What Does 'Owner Will Finance' Mean?

"Owner Will Finance" can be the difference between being able to make a major purchase and not being able to. Most commonly utilized when buying a home or a small business, it is an agreement where the owner finances part of the asking price.

Home Sales

When applied to the purchase of a home, owner financing can take several forms. In the most basic form, the seller effectively becomes the bank. The buyer is required to make monthly payments to the seller that includes a combination of principal and interest. The difference between owner financing and bank financing is that if the buyer misses a series of payments with owner financing, the owner of the house will evict the buyer and the buyer usually will not receive any of the equity he might have built up in the house due to the owner financing agreement. The agreement is more like a rent-to-own agreement than a pure mortgage. Compared to a traditional bank mortgage, if the buyer stops making payments he will eventually go through foreclosure but will receive whatever equity has been built up after legal fees and the remaining mortgage balance has been paid off.

Variations on Home Sales

A second type of owner financing for home ownership involves the owner effectively providing the down payment for a home. In this case, a buyer will go to a bank to get a mortgage for 80 or 90 percent of the asking price and then the current owner will take a note payable from buyer for the difference. This allows the sale to happen but reduces the risk to the current owners because they are no longer providing 100% of the financing.

Business Sales

"Owner Will Finance" agreements are also very common in small business sales. Like a home sale, a potential buyer might not have enough cash to buy the business outright or might not be able to get enough financing from a bank to buy it at the full asking price. Once again, the owner of the business will agree to take a note payable from the buyer in order to make the sale happen.

Differences

The difference between owner financing in a business sale and owner financing in a home sale is the order in which the owner is repaid. If the buyer is using a combination of bank financing and owner financing to purchase the business, the bank is usually going to require the owner financing be subordinated to the bank's financing. What that basically means is that the bank is demanding that its debt be repaid first. If the seller doesn't agree, then the bank won't provide its part of the financing and the buyer won't be able to make the purchase. As a result, the owner will usually agree to the bank's terms.

The Place for Owner Will Finance

"Owner Will Finance" agreements occur because there is a motivated seller. There is a lot of risk for the person providing financing so most owners will not do so unless they really want to get the home or business off their hands. It doesn't necessarily mean that there exists a problem with the home or business, it simply means that the owner no longer wants to deal with it. The great news for potential buyers is that they not only have to bring less money to the table, but they can often negotiate a lower asking price.