If you are interested in investing in the real estate markets of San Juan Del Sur & Tola and searching for a property, it is likely at some point you will see the term “Owner Financing” mentioned in listings. Given the limited financing options in the local real estate market and high-interest rates from local banks, Owner Financing is a popular method for purchasing a property in Nicaragua.
But what exactly is Owner Financing?
Simply put, Owner Financing is when the property owner/seller acts as the bank and “loans” money to the buyer of the property. Although the seller does not actually physically give money to the buyer, the seller allows the buyer to make an initial down payment on the property and carries a note for the remaining money owed. Instead of the buyer using a bank or another financing source, the financing is structured between the two parties involved in the transaction, the buyer and the seller.
As an example, let’s say there is a property listed at $100,000 USD and the buyer only has $50,000 USD cash to put towards the property as a down payment. The seller and buyer can agree that the buyer will make an initial down payment of $50,000 USD (50% of the price), with the remaining balance paid over the next 1 to 3 years. In this scenario, both parties may agree that the balance of $50,000 USD will be paid over 2 years, with $25,000 USD being paid at the end of each year over the 2 year period.
What are the terms of Owner Financing?
This is a very common question amongst buyers and the answer differs on a case-by-case basis. In certain cases, sellers have specific terms that they would like to adhere to, such as in the example above, with 50% down and the remaining balance paid over a 2 year period. However, typically sellers are open to hearing proposals from buyers. It is important to remember that the buyer is the person requesting financing – 9 times out of 10 an owner will prefer a cash buyer over a buyer looking to use Owner Financing. Given that the buyer is generally the party requesting financing, many sellers would like to hear what the buyer can offer based on their own financial standing. Using the same property from our previous example, let’s assume that the buyer only has $25,000 USD to put towards the property and can pay a monthly amount of $2,500 USD to pay off the remaining $75,000 USD balance. In this case, the buyer would offer to pay $25,000 USD as a down payment with a monthly payment of $2,500 USD for 30 months to pay the balance.
A good rule of thumb is that property owners want as much money as possible, as quickly as possible. Generally, a 50% down payment and 1 – 2 years to pay the remaining balance is acceptable for owners who are open to financing. Although possible in certain cases, a small down payment and 5+ years to pay the remaining balance are usually less attractive to sellers.
Interest rates will vary based on the amount of the down payment and length of financing. In certain cases with short-term financing (1 – 2 years), no interest rate is applied. However, the longer the financing the more likely the seller will seek to apply an interest rate on the money being loaned. Local banks currently lend at an interest rate of 10-15%, so the interest rate will be more competitive than the bank’s rate.
Every owner and every property is different. It’s important to look at Owner Financing on a case-by-case basis by speaking with your Real Estate Agent to discuss which properties have owners that will entertain Owner Financing and what terms are considered reasonable if any.
It is also essential that the buyer firmly understands their own financial standing before exploring Owner Financing options:
- What amount could you potentially use as a down payment to purchase a property?
- What amount could you pay on a monthly, bi-monthly, quarterly, or annual basis to pay the remaining balance?
- If you were to lose your job or suffer a financial loss, is this an amount that you could continue to pay?
Having a firm understanding of your financial position will allow your Real Estate Agent to search for properties with sellers that would be open to what you can offer.
Again, unlike a bank, there is no fixed structure with Owner Financing. Communicating your financial position to your Real Estate Agent will allow them to not only help you find an appropriate property but also aid them in the creation of a unique deal structure that works for both parties.
Is Owner Financing safe?
Yes! Owner Financing utilizes the same legal instruments that are used when a bank provides financing to a buyer. The documents that are commonly used for owner financing are:
- The promise of Sale (Promesa de Venta), which shows that a deposit has been paid towards the purchase of the property and that there is a legally binding agreement between the buyer and seller. All of the terms, dates, and penalties are outlined in the Promise of Sale.
- Mortgage (Hipoteca), which shows that there is an outstanding balance owed on the property to the seller. The mortgage acts as a lien against the property and must be terminated before the buyer can obtain full legal possession of the property.
Both of these documents will be registered in the appropriate Land Registry offices by your lawyer and are legally binding with the Nicaraguan Government and Judicial System.
I’m interested in Owner Financing!
Great, we are glad to assist you in your real estate and property journey to help you identify appropriate options! As mentioned previously, please review your financial buying power and be prepared to discuss your potential down payment and monthly / bi-monthly / quarterly / annual payments.
We look forward to hearing from you!