[P.S. There’s a great chapter on this topic in ‘Seller Financing on Steroids’. Sign up for it above]
Many builders have become intensely interested in the concept of the simultaneous closing. It’s become increasingly difficult to move properties, and they’re looking for alternative ways to stay in the game.
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 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.
Unless you’re willing to take a huge discount, 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!).
Even if 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. If they’re buying sooner, you’re probably taking a heavier discount than you need to.
So, is there any hope for the average real estate investor?
Yes! In some cases, we can get around the seasoning issues and do a true simultaneous close.
How can we possibly do that?
We 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 we review 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. No mobiles or row homes
- 5% minimum 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. (And there’s the $8,000 tax credit for buyers right now to boot).