This is a questions that I get at least monthly. The truth is that as many properties there are offering this type of financing there are just as many ways for it to work. How much down? What interest rate? How long is the loan? Principle & interest or interest only? these are all things to be worked out after a buyer has decided on a property.
Although the financing arrangements will vary from deal to deal, I have noticed certain similarities in my market to help a buyer decide if this is an option that makes sense to them.
First is that properties selling with owner financing very often sell for full price. The seller typically takes the attitude that if the buyer is willing to give them their price, then they are willing to negotiate on the "terms", and the buyer, since they don't have the money to negotiate with, typically agrees.
Second is the "terms". What the buyer & seller are going to be negotiating on is basically the amount of down payment, the interest rate, and the length of the loan. If the buyer can give better one aspect, then they can typically get better one of the others.
- The sellers will need at least enough down payment to cover their own costs and still have some money left over, for on the Outer Banks 20% down seems to be the minimum.
- The interest rate would fall somewhere less than what the buyer would get charged from a bank and more than the seller would get if they had all the money up front and put it in the bank.
- The length of the loan is often the most complicated. The buyer wants monthly payments that they can afford & the seller does not want to "be the bank" for the next 15-30 years. The compromise here is often a balloon loan. This loan will be amortized over a long term to make the monthly affordable but the length of the note will usually be only 3-5 years with the balance due at that time. typically the buyers don't have a problem with this because they are figuring that when the note comes due they can refinance elsewhere, they will have more money freed up from the sale of something else, or (in the case of a lot) they are going to be read to build by then and the bank will take care of the current note when the buyer gets their "construction to perm" loan.