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Tuesday, April 16, 2013

A prosperous way to sell real estate

Home sellers retain ownership rights until the owner financing is paid
Owner financing increases home marketability if financing rates are lower
By Alan Noblitt

Although the housing market is supposedly making a recovery, many potential homeowners cannot buy because their credit scores are not quite high enough to get a loan. They don’t have enough cash to buy, and do not qualify to get a great loan with a rock-bottom interest rate. If you are looking to sell a property and are not attracting enough buyers, then owner financing is an option that you should learn about and consider using when selling a property.

In essence, owner financing is having you, the seller of the property, carry the financing for the buyer of the property. You hold the real estate note (often also called a mortgage note or deed of trust note) and become the bank. Then, when the transaction has closed, you can either hold on to the mortgage note or sell it to a mortgage buyer that you trust.

Owner financing

FSBO homes may also include owner financing at lower rates
Owner financing adds loan income
Offering owner financing and carrying the mortgage note is an option that you can use for nearly any property type (residential, mobile homes, commercial, and land). It is usually not a great choice if the underlying loan is large and if there is minimal equity in the property.

The perfect mortgage note, whether you plan on holding on to it or selling it, is one where the sales price is close to the property value, the payer put in a down payment of at least 10% (15-20% is even better for non-residential properties), the payer’s credit is at least 680, and the note terms are properly prepared. For the latter item, this means at least a market interest rate, either no balloon payment or one that is more than three years out, proper documentation, lender’s title policy, etc. While there will still be a discount (the difference between the note balance and how much a note buyer would pay) if you sell even a great note, that discount would be minimal.

Realistically, the majority of notes are lacking at least some of the items listed above, so your best option is often to only sell part of the note. For example, if the note has a 20-year term, you would just sell the next five years’ worth of payments. In the industry, this is called a partial purchase, or simply a partial. With a partial, you get less money upfront than if you were to sell the whole note, but you can look forward to a future income stream and net a lot more money in total. The partial is perfect for paying off large current bills such as those incurred for college or medical benefits. A note buyer will usually be open to buying the rest of the note (at your option) in the future.

So, if you do sell a property using owner financing, you have three options:

  1. Keep the mortgage note and collect the monthly payments. This would mean that you are responsible for collecting the payments, being certain that property taxes are up to date, ensuring that fire insurance is current, etc.
  2. Sell all of the note to a mortgage note buyer.
  3. Sell part of the note, as described in the paragraph above. Over the past few years, most note holders working with us have chosen this option. This allowed them to get some cash in hand while not taking such a discount hit.

If you want to sell your note

If you do decide to sell your note, make sure that you’re working with an experienced and reputable mortgage buyer. In addition to asking lots of questions and using your best judgment:
  • Do a Google search on the person to learn about what they have done and whether there are any negatives listed about them.
  • Look at www.ripoffreport.com to see if they are mentioned there and check their status with the local Better Business Bureau.
  • Certain states (e.g. California) require that note brokers have a real estate broker license, so be sure to ask about that.
Although owner financing is a tool that you can use in any type of housing market, it is especially useful in times like these, when lenders have pulled back. It has been around for centuries and has been frequently used for real estate over the last several decades.

About the author: Alan Noblitt is the owner of Seascape Capital Inc., which buys and brokers real estate notes and business notes. He may be reached at 1-800-634-4697, or visit the website at www.seascapecapital.com.

Image credit: Casey Serin; CC BY 2.0