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Builders Move New Construction Homes Helping Buyers: Seller Financing Plus Simultaneous Note Sale

This is a post I’ve been wanting to write for a while now, because I get so many questions from investors and builders like the one you’ll see below.

When the financing machine is rusty, we need to look for ways to lubricate the system and get those creaky parts moving.  We need to create liquidity one way or another.  Buyers need to buy and sellers need to sell.  So much of our economic activity here in the U.S. revolves around the housing market.


Below is a basic synopsis of what we’re looking to do. We’re builders looking for options for buyers who do not quite fit the mold for an FHA mortgage. Please let me know if this is something that you could help us out with.

  • Historical home sales over the last year have been between $149,000 and $169,000
  • Lots are approximately 50 by 110.
  • Homes are new construction. Brick and siding.

Buyers for this program are typically in the 540 to 620 credit scores, with stable employment histories, and debt ratios that slightly exceed FHA guidelines.

HOWEVER, these buyers are required to have a 24 month clean payment history on a previous mortgage or rental housing, previous 12 months clean payment history on any auto loan, a new housing payment not to exceed a current payment by more than 20%, and must not have had a foreclosure or repo within the past three years.

  • Down payments are typically three to five percent.
  • Note rates are typically eight to eleven percent.

Option 1: Builder will carry a low interest/no interest second for 20% and sell the first lien of 75%.
Option 2: Builder will sell the 95% LTV note at a 15 to 20% discount with a simultaneous closing.

Many thanks, R. M.

Not only are builders in a pickle, but so are all the real estate investors out there who are trying to buy, rehab and flip short sales and REOs.  There are some seasoning issues that sometimes make it difficult for buyers to close with conventional financing in a timely manner, if at all.

So these investors say, “OK, we’ll just sell these properties quickly offering seller financing and then sell the note right away.”  The problem is that there are still seasoning issues to contend with.

A note buyer these days wants to see some seasoning.  No one is that eager to buy rehab/flipper paper.  Either

  • the seller has to have owned the property 12 months before selling it, or
  • the note needs 12 months of seasoning (at least!).

So, let’s pretend you don’t have these seasoning issues.  You’ve owned your property for the last 5 years before selling and carrying paper. Most note buyers are still going to want you to receive 1-3 payments from your Payor/Buyer before they buy the note from you, even if it’s the best note out there.

So, is there any hope?

There is an investor out there who can get around the seasoning issues and do a true simultaneous close. How can they possibly do that??? No one else can touch it!

They underwrite the deal from the very beginning.

You have your prospective buyer fill out a 1003 (loan application) and have them pay for a credit report, and the investor reviews the file.  Some buyers will qualify for the program, some won’t.  If they do qualify, here is a sample of what an average deal might look like:

  • Only owner occupied SFR’s (single family residences), and there are some parts of the country they won’t touch
  • 5% cash down payment
  • Seller carries a 10% – 15% second
  • Seller creates and immediately sells an 80% – 85% first at .85 cents on the dollar
  • Face interest rate on the 1st note will be somewhere between 8.5% – 10% (when 12 timely payments have been made, the buyers will most likely be able to qualify to refinance at a lower rate with the same company, and they can be working on improving their credit scores to boot).

So, here’s what some potential numbers might look like:

  • Purchase Price:  $100,000
  • Down Payment:  $5,000 (plus closing costs)
  • Seller Carry Second:  $10,000
  • Seller Carry First:  $85,000
  • Proceeds From Selling First Note to Investor:  $72,250

So, the seller/investor/builder walks away with $77,250 cash and a note for $10,000 that will ‘hopefully’ get paid off when the buyers refinance in a year or so.

It won’t make sense for everyone, but it is an option that’s out there if the seller can absorb the 15% discount and wait for the 2nd to pay off down the road.  And even though the buyer will have what sounds like a high interest rate, most of the time they still come out ahead owning instead of renting on an ‘after tax’ basis.

Based on the above builder’s understanding that they will be holding a second for a while, it sounds like we will probably be able to put a few ‘simo’ note deals together. Alternatively, if they didn’t need immediate cash, the builder could

  • let the note season for a year or more and probably take much less of a discount, or
  • put the property in a title holding trust.

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