How to Draw Up an Owner Finance Agreement

By David Weedmark - Updated December 09, 2018
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.

Tip

Write up a contract containing all the terms of your agreement, including the length of time of the contract, the amount and number of payments to be made, and the duties of all parties when the payments have completed. The document should be signed by all parties.

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 and you're financing the entire amount, 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. Some templates can be printed so you can fill in the blanks yourself. Other templates print the completed contract after you enter your information. Your county's court website may even have forms you can use. 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 whether you use a template or decide to write your own agreement, 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. If the item is a parcel of real property, include the address and the legal description, which you can find on your own deed and mortgage.

Include a statement explaining that the owner is transferring the property to the buyer, and when the ownership is being transferred. For example, if you enter into a land contract with someone and agree that if they pay $1,000 per month for five years, the property is theirs, you'll have to put in a date on which you'll deed the property to them upon payment of all obligations. 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. This is often the case in a rent-to-own agreement for real estate.

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 worked as a consultant for many small businesses and non-governmental organizations, including several law firms and bar associations. David has also has written hundreds of articles on legal matters and small business trends for newspapers, magazines and online publications including About.com and American Express.

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