Seller Financing and Mobile Homes in Parks
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.
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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.
| Discussion: 2 Comments »
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!
Related Reading:
- What You Don’t Know About Notes Can Cost You Listings, Sales and Closed Escrows!
- Seller Financing and Land Trusts - Secrets of Liquidity After PTSD in the Real Estate Marketplace
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