Seller Financing to the Real Estate Rescue

Seller Financing to the Real Estate Rescue

Banks aren’t lending, sellers can’t sell and buyers can’t buy. Seller financing opens up huge pools of potential buyers who are willing to pay fair market value and above average interest rates to the seller who is willing to take payments instead of all cash at once.

Fifty percent of potential buyers today no longer qualify for conventional loans due to stricter lending guidelines being put into place as a result of the current mortgage meltdown and new government regulations. Many banks are still holding bad assets, which forces them to loan what little funds they do have to only their very best credit worthy buyers.

Owner financing has traditionally been used to purchase real estate that conventional lenders regard as non-conforming or difficult to liquidate in the case of foreclosure for a borrower’s failure to pay the note when due.

Owners have often carried back financing on:

• Unimproved land
• Recreational land
• Mobile homes w/land
• Farmland
• Rehabbed houses
• Property that didn’t conform to standard lending guidelines

In today’s tight credit markets, nice middle class homes, luxury homes, condos and commercial properties of all types are being added to the list of property types above that owners are privately financing.

What are some of the buyers’ advantages of seller financing?

• Less stringent loan qualifying process
• Flexibility of price & terms
• No origination or junk fees
• No points or private mortgage insurance (PMI)
• Marginal credit isn’t a deal killer
• No four property limit restrictions on investors
• Down payments can be motor homes, boats, cars or anything of value that the seller is willing to accept as consideration in the deal
• No prepayment penalties which allows buyers to eventually refinance with a conventional lender in favor of lower interest rates and longer terms once their credit standing improves



Who would consider owner financing their property?

• Older people with substantial equity who do not need a lump sum but would rather have monthly payments while earning higher rates of interest and minimizing capital gains taxes
• Property that needs serious repair that banks won’t loan on
• Property acquired through wills that may be a burden or in a distant state
• People who can’t afford to maintain the property they do have
• Tired landlords & other “don’t wanters” of various types
• People who need to sell fast in down markets
• People who have been transferred or are maintaining two homes
• People facing foreclosure (you could make up the payments in default)
• Vacant property

Don’t be afraid to ask a seller why they’re selling and what they’ll be using the money for; inform them that the reason you are asking is to see if they would be interested in being the bank by owner financing. Let them know that this method may allow you to pay full price but lower interest, etc. It will be your job to show the seller the benefits of considering your suggestions while proving to them that you are a very low risk buyer.

Explain to the seller that they can earn 7, 8 or 9% interest on their equity and avoid hefty capital gains tax instead of cashing out and getting 1 or 2% by putting excess cash in a bank account. You could even offer to pay all closing costs which will be much less than a traditional loan. Who knows, you may be able to trade other property, vehicles, pay off their existing debts, etc. to satisfy down payments or some or all of the principle. You won’t know unless you ask! (You as the buyer are currently in charge in today’s markets.)

Prepare to prove yourself as a low risk borrower with a firm grasp of responsibility and financial ability by preparing a statement that begins to answer these questions:

• How much you have or what you have to offer as a down payment
• Provide income statements, credit reports, employment history
• Provide assets and liabilities accounting, i.e. all sources of income, outstanding judgments, liens, credit card debt, car payments, child support, etc.
• An idea as to price or terms that you are willing to offer
• Present a repayment schedule with maturity date
• Detail contingencies and late fees
• Address any other seller remedies and assurances in event that you default
• Provide references, current and past favorable housing history with contact info

Sellers should seek to verify everything submitted in the application process and strive to get as large a down payment as possible. Both parties should use a real estate attorney to ensure the paperwork is done properly in addition to obtaining a seller’s mortgage insurance policy to protect against title defects in the future.

A few more tips for the seller are to work hard to create a very solid and verified buyers note. This promise to pay can be sold to note brokers for 80-90% of face value if the note is correctly constructed, seasoned and so forth. Seek to create a quality financial instrument backed by well cared for property.