contract in a right way.

About Vijaianand Thirnageswaram

I am a Proud Realtor of Texas, trying to guide and help clients to find their dream home and educate them to buy them for right price. I am also a Candidate for CFP who has more financial knowledge which allows me share and educate clients in any financial decision making process.

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