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Temporary Seller Finance
It is a well known fact that owner financing sells
properties fast . . . especially with properties or prospective buyers that do not
conform to traditional lending or mortgage requirements . . . but until now the
big problem with this approach has been that the typical property seller does
not want to collect monthly payments.
They need or want to cash out at closing . . . to pay off the existing
mortgage, to cover all closing costs, to purchase another property, or for any
number of other reasons. Sellers need cash! The Temp Seller Finance approach will allow
them to harness the power of seller finance and still get their cash!
Who does this work for? FSBO’s, Rehab
Investors, Small Builders, other property sellers.
Click
here to download the worksheet for the next session.
We will be talking about how to show a seller to do a
partial sell of their note
and realize more than the sell price of their home in
the end.
Things to think about:
Why:
Benefits:
How does it all come together:
How to create it:
Benefits
to the Buyer & Seller!
1. The seller gets top price (appraised value) . . . the small discount on the note that is sold is often much less than the "price reduction and other concessions" that sellers often have to provide to buyers in order to get the deal done.
2. This is a very
flexible approach! You can create and structure a note in a wide
variety of unique ways to meet varying buyer and seller needs. And while most
sellers will need and/or want to get all their cash out right away . . . you can
also accommodate the seller who just wants to get some cash now . . .
and the rest at some point in the future. This is simply a partial purchase, and often
provides the greatest overall return to the seller.
3. With the Temporary Seller financing strategy,
there are more prospects . . . with less hassle
4. You can close much faster! Once the buyer is under
contract, and the required paper work is in the possession of the buyer . . . they
can usually close and fund in 7 - 10 working days, or less! Not
30 -90 days!
5. Lower closing costs! . . . No junk fees! . . . No
points! . . . No loan origination fees! Other than your realtor
commission . . . the primary closing costs are simply the normal cost of
an appraisal ($300 - $400) and title work (+/- $1000) + processing / legal fee
($100 - $300) charged by title company to create the required paperwork. And
these fees can usually be split by the buyer and seller.
How does it all come together:
It's really
quite simple! Here are the basic steps:
Basically,
the seller sets the sales price (should be the appraised value),
gets
a down payment,
and
creates a 1st Mortgage Note that they can then sell to an investor for
possibly as much 95% of the balance (depending on Loan To Value Ratio, credit
of buyer, and rate / term of note) shortly after the closing!
The
investor will usually be happy to help you and your home seller through the
entire process.
I
think it will be a very good idea for you to present a newsletter or brochure
to the sellers when you talk to them about this approach. This should be a brochure that talks
specifically about this approach. That
will allow them to review the details of this option after you have left them
to think about it. This newsletter
should be something very simple and something that specifically talks about how
to create a marketable note. You can put
one of these together for yourself or if you have a small amount of cash you
can get several to use through http://www.totalnotessolutions.com/
for a very reasonable price. These
letters are different from what you might use with professionals but with the
same idea. You will add credibility to
yourself and what you are doing and you give your contact some information
about what you do.
How to create it:
First thing you need to do is call
some of the FSBO ads and Rehab investors.
Explain the process to them in basic terms like what is listed above.
Tell them that if they will advertise "Owner Will Finance
. . . No Points! No Bank Qualifying!,
seller finance" (You have the ability to
work with the actual wording as much as you want.) this will attract many more
prospects than the traditional advertisement. This
will help them get the home sold faster and you are not an agent! You are not looking for a commission from
their sale. They will need to find the
buyer still. We do not do that but with
the Temporary seller financing they will be able to get that home sold faster
than with other advertising.
What makes a good note:
Once you have an interested party,
* Tell the seller to set the sale price
equal to the appraised value (Not a penny less! Even if this is higher than what
you now have it listed for).
At this point,
seller pre-determines, based on their needs, the seller-financed deal
that will be offered (i.e. Sales Price / Down Payment / 1st Mortgage Note terms
that will be created etc.)
Below you will see a list
of details that are important when creating this contract:
a) Type of Property: Collateral is one of the
first things we need to look at. The
most secure property type is your SFR.
Clearly a vacant land parcel with no improvements would be considered
far riskier than a single family residence (SFR). This does not mean that we cannot do the deal
if it one of the less desirable property types.
We just need to strengthen the note in one of the other areas. If you
are working with the creation of paper and you want to maximize the amount of
cash that can be received, therefore a properly structured 1st
mortgage on a SFR, owner occupied, is by far the type most note funders will prefer. Meaning simply that if it is other
than an SFR then you will need to make a stronger note in order to get an
aggressive bid.
b) Occupancy: As mentioned above the
most desirable note is one on a SFR that is owner occupied. This means that the person making the
payments on the note lives in the property.
