It’s not uncommon for people to think that the closing process of an owner financed transaction is substantially different than a ‘normal’ sale.
In the last Property & Paper Live I go over the similarities and differences…
A seller financed closing is handled the same way a traditional closing is except for the following:
- There is no 3rd party… the buyer and the seller are the only people in the room
- The seller becomes the lender, the bank… the seller’s name goes on the promissory note and mortgage instruments instead of a ‘Bank of America’… the seller is lending their equity… the paperwork is the same as if they were to lend cash from their bank account
- The seller becomes the Loss Payee/Mortgagee on the insurance policy
- There is usually no appraisal needed
- The closing is much faster because no bank is involved
When the bank is making a loan to a buyer, they call up Fannie Mae and Freddie Mac as ask what sort of loan terms they are willing to buy.
And based upon the answer, the bank determines what the loan terms will be for the buyer, and what documentation is required.
They only want to originate loans that they can sell up the food chain for the highest possible price.
Most banks don’t hold the loans they make on their own books, they sell them on the ‘secondary mortgage market.’
When a seller is going to be the bank, they don’t know who to call… and it’s not Ghost Busters. 👻
They don’t know that there are “Private Fannie Maes” and “Private Freddie Macs” that could tell them how to structure their loan to the buyer in a way that would make it most valuable to the ‘secondary market.’
That’s where I come in.
Seasoned note professionals who actively buy and sell notes are the only people qualified to be a part of a seller financed closing… no other professional has this expertise.
Even if a seller intends to keep the note forever for the cash flow, life happens, things change, heirs may want to sell the note down the road.
Wouldn’t it be nice if the note was as valuable as possible?
That the discount required to sell the income stream were minimized?
On top of deal structure and individual terms, these days any seller financed origination should be fully compliant. It’s worth the time and effort to have the buyer document ‘ability-to-pay’ through a licensed MLO (mortgage loan originator).
It’s also a great idea to require impounds for taxes and insurance and to require that a borrower agrees to cooperate with any change in loan servicing.
Sometimes when the servicing of a note is changing, the new servicer needs a social and a signature from the borrower to board the loan.
Borrowers can sometimes be slow about cooperating, which can hamstring the seller in switching servicers. But if it’s in the promissory note, then they would be in default for declining to cooperate, so there’s a little leverage to be had.
Until next time,
Dawn 🙂
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To grab the first half of this week’s Property & Paper Live, check out “Seller Financing Vs Traditional: Same Same but Different” on YouTube or Podcast.
To access the FULL replay, join the Citizens of the Realm community and click on the “Learning” tab.