Once in a while, I really get a head scratcher.
The other day I met with a seller and the buyer he had found for his property. The kitchen still needed to be finished, but they had agreed on a price, and the buyer was willing to take it “as is.”
The problem: the property wouldn’t appraise for the new loan unless the kitchen was finished. So the deal was off . . . or so they thought. That’s when I asked the seller why he wasn’t providing the financing for the buyer so he could get his escrow closed. I can usually find two or three ways to put the deal together without going to a bank.
I knew that the seller had existing financing that looked something like this:
- Loan amt: $360,000
- Interest rate: 5.85% fixed
- Term: 360
- Monthly payment: $2,110.98
Now that’s REALLY attractive underlying financing! Perfect for a ‘wrap.’ If the seller would carry paper for the buyer and leave his financing in place, here’s how it would look:
- Purchase price: $540,000
- Down payment: $100,000 (very nice 19% down)
- Loan amt: $440,000
- Interest rate: 6% (buyer’s credit score is 800)
- Term: 360/due in 10 years
- Monthly payment: $2,625.58
The seller would get $100,000 now, and a positive cash flow of $514.60 per month until the buyer finished the project and got his own financing. Or, if market conditions weren’t favorable for a new loan when the kitchen was finished, he would have the option of keeping the seller carry back loan for up to 10 years.
And why did we make the rate to the buyer only 6% when prevailing bank rates were 6.79%? Usually, sellers who offer financing can justify getting better than the prevailing rate.
When the seller and buyer originally agreed on the price of $540,000, the buyer could have secured a loan at 5.89%. By the time I met with them, rates had jumped almost a point, and that was a deal breaker.
The seller is stuck on price
The buyer is stuck on terms
So the seller gets his price in exchange for giving the buyer below-market terms. Hooray! Problem solved, deal done . . .
Nope.
The buyer, even after several rounds of explanations, decided that seller financing was “just too complicated.” Huh? The only difference is where you send your payment.
He decided he’d rather buy another property where he can
- apply for a bank loan (whose programs and/or conditions could change mid-escrow)
- pay loan points and fees
- pay almost 1% more on his interest rate
- take three times as long to close
- possibly have a prepayment penalty
I know, right???
This is where many will start shouting about the infamous ‘due-on-sale’ clause in defense of our poor buyer. The chances of the bank calling the loan are minimal, and even if the loan was accelerated, the buyer is strong enough to replace a $360,000 loan at will.
And if the threat of the bank calling the loan is just too much for either party, that’s when the Trust Transfer System makes a lot of sense.
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