Ever see the phrase “Owner will carry” in an ad for a real property on the market? What that means is that for the right buyer, the owner of the property on the market is willing to become a lender, if that’s what it takes to close a sale. Generally, a seller that is willing to do this is going to be a well-off individual who is selling a home that is not a principal residence or who doesn’t need the equity in the building to reinvest immediately in order to keep his financial house in order.
A Good Opportunity for the Right People
Owner financing was a fairly common occurrence through the sixties and seventies, until the stock market took off and there were better investment opportunities on Wall Street than in a thirty year mortgage. The practice is reappearing however, as the real estate and securities markets have been unpredictable for long enough to send investors looking elsewhere. Cautious investors can do better carrying a mortgage at market rate than with CDs or other ironclad investment devices that have low rates of return.
So the right owner may well be willing to “carry the paper” on a house he’s selling, if the right buyer comes along. Security for the seller in a privately financed mortgage is in finding a reliable buyer with a seemingly healthy financial future. It is incumbent on the seller to check credit ratings and financial history, perhaps even personal references. The seller should know if his potential buyer has a history of litigation and what, if any prior real estate dealings he has had.
Structuring the Financed Mortgage
The structure of the deal is in the hands of the seller. If the potential buyer is a newly minted professional, he may not have the ability to step forward with the down payment that many professional mortgage houses require. That’s the beauty of a private arrangement, but also one of the risks. So it is critical that the seller have a professional mortgage agreement drawn up by a real estate lawyer, a document that provides ample protection for the seller should the buyer run into financial difficulty.
The mortgage should provide the seller the ability to reclaim the property with dispatch, if the seller falls behind and cannot recoup fairly quickly. The seller’s ability to do this has to fall within the law and hopefully, without extensive legal action. A mortgage between private parties has got to be carefully drawn because it is ruled by tort law rather than the body of real estate law out there that long ago established the guidelines for mortgage lending.
Meeting Commercial Mortgage Standards
It is also important that the mortgage be designed within the parameters of professional acceptability, so that it can be resold if the original home owner decides to do so. Tens of thousands of mortgages are resold every year into a thriving secondary market, but they must meet certain legal requirements and contain standardized components. A private mortgage should pass the “resale test,” especially for a private financier who may decide five years into the arrangement that he would like to refocus his investment assets.
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