Land Trusts

Archive for the 'Land Trusts' Category

Buyer Wonders How to Structure an Owner Financing Offer - If the Owner Will Carry, What Should You Do?

July 18th, 2008 categories: Land Trusts, Seller Financing

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:

Hi Dawn,

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:

Hi Laura,

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!

How Seller Financed Properties Help First-Time Home Buyers Get Their Piece of the Dream

July 10th, 2008 categories: Land Trusts, Real Estate News, Seller Financing

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.

Shoot me an email if you’re a buyer interested in finding owner financed properties. If you’re a buyer’s agent, I’m available for consultations that help you put a seller financing deal together.

Owner Financed Properties Gaining Popularity as Freddie and Fannie Face the Fire

July 8th, 2008 categories: Land Trusts, Seller Financing

“Will the seller take 5% down?” the agent asked me. “FHA is the only possible thing out there right now for my first time home buyer, but if your seller can match it, then we should be able to write an offer.” This kind of conversation will become increasingly common as the credit crisis plays out and buyers and sellers look for other ways of putting and keeping real estate transactions together.

Go read this article by CNN Money regarding Fannie and Freddie:

“Fannie Mae and Freddie Mac are government sponsored entities that help the mortgage market function by purchasing pools of loans and packaging them into securities.

Fannie Mae has reported a loss for the past two quarters while Freddie Mac has posted three consecutive quarterly losses. Both companies are expected to report a loss in the second quarter as well.

According to a report from Lehman Brothers analyst Bruce Harting, it would be “extremely challenging” for either company to come up with so much cash to meet new minimum capital requirements, causing already timid investors to be concerned. He added that a “severely undercapitalized” Fannie and Freddie “could possibly topple the already fragile markets.”

A study by Bridgewater Associates, one of the world’s biggest hedge funds, estimates that total credit crisis losses will amount to $1.6 trillion worldwide, and we’ve only lost $400 billion so far . . . so the global financial crisis might only be 25% complete? Wowee . . .

“Yes, we’re ready to consider a 5% down,” I answered, “but we’ll have to structure the transaction in a way that adds some extra protection for the seller.”

In the standard seller carry back world, a 10% down payment is considered minimum, with 20% or more being preferable. If a buyer puts down that much hard equity, then it’s considered a pretty good note, and a note buyer will offer a higher price for it. Anything less than 10% and you seriously compromise the value of the note, or your ability to sell it at all.

So why would any seller consider taking a 5% down payment? Because:

that may be the only way to sell without a drastic price reduction
the seller needs out from under their mortgage payment
we can close quickly
there are more potential buyers if there is a low down payment requirement and there are no loan origination fees
we can structure this deal using a land trust so that the underlying financing can stay in place without risking a “due on sale” violation, and upon any default, the seller can regain possession of the property in 60 days rather than the 120+ it would take if foreclosure were necessary. This reduces the risk of accepting a low down payment.

If we can’t count on the institutional lending community while they work out their issues, secure government bailouts, etc., then buyers, sellers and the real estate professionals who serve them need to become proficient at other ways of closing real estate transactions.

If you’re a seller wondering if you are able to offer seller financing on your property, email me
To talk about buying a home without bank qualifying, call me!

MEET THE TEAM