Archive for July, 2008
Buyer Wonders How to Structure an Owner Financing Offer – If the Owner Will Carry, What Should You Do?
If you’re a buyer right now, it really behooves you to know how to structure a seller financing offer. In the live deal that I’m sharing with you below, the buyers specifically looked for properties that were owned free and clear (there was no mortgage on the property) and zeroed in. Here’s the conversation in a nutshell:
I saw your website while searching for a way to put together a deal to purchase a home. My husband and I are the buyers and have found a lake home in north Georgia that we would like to buy and we have a great realtor. The seller is willing to owner finance the home for 10 years @ 6% with a 30 yr amortization but wants more of a down payment than we have at this time. We have a great income but a few years ago through a failed business we damaged our credit. We have spoken to a mortgage broker and we qualify for the new FHA loans with our income and even with our credit but last september my husband became self employed and they need 2 years on the tax return before the underwriters will do the loan.
So, we are searching for a creative way to raise the cash for the down payment he is wanting. Is it likely that we might structure a note for the cash needed in the form of a second and then sell it at closing to raise the funds? You might have some other ideas that we could try ? Like I said before we have the income to support this home but we just do not have the cash.
Thanks in advance for your help.
We chatted on the phone and by email so I could get a very clear picture of the needs and objectives of all parties, and then I responded below with what I would have the listing agent (who will double end this deal) submit to the seller:
Great talking to you again. So here’s the recap:
Purchase Price: $675,000
Down Payment: $20,000
Face Value of Note: $655,000
Interest Rate: 6%
Amortized Over: 360
Due In: 120
Monthly Payment: $3,927.06
In light of the low down payment, property to be placed in a 2 party trust to give the seller the ability to regain possession of the property through eviction (as if buyers were tenants) instead of foreclosure upon any buyer default. The buyers will be able to take all the usual mortgage interest write-offs.
Property to be purchased “As Is” (no requests for repairs or warranties)
Escrow to close in 21 days (likely sooner)
Just after close of the first escrow, I will buy a portion of the note.
I will bring $75,000 to the closing table in exchange for either:
- the first 24 payments of $3,927.06 OR
- half of each payment ($1,963.53) for the first 67 payments
If the seller accepts the first option, he will get:
- Buyer’s down payment: $20,000
- My note purchase: $75,000
- TOTAL: $95,000
- Estimated closing costs (if agents will take 4% total commission): $50,000 (trust, title, escrow/atty)
- At closing: $45,000
Two years from now the note will still have a balance of $638,416.82, he will start receiving the payments:
- $3,927.06 for 96 payments: $376,997.76
- When the balloon pays off in 10 years, he will get $548,140.82
- Grand total to seller: $970,138.58
OK, so there’s my pitch. Please feel free to have the agent and/or seller call me regarding any questions they may have.
Best of luck!
Discussion: 1 Comment »|
July 16th, 2008 categories: Seller Financing
Bummer . . . well, I found out that my nice little seller financing strategies don’t work on mobile homes in parks when there is underlying financing in place (the seller still owes a bank some money). If the seller owns the mobile home free and clear, or if the manufactured home is somehow affixed or attached to the land, then that’s a different story and I can work with that.
I had someone named, well . . . Dawn (the names have not been changed to protect the guilty) contact me about a situation she had in Northern California.
She had purchased the mobile home 3 years ago, expecting to stay single. She put down about $7,000 and had a first mortgage of $69,000. Everything was great, but then it happened . . .
Good news: She fell in love and she and her husband bought a fixer upper house because that makes a whole lot more sense for raising a family
Bad news: If she tried to sell in this market, she would end up being a short sale, and she doesn’t want to ruin her stellar credit
Good news: She had a friend that wanted to move in and take over the existing loan payments and space rent
Bad news: The mobile home park’s rules prohibits anyone but owner occupants . . . no renters allowed
Good news: OK, then, we’ll just leave the underlying financing in place and “wrap” the note (AITD). The friend will pay the seller and the seller will pay the bank.
Bad news: You can do this with regular real estate, but not with mobile homes in parks. They are governed by a different governmental agency, and they will not allow a property transfer unless the underlying loan is completely paid off.
Good news: There’s still the land trust idea
Bad news: It only works when the personal property (mobile home) is affixed to the land. Hmmm . . . there may be some reason it’s called a land trust after all.
More bad news: The bank won’t let the friend assume the loan, and they won’t modify the loan. They’d rather lose a lot of money foreclosing instead (Gee, I wonder why the banks are in such trouble.)
