Monday, July 18, 2011

Can't You Get a Mortgage?

Inevitably, when approaching a seller about providing owner financing, this question comes up.

Well, if you can put 10% down and pay 5% interest, why don't you get a mortgage?

Here is my response.
First, a bank may not let me put as little as 10% (or less) down on a property today, and certainly not if it is a non-owner-occupied investment property or rental. Investors are significant buyers in today's market, the first to go in where others fear to tread. By requiring a 20-30% down payment, as many traditional lenders do, an investor who often plans to spend that much in remodel costs anyway, will balk. Better to find a deal that does not require that much out-of-pocket cash.

The less cash I have to put down, the more deals I can buy. Or the more I can put into fixing up the property.

Banks have all kinds of requirements that an investor might find onerous. For example, lenders will limit the number of properties that a single investor may finance. The limit may be four, or it may be ten properties. Again, with seller financing, an investor does not have to limit the size of his portfolio and can buy more properties than dealing with a bank.

Until recently, FHA financing required a lengthy amount of time for "seasoning." (See my previous post on this). An investor was unable to buy a property, fix it up, and resell it without having to wait for this "seasoning" term to expire. Therefore, many investors stopped flipping and hence, stopped buying.

Banks require appraisals, pre-payment penalties, mortgage insurance and other fees that add to the cost of a property, and limit an investor's flexibility.

Nationally-known note-buyer Eddie Speed claims that 50% of deserving buyers cannot qualify for a mortgage today.

A seller offering owner financing has a larger pool of potential buyers, can get a higher price for his property, and receives an above-market rate of return on his cash. In some cases, through seller financing, he may be able to defer capital gains taxes. And his investment is secured by collateral (his property he sold)that he knows.

Sure there are risks for the seller, but these can be mitigated. If the buyer/borrower has a good credit score - say anything higher than 690 - good references and track record, good income, and/or some "skin in the game" (which includes not only the down payment to the seller, but also the investment they intend to make in the property), then the seller can feel more secure about making a loan.

And if the buyer should default, the seller gets to keep all the money he has already received, all of the improvements to the property, and gets his property back to keep or sell again. Furthermore, Washington is a non-judicial foreclosure state, which means that the foreclosure process is much faster than in a judicial state.

Why can't the buyer get a mortgage?
Well, maybe he just doesn't want one....

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