2009 January

Archive for January, 2009

A Note from Jerry …

January 25th, 2009 categories: Seller Financing

What’s around the next corner? I don’t know … let’s look!

In your journeys from here to there, you’re going to run into potholes, bad weather, detours, missing signs, one-way streets, construction sites, broken signals, crappy drivers, road-rage … and the occasional jay-walker.

Kinda makes you want to stay home, doesn’t it? So how do you ever get “there”?

By being flexible … making adjustments as you go … and not being attached to how you think the map should read.

Jerry

“Climbing the ladder of success, when rungs were missing, I learned to jump.” – William Warfield

Pack a rope.

Why not sign up to receive Jerry’s daily messages ?
Visit Jerry on the Guest Authors page

Spoken by Jerry Hannan | Discussion: No Comments »

If I Carry Paper, What Happens if the Buyer Quits Making the Payments?

January 23rd, 2009 categories: Seller Financing, Selling Your Note

Well, the first thing you do is sit down and try to have a friendly conversation, maybe over the drink, or a game of poker. A little diplomacy can go a long way.

If they don’t bring out the briefcase stuffed with greenbacks right away, you could also offer to introduce them to your cousin Al . . . every respectable family has one of these.

And if none of these soft approaches work, then you do what all lenders are doing right now . . . ask Obama for a handout. It’s plain un-American to take a risk and lose! Investors need to be protected.

Actually, I do plan on getting serious starting right . . . . . . . . now.

When you sell a piece of property and carry paper (carry back a note, take back a note), you become the beneficiary. Under ‘normal,’ or at least typical, circumstances, the beneficiary is a bank, an institutional lender. But in seller carry back transactions, there are no third party lenders.

The seller becomes the bank

You, the seller, are ‘lending’ the buyer your equity in the property. (Read about becoming the bank on your own property, especially as a retirement planning strategy). You are taking a down payment and agreeing to let them pay you over time for the rest, with interest, of course.

So . . . you, as the lender on property that you previously owned, will do whatever banks usually do when they stop receiving payments:

Start the foreclosure process to regain possession of the property
Work out a loan modification with the buyer/payor
Sell the defaulting note at a steep discount

None of these sound very fun, do they? (Unless, of course, you got a 50% down payment and now get to take the property back for an opportunity to sell it for full value all over again).

Foreclosure is one of those ‘F’ words that causes people to get a bit queasy, but really, in most circumstances, it’s not that big of a deal. How strenuous the process is depends largely upon what kind of a down payment you received at closing.

The time to worry about a loan is before you make it

If you got a large down payment (20% or more), then you should have enough protective equity to get you through the foreclosure process without a loss. Protective equity ‘protects’ you against loss in case of default. That’s why you get the biggest down payment from a buyer that you possibly can.

But I don’t want to have to foreclose on someone!!!

If you just can’t stand the idea of potentially having to foreclose to protect your interest, here are some alternatives:

Sell the note at a discount – even non-performing paper can be worth something on the secondary market, but you can choose to sell the note long before there is a problem. Some sellers use seller financing to get a property sold, then they season the note for a while (collect a few payments) and sell it to someone else so they don’t have to worry about anything down the road.
Put the property in a land trust before you transfer a beneficial interest to another party – besides allowing you to evict, rather than foreclose upon, a defaulting ‘buyer,’ this will also protect you from an increased tax basis should you end up taking the property back.

What happens when the buyer quits making the payments is dependent upon how you set the transaction up in the first place. This will make all the difference. That’s why you will usually want a note professional/seller financing consultant to help you put your deal together.

So now I’ve gotta go . . . the family’s waiting.

Seller Financing on Steroids: Developing Trust

January 21st, 2009 categories: Land Trusts, Seller Financing

Def.: Trust – confident expectation of something; hope.

Many luxury residential and commercial sellers don’t have a lot of trust in the real estate market. Recently, as if rattling a sordid skeleton, a local high-end Realtor squeamishly confided, “Nothing’s moving right now.”

Though conventional financing is more attractive than ever, jumbos ($625,500+) are sporting a healthy 7%+ rate, and they’re tougher to get. Many buyers, who could easily afford a high end property, can’t qualify for a jumbo loan . . . stalemate.

Now, while I probably can’t help you with a stale mate if you’re married to one, I can probably figure out how to help you safely close a high end real estate transaction.

But isn’t seller financing risky? What if the buyer quits making the payments?

Trust issues:

How do we trust that the buyer will keep making his payments? If he defaults, it will take us at least 6 months to get the property back, during which a normal 10%-20% down payment cushion would probably evaporate.
How do we trust that the bank won’t accelerate, or ‘call,’ underlying loans? Having to replace a nice 6.75% fixed $1.7 mil loan would represent an unacceptable financial risk and destroy the investment objectives of any buyer.

“The best way to create trust is not to need any.”

Developing trust:

We can put a property into a land trust, with an associated document ‘transfer system.’ Using the land trust transfer system, we achieve two important objectives (which is why I call it Seller Financing on Steroids):

If the ‘buyer’ defaults, we can evict him according to tenant law, instead of having to foreclose = possession of the property in 60 days rather than 6 months, mitigating the risk of a small down payment (small is 10% or less on conventional, 20% or less on jumbo)
We prevent the bank from being able to ‘call’ the loan, as the trust system works within federal Garn – St. Germain guidelines.

Seller financing is a powerful tool that can help us close more transactions, restoring trust in today’s market. With the Trust Transfer System, we can expand seller financing techniques to those situations where there might not be a lot of equity, but there is good underlying financing that can be left in place.

Putting Seller Financing on Steroids is a great way to close more high end real estate transactions . . . trust me!

MEET THE TEAM