The Owner Contract
Updated: Feb 8, 2020
The Owner Contract has many names—Seller Contract, Seller Financing, Owner-Carry Financing, and any variation of the same. To paint it with broad strokes, this is when a seller agrees to accept payments over a certain period of time, in lieu of cash at closing.
Under a true Owner Contract, title does not transfer until the final payment is made. These contracts can help make a sale happen when a bank can’t or won’t get involved, but they are also risky.
Most of this risk is carried by the buyer, especially when relying on standard MLS forms—which in my experience tend to be very seller-oriented, for reasons I won’t be going into here. For this reason, there are numerous blogs and articles available on the pitfalls to buyers. (I’ll probably write one myself at some point.) But there are also things a seller should take into consideration...
The most obvious, is that you will have to wait to get paid in full. If you need the money now, then you shouldn’t even be considering an Owner Contract. And if you’re going to be depending heavily on those monthly payments, I would still think twice about carrying the financing yourself. At the end of the day, you are not a bank, and buyers very often struggle to make payments. A poor payment history may be the reason they are needing seller financing to begin with—and even if it’s not, life happens.
If a buyer fails to make their payments (or often even a single payment), yes they will be in breach of contract and you (as the owner/seller) most likely have the option of calling the loan due in full, or reclaiming the property. But neither of these happen automatically, or overnight. You will need to go to court, likely hire an attorney, and in the meantime money and time is slipping by. Your contract probably states that the buyer will pay the attorney fees and other costs associated with pursuing these remedies, but that (a) still takes time, and (b) assumes you'll be able to recover money from the buyer at all. (What’s that saying—you can’t squeeze blood from a turnip?)
Let‘s assume then that you DO have the luxury of absorbing a missed or late payment, and other various expenses. And maybe you have a property that a traditional lender won’t touch. An Owner Contract may now make sense. In this case, stay on top of those payment due dates! Make sure you document late payments, and that you are doing so in a manner consistent with your contract.
Consider this example. Your buyer has consistently been making payments 10-15 days late, but you do nothing. You finally have had enough and consult your contract. It says that payments are considered late at 3 days, at which point you can “call the loan” if the buyers are unable to remedy the situation within an additional 5 days. At 3 days late, you send your buyers the required notice and attempt to call the loan. They’re unprepared to pay it, because they’ve gotten in the habit of paying 10-15 days late. They fight back, and now you’re in court. There’s a good chance a judge will say that, by continually accepting payments 10-15 days late without saying anything, you essentially modified the contract and the buyers weren’t in default after all.
Moral of the story? Set alarms. And document late payments. If a payment is late, bring that to the buyer’s attention immediately, even if you don’t intend to call the loan or pursue other remedies under your contract at that time. Say they call and let you know that, for whatever reason, their payment will be a week late. The contract only allows for 5 days, before the buyers are technically in default. Send them written notice acknowledging that—this month only—you are allowing them 3 additional days to make their payment. And for the love of God, unless your contract says that text message notices are sufficient (and trust me, it probably doesn’t), do not send notices via text. Read your contract and know what manner of notice is acceptable. And then be consistent.
If you are considering an Owner Contract, as either a buyer or seller, please get legal advice. Know the pros and cons for your particular situation, and how to avoid the inherent risks.