Creative Seller Terms

LET'S TAKE A TYPICAL $100K HOUSE. SELLER OWES $50K. YOU MIGHT.............

1. Assume underlying ...Seller carry back $50k second deed of trust or unsecured note.
2.  New loan for $70K...Seller carry back second for $30K...notice the low loan to value for the lender in first position.
3.  New $100K wrap loan. Pay to escrow on the whole $100k and escrow pays the $50k underlying out of payment. ..Balance goes to seller.
4. Seller refi 80% LTV (Loan to Value) ...Payoff the $50K ...Seller gets $30k net from refi...You assume $80K...Seller carries note in second position for $20K plus fees to refi ...Say $22K.
5. Give seller $60K down, with note for $40K secured by a second position equity in another piece of real estate. Get a 75% LTV loan on subject property ....Out of this $75K pay off the 60K down and walk out of escrow with $15K in your pocket.
6. Get a construction loan based on the future value of subject property ....fixed up say it is worth $130K....borrow 75% and have seller carry back second DOT for one year...$25K on note...The cost of loan is or $97,500. But they give $75K at ·closing. Use $12,500 to fix up the house out of the $22,500 available to do so ...Put $10K in your pocket out of the "pull-out" of the cost breakdown ...cost loan. When job is done...refi the property based on its new value for 90% LTV... ($l17, 000.) Payoff the $97500.construction loan ...payoff the note for $25K with the seller and you still have $4500 left over from the pull-out of the cost loan. Not bad, huh? A new house and $4500.00.
7. Offer $105K for property on a wrap (all inclusive trust deed) with terms of 8% per annum with a cash out in 10 years.
8. Substitute what the seller needs in trade for the down payment.
9. Assume $50K seller carry. back, $30K on a third deed of trust. Open second position for a ·second mortgage to go to a lender and borrow the $20K to give to the seller as down payment.
10. Does 'the seller really want to sell or do they just need some capital and their equity is their only source? What about a life estate?
11. Offer all cash at a discounted price contingent upon the underlying discounting for cash as well. Then get a new 80% loan to value loan to cash out all involved.
12. Bring in a financial partner to put up the down payment in trade for a favorable return on his investment.
13.  Bring in a financial partner to share in the equity of the subject property.

Options are another great way to keep an offer open.

A FEW BASIC MECHANICS

•  Offer earnest money with a note due at closing whenever possible
•  And or Assigns always as the buyer
• An understanding of Subordination agreements
• An understanding of Substitution of Security
•  An understanding of how to handcraft your cash flow into the offer.
• Remember that the first years of property ownership are the most crucial cash flow years.

Happy Investing!

Seller Financing for Your Property

I will buy almost any property, in any condition, in any location AND will pay a seller more than what it is currently worth IF the seller can carry the paper. Why is that?

My partners and I focus exclusively on purchasing owner-financed income-producing properties mainly in Seattle, and the greater Seattle area. Owner financing allows us to purchase more properties, buy them more quickly, and use more different exit strategies than under conventional financing. For a seller, owner financing may allow for a higher price, greater profit, quicker exit, less expense, and lower taxes than if sold conventionally. For older sellers, it may preserve eligibility for Medicaid, in the event that is needed in the future.

If you are considering carrying the financing on your properties, commercial or residential, I am happy to talk. FREE book on seller financing available to anyone with a property to sell, who is willing to consider owner financing. Just email me privately at HomeLandInvestment@gmail.com, with your contact information, including the address of the property you would like to sell.






Happy Investing!

Seller Financing Risk and Mitigation

In my last blog, I talked about the opportunity that the current economic climate provides for sellers who have equity in their property:

Opportunity for lucky sellers, who are fortunate enough to offer financing in a world where credit is tight and lenders are running scared. These sellers will have a bigger pool of potential buyers and command a HIGHER PRICE for the sale of their home in LESS TIME than the same seller down the street who cannot offer owner financing.

Oh, sure! There are risks, as in any investment. What are they? and how might a seller mitigate the risk?

First of course, is to realize that as a seller providing financing, you ARE the bank. So think like a bank would in qualifying your borrower for a loan. Do they have a reliable and verifiable source of income? Do they have a history of good income? Have they been employed in the same field for a number of years? What is their credit history and credit score? Yes, you should ask for and verify a credit report! If credit score is low, you may want to charge a higher interest rate and/or get more of a down payment and/or shorten the term of the loan.

But, you ask, what if they stop making payments?

Make sure that you have handled the financing in a businesslike way and that you have a written agreement that should include a promissory note, and a warranty deed on the property that has been recorded with the County. Your loan is a lien against the property, just like a conventional mortgage. Your written agreement will include an understanding about what happens in the event of a default.

