There are many advantages to owner financing
Question: I am considering selling my rental property and providing owner financing. I want to make sure that I do not pay too much in costs in financing my buyer, and, more importantly, I want to protect my investment. Any suggestions?
Answer: First, Happy New Year to you and everyone. There are many advantages to owner financing, such as providing a good income stream to you, while helping the borrower avoid some of the costs involved with borrowing from a bank. However, you want to be very sure you protect your investment by insuring you are paid back some day.
In a typical contract in Lee County with seller financing, the borrower will pay for the cost of the loan documents, such as the mortgage and note. These are prepared by an attorney. The borrower will also pay documentary stamps and intangible tax on the amount of the borrowing. On a mortgage, 35 cents per $100 in value are paid for documentary stamps, and 20 cents per $100 is paid for intangible tax. On a larger loan, these taxes can cost thousands. This tax is paid regardless of whether money is borrowed from an institutional lender, or a private lender like yourself.
The mortgage and note will contain important provisions regarding the borrowing, particularly provisions that protect your interests. For instance, borrowers are typically required to carry hazard insurance on the property, and name you, as lender, loss payee. If the house is destroyed in an insurable event like a fire, you would be paid your investment first prior to the borrower.
Additionally, a mortgage will require that the borrower pay property taxes at the earliest possible opportunity (In Lee County, that is November).
Mortgage documents will provide for protection in the event of a default by your borrower, so that you will have the opportunity to recover costs incurred in collecting funds owed, or foreclosure if necessary. My best advice to my clients is to obtain the largest amount of deposit possible when offering owner financing. Not only does this reduce your potential exposure, but it also provides a major incentive by the borrower not to default, which would potentially endanger his or her equity.
You will also want to make sure that your mortgage is recorded prior to any other potential lienholder. So, upon the sale of the property, be sure to use an attorney or title company that records deeds and mortgages the same day.
Eric P. Feichthaler has lived in Cape Coral for 27 years and graduated from Mariner High School in Cape Coral. After completing law school at Georgetown University in Washington, D.C., he returned to Southwest Florida to practice law and raise a family. He served as Mayor of Cape Coral from 2005-2008, and continues his service to the community through his chairmanship of the Harney Point Kiwanis Club KidsFest, which provides a free day of fun and learning to thousands of Cape Coral families, and funds numerous scholarships. He has been married to his wife, Mary, for 13 years, and they have four children together. Recently, he earned his board certification in Real Estate Law from the Florida Bar. He is also a Supreme Court Certified Circuit Civil Mediator.
This article is general in nature and not intended as legal advice to anyone. Individuals should seek legal counsel before acting on any matter of legal rights and obligations.