How to Draw Up an Owner Finance Agreement

By David Weedmark ; Updated June 17, 2017
Couple calculating finances at home

If you are selling your property to someone who can't pay the cost up front, you can draw up your own financing agreement. Write it from scratch or use a template. Provided you write the agreement accurately, it would be enforceable by law.

Determining the Financing

Before starting the paperwork, both the seller and buyer need to agree to the terms of the financing. Use an online interest calculator to determine the payment plan. For example, if you are selling a friend your used car, you need to agree on the value of the car, the interest rate, how often he will make a payment and the duration of the loan. If the car is worth $5,000, at a 4.5 percent interest rate, paid monthly for two years, the payments would be $218.24.

Writing Up the Agreement

An easy way to create a financing agreement is to use one of the many templates already available online (see Resources). Some templates can be printed so you can fill in the blanks yourself. Other templates print the completed contract after you enter your information. Note that in some cases you may have to register your email address to get the completed document. Other websites may charge a fee.

Information Your Contract Needs

Regardless of which template you use or if you decide to write your own, the contract should state the lender's and borrower's names and addresses. The contract should also state what is being purchased, with a complete description. In the case of a car, for example, include the vehicle's make, model, year and identification number.

Include a statement explaining that the owner is transferring the property to the buyer – and when the ownership is being transferred. In addition, include a statement that the agreement is to be governed by the laws of the state and county where the agreement is being made.

You can also stipulate the consequences if the buyer is late on a payment, such as a late fee that would be due immediately.

Both parties need to sign and date the contract. Consider having two witnesses without a stake in the agreement sign and date it as well. If there is a problem, the witnesses can verify that both parties did agree to the contract. Some states may require that the contract be notarized. If this is the case, wait until the notary public is present before signing.

Common Pitfalls to Avoid

When you loan money or property to someone with the promise that he will pay you back, there is always a risk that he may not do so. If you need to sue the buyer, you will face court costs and legal fees and, if the agreement wasn't properly drafted, you could lose your money. Avoid owner financing with anyone you don't know well. To reduce your potential loss, you should also consider asking for a down payment or keep the property in your name until financing is complete – as is the case in a rent-to-own agreement.

The higher the value of the property being financed, the more important it is to consult a lawyer before entering into an agreement.

About the Author

A published author and professional speaker, David Weedmark has advised businesses and governments on technology, media and marketing for more than 20 years. He has taught computer science at Algonquin College, has started three successful businesses, and has written hundreds of articles for newspapers and magazines throughout Canada and the United States.