Whether you’re looking to invest in real estate or purchase a new home, there’s a good chance you’ve heard about owner financing. Although not as common as a traditional bank mortgage when buying a home, seller financing is a common option for vacant land buyers.
Not sure how the process works?
We’ll explain how owner financing land works to help you decide if this is the right option for you. So, if you’re looking for “Land for sale by owner”, this blog post is for you.
What Is Owner Financing?
Owner financing is exactly as it sounds. Instead of a buyer getting a mortgage from a bank, the owner will finance the purchase.
Just like with a traditional loan, a promissory note will be drawn up by the buyer and seller that outlines the repayment schedule, interest rate and the consequences of defaulting on the loan.
In essence, the owner of the property takes the place of a bank. The buyer will send monthly payments to the owner, and the owner will collect interest on the loan.
Seller financing is typically short-term (five years or less). At the end of the loan term, a balloon payment is due. Some owners offer paying off the loan at any time, but this may come with a prepayment penalty. At LandDeals247 however, you can pay off the loan at any time without any prepayment penalty.
Owner and Seller Financing Difference
You may hear the terms owner financing or seller financing used when talking about this lending method. Don’t let these terms confuse you. Both refer to the same thing, and can be used interchangeably.
The Advantages of Seller Financed Land For Buyers
From a buyer’s standpoint, there are many advantages to seller financing:
- Closing costs are usually lower. Because you’re not dealing with the bank, you can avoid having to pay appraisal costs and bank fees. This greatly reduces the closing costs, which means buyers can purchase the property for less.
- The down payment may be lower than the mandated minimum. Because you’re dealing directly with the seller, the down payment can be whatever you and the seller agree to. Note: While there’s a chance the seller may negotiate the down payment, don’t expect them to. Many sellers still expect buyers to put 10% down.
- The closing process is much quicker. There’s no need to wait for the legal department, underwriter and loan officer of the bank to clear a file, so closings can happen quickly with owner financing.
Seller financing allows owners to finance the buyer’s purchase and earn some interest from the loan. Although not common in real estate, owner financing is more readily available when selling land as mortgages are difficult to obtain. This financing method allows buyers to get into properties quickly, and sellers to minimize carrying costs.
What’s In it For The Owner In A Land For Sale By Owner Deal?
Ok, so we know that buyers love to buy in a land for sale by owner deal.
But why would the seller want to sell land for sale by owner with the risk that the buyer stops paying and they won’t get their full price. They may have to repossess the land and start marketing the property all over again?
From the seller’s point of view, the deal will be able to be done quicker, cheaper, and easier than waiting around for a buyer who can come up with the full cash price.
Think about it:
Buyers may want the land, but not have all the cash available today. They may need finance but if the banks are not lending on most land parcels, then sellers can struggle to sell their land. The seller has the choice of either waiting for years until a buyer comes along with cash or go down the land for sale by owner route and be able to sell today.
They are taking the risk that the buyers will be able to pay in full eventually. Allowing the sale to occur via the land for sale by owner method allows for a much faster and less costly transaction.
Generally, the buyer and seller work directly with each other. There is no loan officer, less paperwork, less middle men along the way which can delay property transaction by 2-3 months.
With less middlemen involved taking their fees, closing costs are considerably less for both parties.
Land For Sale By Owner – Summary
Buying land with a land for sale by owner approach brings advantages for the buyer and the seller. Both benefit from a considerably faster transaction. Closing costs are lower and the land is affordable for more land buyers.
So, if you as a buyer are looking for land to purchase, land for sale by owner is a common way to buy land, even if you don’t have the cash available yet or if you can’t get a bank loan.