EDMOND — EDITOR’S NOTE: This is a weekly series of columns written by attorneys at Lester, Loving & Davies law firm in Edmond.
Q: We are selling our house and are considering providing owner financing. Is this a good idea?
A: I am not a financial planner, and offer no financial advice. But, there are a number of financial factors you should consider to determine whether owner financing is the right option.
If you sold your house for cash, what would you do with the money? If you currently owe money on your home, then the sale proceeds would first go to eliminate the mortgage. But what would you do with the rest? Do you need it to purchase another home? Would you invest it or use it to pay off other debts? Compare the return you would receive on the underlying capital. Sometimes you will make a better return by carrying the financing, but the answer depends on your own financial situation.
It is even more critical to fully evaluate the condition of the buyers. Make sure they can afford the payment. Usually, a credit check and review of their tax returns will provide the answer. But also consider how they will take care of the property. If they default, you likely will be taking the home back from them. What condition will it be in then?
If you provide owner financing, there are different contractual arrangements to consider. Usually, deeding the house to them and taking a note and mortgage back is the cleanest way. The new buyer owns the home and you have no responsibility or liability for the property. If they default, though, you will have to file a lawsuit to foreclose the mortgage in order to get the house back.
A similar option is to execute a contract for deed so that you continue to own the home while they pay for it. You only transfer the home to them when they have fully paid. This sounds safer, but is usually a less attractive option. If they default, you still have to file a foreclosure suit. And because you still own the house, you have greater exposure to liabilities to them and others.
You might also sell the house to them under a lease-purchase agreement. The benefit here is that if they stop paying and refuse to vacate, a lawsuit for forcible entry and detainer should suffice. This is a quicker and cheaper option than foreclosing a mortgage, but the contract must be worded very carefully to be effective.