Owner Financing Primer
Buyers of owner financed property are exposed to risks which are normally filtered out by the closing requirements of conventional financing.
1. Many owner financed deals are closed without title insurance. There may be problems with the sellers title that will cause problems in the future. For example, I know a guy who lease/options homes and then sells them on contract. If there are problems with his leases he will find it difficult to actually transfer title when the time comes.
2. In their eagerness to get a home of their own buyers may agree to larger payments, higher interest rates, or short balloons. If times get tough, someone looses their job for a few months, or an unexpected baby arrives, they may not be able to continue buying their house. Some sellers actually count on getting the house back this way, keeping any downpayments, and selling it again.
3. The buyer must be sure to get copies of and read carefully all the sellers mortage paperwork. For example, the seller expects to use the buyers payment to pay the existing mortage. That is fine, but what if the sellers mortage is an adjustable rate loan and the payment increases a lot? If the seller financing did not make provision for this situation the seller may find himself making a payment which is larger than the buyers. If the seller can't or won't do that, the buyer has a problem.
4. Since the seller is frequently still responsible for payments on underlying loans, it is possible for seller problems to spill onto the buyer. A messy divorce, tax problems etc. can all do this.