Washington State is a non-judicial foreclosure state, which means that a lender can foreclose on the collateral (the property) in the event of a default without having to go to court. This means that the entire foreclosure process happens much more quickly (typically in about 120 days) and at much less cost. If your borrower misses a payment, hire a real estate attorney and have them foreclose on the property.

What if they trash the property when they leave, after defaulting?

Make sure you get a sufficient down payment up front to cover this possibility. Damages to the property are grounds for a court judgment that might allow you to garnish wages or recover your expenses in the future. You might also offer your soon-to-be-evicted tenant/borrower a partial refund if they leave quietly and leave the house in good order. Then you get the house back, get to keep all the funds already paid, and do it again.

In my next blog, I will cover the risks and mitigation suggestions for a private lender.

Creative Financing

I am all over creative financing as the key to sell homes quickly, benefitting both buyers and sellers. In my May 16 post, I talked about the advantages of offering 100% seller financing. That is not always possible, but a seller may be able to offer partial financing. Here's why, from my website at www.homelandinvesting.com. These great tips on creative real estate financing explain the ins and outs of seller financing from both the seller and the buyer perspectives:


Creative Financing

Seller Financing
As the seller, you have the option of financing the buyer's purchase with the equity you have in the property. You can finance part or the entire mortgage for the buyer. Before setting-up a private mortgage, it is wise to consult with your attorney.

Carrying Back a Second Mortgage
In the case of "carrying back a second mortgage", the seller loans the buyer part of the seller's equity. In this scenario, the buyer would finance the majority of the loan with a traditional mortgage lender and finance the remaining amount with the seller. Typically the buyer would pay a slightly higher interest rate on the loan financed by the seller.

Financial Issues

The Purchase Price
The seller and buyer's mutually agreed upon purchase price for the property. As the seller, you should know up-front that the buyer would like you to finance the deal. Knowing that you will be financing the deal may affect your willingness to make adjustments to the sales price.

The Down Payment
The size of the down payment may affect the buyer's commitment to honoring the mortgage contract. The larger the down payment the buyer invests, the stronger his/her motivation to protect the investment. In addition to making the monthly payments, the buyer's commitment to the investment would include a willingness to maintain and upgrade the property, as well as make tax and insurance payments.

The Interest Rate
At a minimum, the interest rate you charge should match current interest rates traditional mortgage lenders are offering for loans of the same term. You may want to charge an additional percentage point as compensation for the work involved with servicing the loan.

The Buyer's Credit & Income
You'll want to review the buyer's credit history to determine the buyer's willingness to pay his/her debts. A credit report will give you a better understanding of the buyer's financial history. Red flags would include late payments and loan defaults. If a buyer has a less than commendable credit history, you may decide not to finance the loan or you may require a larger down payment. In addition to the buyer's credit history, you'll want to review the buyer's income sources. Is the buyer's salary sufficient to make the monthly payments? Does the buyer have additional income sources that could be accessed if the buyer lost his/her job?

Amortization
The amortization period is the length during which the loan is repaid. The longer the amortization, the longer you are at risk that the buyer will default on the loan.

Balloon Payment
A common practice is to have the full amount of the loan due on a certain date, usually in 5 to 10 years. As the lender, this gives you a profitable short-term investment with the provision that your principal investment will be recouped in just 5 to 10 years.

The buyer is usually in a better position to secure traditional financing after 5 to 10 years. Both the buyer's equity in the property and record of timely mortgage payments can help the buyer secure a loan to cover the balloon payment.

Escrow for Tax and Insurance
Lenders typically require borrowers to pay 1/12 of their annual taxes and insurance costs as an escrow payment due with each mortgage payment. Then, the lender makes the borrower's annual tax and insurance payment. While this adds time and hassle to the seller-financer, it also protects you from the unfortunate situation of having a buyer make his/her mortgage payments but not tax and/or insurance payments.

Lender's Title Insurance
A smart investment is a lender's title insurance policy. The policy protects your lien on the property from being defeated by a prior lien or other interest in the property, which, if exercised, would wipe out your security. Things that can affect your rights as the seller-financer include marriage, divorce, death, forgery, a judgment for money damages, a failure to pay state or federal taxes, and more. Be sure to include the cost for your lender's title insurance as one of the buyer's closing costs.

Closing the Sale
Both buyer and seller will be responsible for paying the usual closing costs. You will also want the buyer to pay all the costs associated with setting up the mortgage financing. This would include the cost of having your attorney create the mortgage note.