LA Times – Sep 9, 2001 – ROBERT J. BRUSS
If you want to buy a home but think you must beg for a home loan, think again. Especially if you are “less than perfect” when it comes to your credit report and income level, ask your realty agent about seller-financed homes.
It’s a little-known secret, but at least 20% of home sales are financed by their sellers with a first or second mortgage, without involving an institutional lender. Although this isn’t a large percentage, all you need is one home to buy with easy seller financing.
Unfortunately, most agents and their buyers think there’s only one way to finance a home sale: 10% to 20% down payment and a 90% or 80% mortgage.
If you have superb credit and steady income, you can probably even qualify for a 100% mortgage. However, if you can qualify for a 100% home loan, you don’t need seller financing.
Many sellers, if shown the benefits, will gladly help finance your home purchase. However, few sellers advertise seller financing. It’s up to savvy buyers to suggest the seller help finance your home purchase by carrying back either a first or second mortgage.
My experiences with sellers who never thought of the benefits of financing include a woman in her 80s who listed her home for sale with an excellent Realtor. When I inspected her house, I asked the listing agent if there was any mortgage. The agent said no. Then I asked if the seller would help finance the sale. The Realtor told me the seller was about 80 and was moving to be nearer to her daughter. She wanted an all-cash sale, I was told.
After learning the vacant house had been listed for sale several months, I offered a 10% down payment if the seller would carry back a 90% mortgage at 8% interest. The listing agent protested, stating she was sure the seller would never accept. Two days later, I received the agent’s phone call reporting the seller accepted my offer.
I owned that house for about three years. When I decided to sell, I listed the house with another Realtor. A buyer offered me an all- cash sale. I accepted. Then I had to deal with the previous owner, then in her mid-80s.
Although there was no prepayment penalty on her mortgage, she hit the roof when I politely informed her I had sold the house and my buyers would be paying off her mortgage. Having become accustomed to my monthly payments, which gave her financial independence, she convinced my buyers to assume the existing seller-financed mortgage.
Think about the seller-finance advantages: No mortgage lender rules. No lender ratios. No nonsense FICO scores. No loan officer pressure. No appraisal. No mortgage lender last-minute “garbage fees.” No loan fees. No unnecessary lender paperwork.
Thousands of homes are sold every day without institutional financing roadblocks. Seller financing provides an easy, quick sale for top dollar with excellent above-market interest rate income for sellers. Buyers benefit from easy financing without lender hassles.
But few sellers tell their agents, “I want to carry back a first or second mortgage to help my buyer purchase my home and to get an excellent mortgage investment for myself.” That just doesn’t happen.
Buyers who want to purchase with seller financing must usually find their own likely candidates, often with the help of a savvy buyer’s agent who understands seller-finance benefits. Here are four criteria that have worked for me:
* Ask why the owner is selling.
Knowing this was the key to my purchasing the home owned by the 80-year-old. When I learned the owner was selling to move closer to her daughter and the home had no existing mortgage, that information indicated it was a great seller-finance candidate. Don’t let the agent discourage you from making the offer.
However, if you learn the seller is selling to raise cash to purchase another home, to buy out a spouse in a divorce or for another cash-required good reason, the home is not a great candidate.
But don’t always believe the seller or the agent who tells you the seller wants cash for investments. When you show the seller in your written home purchase offer you’re willing to pay, for example, 7% interest today and the specific monthly payment, that will often persuade a reluctant seller to accept your seller-finance offer.
* Look for free-and-clear homes listed for sale.
The best indicator of a seller-finance candidate home is one that lacks a large mortgage. Most buyer agents can search their local multiple listing service for such free-and-clear homes. Nationally, more than 50% of U.S. homes have no mortgage, so there is a large potential of seller-finance homes.
* Unsold, vacant homes.
Another signal of a possible seller-financed home is one that is vacant and has remained unsold at least 30 to 60 days. Vacant fixer- upper houses are also excellent seller-finance candidates because, if extensive work is needed, most institutional mortgage lenders will not finance them.
* Vacant homes for sale by retirees and wealthy sellers.
By asking why the owner is selling you might learn the seller is retired and/or wealthy. These sellers are often eager to get rid of their vacant houses. Nobody wants to own a vacant house that has been listed for sale more than 30 days.
As an investor who has convinced many sellers to accept my seller- finance offer, I find their greatest fear is foreclosure.
I politely explain foreclosure is the best thing that could happen to a seller who carries back a mortgage.
Should I default, then they would either be paid in full at the foreclosure sale or reacquire the house to resell for a second profit. If that argument isn’t persuasive, here are some additional techniques I’ve found to be effective.
* Offer to prepay six to 12 months of mortgage payments at the closing (instead of a large cash down payment).
* Give the seller a year’s post-dated payment checks so all the seller must do is remember to deposit a check in their bank account on the first day of each month.
* Accompany your buyer’s agent to present the seller-finance offer so you can meet the seller. Although most agents try to avoid having seller and buyer meet, I find this technique works wonders when asking for seller financing.
Robert J. Bruss is a syndicated columnist as well as a real estate investor, lawyer, broker and educator in the Bay Area.
Credit: SPECIAL TO THE TIMES