Purchasing properties using owner finance is a powerful alternative to traditional bank mortgages, offering unique advantages for both buyers and sellers. However, without proper legal guidance and documentation, these transactions can quickly turn into expensive nightmares, as my experience over the past 25 years of closing owner finance transactions has proven.
One of my recent cases involved a seller who attempted a DIY owner finance deal. The buyer eventually refused to make payments, forcing the seller to seek legal help. The resolution required negotiation with the buyers, foreclosure threats, court hearings to stop buyer interference and, ultimately, an agreement to resume payments. The seller ended up with far less money than he should have earned from the deal due to poorly drafted initial documentation.
The Benefits of Owner Finance
Owner finance lending fundamentally differs from traditional mortgages as it eliminates the middleman. Instead of working with mortgage brokers, lenders, and banks, the seller acts as the bank in the transaction. This arrangement offers three key benefits:
1. Lower costs – Buyers avoid expensive bank fees and closing costs.
2. Faster closings – Without institutional red tape, transactions move quickly.
3. Greater accessibility – Buyers who might not qualify for traditional financing can still purchase property.
Essential Documents
While owner financing can be a great strategy, success depends on proper legal structure and professional guidance.
Every properly structured owner finance transaction requires specific documentation.
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- A promissory note that outlines the loan terms and payment obligations
- A deed of trust that secures the property as collateral for payment of the Note
- Servicing documents to establish third-party payment processing
There are additional requirements for wrap owner financing (where the seller maintains an existing mortgage and wraps the buyer’s new loan around it), including legal disclosures and authorization documents allowing the buyer to contact the underlying mortgage company.
Avoid These Mistakes in Owner Finance
1. Working with Inexperienced Professionals
Many title companies lack expertise in owner finance, particularly wrap transactions. I know because our title closing office has rescued many deals at the last minute because of mistakes made by a title company that had worked on the transaction previously. Work with attorneys and title companies that are experienced in owner finance transactions.
2. Skipping the Servicer
Always use a third-party servicer, regardless of transaction type, to make sure the following are done correctly:
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- Collect payments from buyers
- Distribute funds to sellers
- Handle underlying mortgage payments in wrap transactions
- Provide annual tax disclosures
- Prevent payment disputes and surprises
3. Insufficient Down Payments
Without adequate down payments, sellers lack the cushion to cover the carrying costs during foreclosure or legal fees for reselling the property. Require at least a 10% down payment, preferably more.
4. Letting Buyers Prepare Documents
When buyers offer to “take care of everything,” sellers often end up with unfavorable terms. Sellers should have their own attorney prepare documents or thoroughly review buyer-prepared paperwork with legal counsel.
Proper Procedures Before Signing Any Owner Finance Agreement
1. Deal with Knowledgeable People
Consult an attorney who is experienced in owner financing. The law is very specific about the procedures that must be followed, so we recommend consulting with your real estate attorney to make sure that you follow the correct process.
2. Know Your Numbers
Use analytical tools to project returns over one, five, and 10 years.
3. Use a Third-Party Servicer
This ensures proper payment handling and regulatory compliance. If this statutory procedure is followed exactly as required, you will avoid payment disputes and maintain proper documentation.
Why Owner Financing Remains a Great Strategy
Despite the legal complexities, owner financing offers compelling advantages.
For Sellers
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- Passive income – Collect “mailbox money” without landlord responsibilities.
- No midnight repairs – Unlike rental properties, sellers are not responsible for maintenance.
- Higher long-term returns – Properly structured deals often outperform traditional sales.
- Flexibility – Works for direct sales or wrap transactions
For Buyers
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- Lower entry costs – Reduced closing expenses and down payment requirements
- Speed – Faster closings than traditional financing
- Investment opportunities – Buy properties to rehab and flip, or purchase rental properties with tenant income covering payments.
Regulatory Compliance Matters
Sellers who frequently offer owner finance must comply with federal and state disclosure requirements. Even one-off sellers trying to finance a home need to understand applicable laws. Non-compliance can lead to legal problems beyond just financial losses.
The Bottom Line
Owner finance represents a powerful tool for real estate investors and homeowners alike. Whether structuring a direct sale or a wrap transaction, success depends on working with experienced professionals, understanding the numbers, and using proper servicing. The Lonergan Law Firm PLLC and Title Closing Office can help you succeed using owner finance.
Gaylene Rogers Lonergan
Board Certified Residential and Commercial Real Estate Attorney
Lonergan Law Firm PLLC and Title Closing Office
12801 North Central Expressway, Suite 150, Dallas, Texas 75243
214-503-7509 | lonerganlaw.com | grogers@lonerganlaw.com
© Gaylene Rogers Lonergan and Lonergan Law Firm, PLLC, 2026. All rights reserved. This article is provided for educational reasons exclusively and is not meant to be construed as legal advice. The Lonergan Law Firm, PLLC, will represent you only after being retained and that agreement is made in writing.
