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Buying a Home Under Owner Finance Terms


Owner Finance terms means that the home owner/seller has a loan in place with their own bank or lender and are happy to on sell the property to a buyer using this finance that is already in place. In Rent to Buy terms, this deal type is called a Wrap (short for Wrap Around Mortgage). A contract for sale is entered into with supporting paperwork called an Instalment Terms contract. The contract that is entered into 'wraps' around the owners own bank loan as well as the new loan created for the buyer (hence the reason for this deal being called a Wrap). Contracts are exchanged but do not settle until the end of the term agreed upon, making a Wrap just like a delayed settlement. A Wrap falls under the Uniform Consumer Credit Code.

Many sellers who have negative equity (where the property was purchased years earlier for a higher price than what they can sell the property for now) find answers selling their homes using a Wrap. Sellers who are finding it hard to keep on top of high mortgage repayments also benefit from on selling their property this way. It's important to note that this requires cooperation from both the buyer and seller because they are both going to need time to be on their side. The seller will need time to allow the property go up in value and so will the buyer. Time will become the buyer's best friend as they gain control over a property that they will own, once some time has passed and they have gained the equity required to finance the current owner out of the sale.

A Wrap is very similar to a normal house sale with one big difference - it is the seller supplying finance to the buyer - not the bank. All of the buyers repayments reduce the total amount owed just like a normal bank loan. The buyer usually takes over the sellers full mortgage repayments in a Wrap, including rates and insurances. Interest is charged in a Wrap - just like the banks charge their customers interest. When dealing directly with a seller, the interest charged usually is exactly what the home owner/sellers own bank is charging them. Important note: when an investor Wraps, they will usually charge at least 2% on top of the standard bank rates, but many charge MUCH more then this. This is where the investor collects what is known as 'positive cash flow'. It is always a wise move to get the seller to fix his/her home loan rate with the bank for the period of the term agreed upon, this way everyone knows exactly what the repayments will be for the period of the term.

The deposit required for a Wrap usually consists of the First Home Owners Grant (if applicable) and also some hard earned savings of the buyer (anywhere from $4000 upwards). With the buyer committing a reasonably large sum of his/her own savings into the deal, the seller secures the buyers position to ensure that his/her repayments stay on track - there is far more to lose when you put your own money into a deal. This deposit is far less though than what the banks require if purchasing traditionally.The old saying of you don't value what you don't pay for is so true.

The price of the property is agreed upon and documented into the contract at the beginning of the deal. The Wrap buyer has the great advantage of entering into a house purchase without needing bank finance while he/she is fixing up whatever it is that is preventing them from obtaining a bank loan. The buyers monthly repayments reduce the amount owed of the sales price over the period of the term.

Once all the terms are agreed upon they are documented into the contract (along with the property price). Contracts then exchange, but do not settle until the end of the term agreed upon. In most cases, the field on the contract that requires the settlement date to be noted (normal sales would generally say 6 weeks after the contract date) would say "When the final installment has been made". This is called a delayed settlement, which can go from 2 to 30 years depending upon what has been agreed between both parties. Usually (unless the buyer has a strong dislike for banks and refuses to deal with them) a Wrap will settle within the first 5 years. The title of the property does not change over into the new buyers name until settlement takes place. 

It is extremely important that both sides obtain their own independent legal advice and that everything that is agreed upon is documented into the contract BEFORE an exchange of contract takes place. This way both sides have full protection should something go wrong.

Another Rent to Buy type deal that fits into this category is called a License to Occupy. A License to Occupy is similar to a Wrap. This deal type does not fall under the Uniform Consumer Credit Code as no interest is charged. A large deposit is not required for a License to Occupy (this is negotiable between the parties). The deposit put down can be as low as $10.00, though most traditional contracts require a 10% deposit on the purchase price.

A contract for sale is entered into, with the price of the property documented into the paperwork at the beginning of the deal, BEFORE signing. The paperwork is exchanged, but does not settle until the end of the term agreed upon. The buyers agreed monthly repayments DO NOT come off the purchase price. If the buyer chooses to pay more, over and above the agreed monthly repayments, this then does come off the purchase price. It is important to make sure that a clause is added to the contract to reflect the additional payments coming off the purchase price.

For the buyers protection, we always suggest that a caveat is taken out (by the buyer) on the properties title for the length of the deal, registering the buyers interest in the property until the deal settles. This prevents the seller from on selling the property to another party. This is important as the title of the property does not change over into the new buyers name until the end of the term when the property settles.

The length of the term that a License to Occupy goes for is totally dependent upon what the seller and the buyer agree upon. The term could be as short as a few months, or as long as 30 years. The longer the term that the buyer can get the seller to agree to, the more time the buyer has to come up with the purchase price at the end of the term. On entering into a License to Occupy, the buyer has committed himself to purchasing the property at the end of the time as a contract has been entered into and exchanged. The buyer can settle at any time during the term agreed upon if they are ready and able to obtain bank finance.

A seller who may be needing relief from high mortgage repayments or is having trouble selling the traditional way for the price needed benefits from a License to Occupy. Flexible terms of sale (Rent to Buy systems) bring such great relief and answers to both parties involved (the buyer and the seller), as well as an opportunity to obtain the best possible result for both sides. The banking system and traditional real estate certainly cannot bring flexibility like this into the real estate marketplace.

For anyone wanting to know more, our DIY Rent to Buy manual explains in much greater detail about these flexible terms of sale, including all the steps required to implement them.