It was a great disappointment not to have a solution for these people. I refunded the consultation fee she had paid, and received this from her:
“Thank you so much for following up on this. This is a big disappointment to me, too, as I think I have exhausted all the options. I talked to the loan servicer again the other day and they said they absolutely cannot do an assumption of the loan. I will have to talk to someone about refinancing the loan and maybe putting my friend on the title as a co-buyer. Thanks again for all your help. I have learned a lot from your site and, though it didn’t help me at the moment, I have no doubt that I will be able to pass this information on to someone whom it can help at some time in the future. I would not hesitate to refer people to you. Thanks.” - Dawn
Wow, thank you.
Discussion: 1 Comment »|
A common buyer’s lament: “Now that prices are coming down and it’s finally a buyer’s market, there’s no more 100% financing, and even though I do have a 5% down payment, it’s so hard to get a loan . . . what good does it do to have a buyer’s market if I can’t buy?”
There’s a big disconnect out there. Many people who want to buy are discouraged.
But they don’t have to be . . . this can be such a great time to put a deal together if you’ll just step outside the box with me for a moment. There are ways to consummate real estate transactions without any institutional financing whatsoever.
And they involve some form of Seller Financing: find a property where the owner will carry the financing, leave the existing financing in place, or both.
“Yahoo!” you say, “let me call my Realtor right now so they can find me a nice seller financed property. They’ll just look through the MLS and print me out a list of all the properties where the seller is willing to offer terms and provide the financing for me.
Well . . . good luck. Yes, there is actually a place where the listing agent can indicate that the seller is open to this. They can enter: OWC (Owner Will Carry) or OMC (Owner May Carry). Commercial brokers are more accustomed to seller carry back, but residential listings rarely get coded this way.
So does that mean these sellers won’t do it?
Not necessarily. What it means is that sellers don’t know about it, haven’t considered different options that might work for them, and likely, the listing agent has never thought to probe and poke around on the topic. Most sellers and real estate agents just don’t think beyond cash-to-new-loan, but I think the time is ripe for this pattern to change.
When you can open your mind and create a solution “out of thin air,” for yourself or your client:
- Sellers get to sell
- Buyers get to buy
- Real estate professionals get to eat and look like heroes (when they’re involved, of course)
If you’re a buyer or a buyer’s agent, you’re going to need to know how to structure a seller carry back offer. Most sellers don’t know that they will accept a seller financing offer until they get one (and the longer they hang on the market, the more open to alternatives they will probably be).
Most owner financed deals are instigated by the buyer’s side of the equation. The exception is when (usually older) sellers offer to carry paper as part of their retirement strategy. They usually own their properties free and clear and use the installment sale to defer capital gains and create cash flow.
So, if you want to find a property where the seller will carry, here’s some steps you might want to take:
Get Prequalified for a Conventional Loan
You need to know what your finances can handle. Getting a great seller financing “deal” doesn’t really help you if you discover 6 months into it that you just can’t afford the payments.
Granted, the debt-to-income ratios required by the banks right now may not reflect your true ability to pay, but getting checked out by a traditional lender will give you a good starting point for evaluating your financial situation.
Get a Down Payment Together
Most sellers are not going to get caught being the next round of subprime lenders, handing out 100% financing to anyone with a pulse. An educated seller will typically ask for at least 10% down, but may take 5%.
Yes, it’s risky to take 5%, but it may be worth it just to get the property sold quickly. Otherwise, if they have to attract a conventional or cash buyer, they will probably have to lower their asking price. Better to take the 5% and hope that the buyers keep paying than to discount heavily now, they muse.
It is not uncommon for first-time home buyers to get help with the down payment from parents and/or grandparents. Sometimes the money is a gift, and sometimes it’s structured as an equity-sharing agreement where both the parents and children own an interest in the property and agree to split the profits when the home is eventually sold.
50% of something is better than 100% of nothing.
Even if you can do no more that put 3-4 months’ rent aside, it’s possible to get into a property by taking over someone’s existing financing. This type of arrangement is most prevalent when the seller owes as much as the property is worth (has little or no equity), and just wants out from under the payments.
If you can afford the payments, then you can ‘buy’ this property for very little down. When there is less than a 10% down payment, the seller should put the property in an Illinois-type of land trust to: 1) prevent the bank from exercising their due-on-sale clause, and 2) be able to regain possession of the property in 60 days if you quit making the payments.
Find a Seller Financed Property
Finding a seller willing to help out with the financing isn’t always easy, but it can be done. You will probably want a good real estate agent helping you, but you need to pick one that understands the owner carry back world. Unfortunately, that can be as hard as finding a seller willing to advertise seller financing.
I can help you root around for a knowledgeable seller financing agent. I have connections in most parts of the country, and can usually help you hook up with someone who understands this expanding niche of the market.
As mentioned above, sellers who have had their homes on the market for a long time may be good candidates for seller financing. Check expired listings, as well as FSBO’s who haven’t had much luck in selling (and give them this FSBO report).
And, of course, retired sellers who own their properties free and clear are always great owner financing prospects.
Discussion: 3 Comments »|