Archive for December, 2010
Buyers Be Careful With Lease Options – Land Trusts are Safer
December 30th, 2010 categories: Land Trusts, Real Estate News, Seller Financing
[youtube]http://www.youtube.com/watch?v=c9M-4D1L8ek[/youtube]
Recently I was talking to a potential client who was wondering if there was any way I could help rescue his lease option tenants. Last year, he had done a lease option on one of his rentals with a nice couple who put down a healthy option payment.
This year, his financial affairs are forcing him to file for bankruptcy, and the BK trustee is going to sell that rental right out from under the nice couple with the lease option. So, unless they have a way of getting either cash or a bank loan, and can buy the property from the BK trustee, they are going to lose everything…
Their option money, and the chance to own a
property they’ve put a lot of time, money and love into.
The seller feels bad, but there’s nothing he can do. He can refund their option money, or find them a replacement property, but as he’s in the position of filing for bankruptcy, there’s very little chance that he has the money to do either. The nice little couple is out of luck.
With all of the ‘reorganizing’ of people’s financial lives right now, there are a lot of BK’s, liens and judgments flying around that can easily attach to a piece of property, changing everything.
Besides that… with the uncertainty of the real estate market, a lot of agents I know who used to feel good about putting their clients into lease options now consider it a bad move for their clients, and one that represents unacceptable liability that could come back to haunt them…
If you were the one representing that nice couple, and you got them into that lease option that went south, wouldn’t you be a little bit worried when they called you after finding out they were losing their entire investment?
And even if nothing like that happened, in many areas, it’s likely that home values will be below the strike price, making it financially unsound to exercise the option that they spent their hard-earned money for.
So… what are the options?
If you have at least a 5% down payment, see if the seller will sell to you in a straight owner carry transaction, with a note and deed of trust or mortgage . That way, title is in your name, and shrapnel from the seller’s exploding financial world won’t embed itself into your life and real estate holdings.
Alternatively, have the seller place their property into a land trust and become co-beneficiaries with them in the trust. There are many benefits of using the land trust:
- protect the title from liens, judgments, bankruptcies, probate and divorce issues
- protect any existing financing against acceleration
- privacy of ownership and potential tax benefits
- get sellers to agree to take a small amt of money up front, because they don’t have exposure to foreclosure
You get the benefits of ownership without many of the risks. And fewer risks for buyers means less liability for the real estate professional working with clients who are looking for lease option or owner financing opportunities.
Think twice before you get into a lease option, or put your clients into one.
From the buyer’s perspective, (and often the seller’s) owner financing, and/or the intelligent use of land trusts offers more benefits and fewer risks.
Check out the Note Queen Store!
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Recovery Hinges on Lending… The Economy Needs Owner’s to Provide Seller Financing
December 22nd, 2010 categories: Real Estate News, Seller Financing, Selling Your Note
Economist Kenneth Rosen says “Money is easy, but credit is tight– many would-be home buyers have discovered during the downturn that while loans may be dirt cheap, but they’re hard to come by.
Rosen, the chairman of the University of California, Berkeley, Fisher Center for Real Estate and Urban Economics, said he doubts the Federal Reserve’s efforts to keep long-term rates low can stimulate the kind of growth Fed Chairman Ben Bernanke and his colleagues are hoping for.
Speaking of Bernanke (and this is totally a random side note, but it was so funny and poignant at the same time)… watch this video about “Quantitative Easing” and “the Bernanke” if you’ve got 7 minutes to spare:
[youtube]http://www.youtube.com/watch?v=PTUY16CkS-k[/youtube]
Anyhow, with bank loans tough to come by, owner financing strategies are increasingly needed to keep the real estate market liquid… we need buyers and sellers to keep coming together in mutually beneficial ways, even when “the system” isn’t working very well.
But we can’t afford to be sloppy. Creative deal structuring still needs to be legal, ethical and intelligent, and give all parties a reasonable exit strategy that preserves both real and paper assets. And if you’re a real estate professional involved in an owner financed transaction, then you really need to know how to advise your clients accurately to avoid liability your broker probably wouldn’t be happy with!
I’ll never forget one seller who brought a seller carry back note to me hoping I would buy it.
Unfortunately…
- the way the transaction was engineered,
- the lack of documentation, and
- outright errors in the calculation of the numbers in the note
made the note impossible for me to buy.
When I told him that I probably would have been able to buy at least part of the note if I’d been involved in the underwriting, he nearly exploded with exasperation:
“I asked my agent if he knew anyone that could help us put the note together, and he said ‘no’!”
If you’re a real estate professional that has used seller financing to sell a client’s property, did you also tell them that they could sell their note? If not, they could come back to you screaming :-/
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How Do I Get Paid if my Clients Offer Owner Financing?
December 21st, 2010 categories: Seller Financing
I thought this was a great email addressing concerns that real estate professionals sometimes have when dealing with owner financing situations:
“Hi,
I was just on your page “Dispelling the 5 myths of owner financing“. I am an agent in Chicago currently working on a owner finance deal for the first time. I get the process, but I am not sure about one thing. When do the agents get paid their commission???
We have asked the seller to hold the note for 12 months. Do we (realtors) get paid when the seller and the buyer have agreed on terms and transaction is signed off or do we get paid in 12 months when the buyer’s note comes due and they re-finance into a conventional mortgage and the real closing happens???
My broker says he believes it’s when in 12 months when the real closing happens, yet I have had other agents in the office that have done these type of deals in the office and they have gotten paid once the deal was put together.
Not sure??? Can you shed some light?
Thanks,
Sylvia”
Dear Sylvia,
Glad you found me, and yes, you should get paid at closing out of the down payment that the buyer brings to the table. An owner financed transaction IS a “real closing”. A bank loan does not a “real” transaction make.
If there’s a small down payment, not enough to cover closing costs (including your commissions) then you have to ask yourself 2 things…
- Is this a good deal for the seller? Small down payment = greater risk of default
- Would I be willing to receive my commission in monthly installments?
A couple other things…
- Are you sure the buyer will be able to refinance in 12 months? The short 12-month term could potentially be a problem.
- Would your seller like to be able to get more cash at closing? Sometimes if structured properly, the seller can sell a portion of their note, or a small first with the seller holding a larger 2nd. It all depends.
I am frequently a consultant in these types of situations to:
- Help mitigate risk for sellers and buyers
- Reduce liability for Realtors involved in owner financed transactions
- To preserve real and paper assets for the seller
- To help more deals come together by properly understanding owner financing and the secondary note market
Hope this helps! Put that deal together and GET PAID!
I hope you’ll stay tuned for my online training that is getting ready to launch at Owner Financing Club. There’s material there aimed specifically at Realtors.
To your success,
Dawn
P.S. If you’re a Realtor, have you even taken your commission on an installment note? Leave a comment below if you’re a real estate professional that has been involved in closing a transaction financed by the seller… would love to get your feedback!
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