If it is their primary residence they will be more likely to keep it in
good condition and to make their payments on time. If it is owned by an investor and he is
renting the place then it will not be as desirable because the investor has
other responsibilities and worries. This
note is not his primary worry. It is
best to have the payor living in the house and for them to have that emotional
attachment to it.
c) Down Payment: The next thing to look at is
the down payment from the buyer of the property. It is very important in these deals that we
get a good down payment. This is one of
the areas where we can strengthen the note for the investor. We should be looking at selling to people who
don’t want to work with banks or can’t qualify for credit reasons or other
preferences and not because of lack of funds.
It is very important to get a down payment. Typically we will want to see 10% down. For a SFR we should try to get as close to
that as possible. At least 5% minimum. For the higher risk situations such as
commercial and vacant land deals the down payment should be minimum 20%. The higher down will make a risky note look
almost as good as the SFR note.
d) Buyer's Credit and Credit Profile: The next thing we need to be sure of is that
we have a credit application (1003 form) and an authorization
to release credit information form. It
is very important to pull credit on any perspective buyers. We do not need to have a buyer with perfect
credit. Most investors who buy notes
look at a low 600 fico score as decent credit.
Again, we are not pulling the credit to find perfect credit but we do
need to know what that score is. If the
score is not so good the profile will tell why and if there have been steps to
improve the credit. Once the seller gets
these filled out on the perspective buyer your investor will help pull it and
check the history.
e) Buyer’s
stability: Get some references and call them. What someone does for a
living and for how long often illustrates how stable a prospective buyer may
be. If an individual has been bouncing from job to job over a short period of
time or who has relocated several times over recent years they may be
considered a higher risk. However
individuals who have some longer-term stability either in working for
themselves or an employer are considered less risky.
f)
Repayment
Terms: Finally the terms on the
note will need to be favorable to an investor and yet work well for the buyer
as well. If we have a lower risk
individual meaning someone with good credit and who plans to live in the
property and has plans for a good down payment then we can set the interest
rate a bit lower. In today’s market
(2006) a rate of 7.5% would be the lowest we would want to go for a great
potential buyer. Typically we would want
an interest rate of 8% - 8.5%. Typically we should be about 2 points above
current prime rates. If we have a buyer
with lower credit lower down payment then the rate should be more like
9%-10%. Likewise if we are dealing with
a property that is not SFR then the rate should be 10% - 12% to start. This would be typical for commercial loans or
vacant land.
The other terms of the note such as clauses to be
entered will very from one investor to another.
In general investors will not want to see a pre payment penalty. Most investors will want to see that the note
is not assumable. They will want to
see a late payment fee provision and there may be other clauses that
they will ask for in the note. Be sure
and talk to one of these investors before explaining details to any potential
sellers. Do your homework and then find
the deals and put them together. It is
really that easy. Start today by
contacting some investors who will buy simultaneous closes.
Ultimately what you want is to create a note that an
investor will pay a good amount for. We
want to create a note that will get 95% or more.
3.) Next
the seller will receive and screen the calls from the Ad . . . show the
property to three - four prospective buyers . . . Present the seller- financed
deal that is being offered . . . get the interested buyers to complete a 1003 Credit Application and an Authorization to Release Credit Information (standard forms).
4.) FAX the completed Credit Application(s) + an Authorization To Release Credit to the investor. . . they will review buyer's
credit information; get them pre-approved; and help determine the best prospect
to sell to. Note investors are much more
lenient regarding credit issues than traditional sources.
At this point, based on the buyer's
financial information and the structure and terms of the note, the investor can
determine the exact value of the note and make a firm purchase offer. Up to this point the offer has been fairly
loose.
5.) Seller and buyer(s) sign a Real Estate Purchase
Contract. Everyone
agrees on the structure and terms of the note to be created . . . and the
investor provides the seller with a contract to purchase that note at, or right
after, closing. The seller can generally use their choice of a local title
company, or closing agent, and they take over from there. The investor will
work with the Title Co. to create and collect all the required documents and
set a closing date. From this point forward, there will be little or
no negotiation with any prospective buyer. Your seller is offering the
financing, which the buyer may not qualify for elsewhere, so seller is in
control. Remember, this may be the only way the buyer can purchase a home, so
they too appreciate this strategy and are eager to cooperate.
6.) At closing, seller creates the mortgage note. The
buyer pays all closing costs. The seller finalizes the deal. The seller will
hold the note for 30 days and received the first payment and then the investor
will buy the note. The buyer will then
start making their payments directly to the investor. It is important to note
that the investors are not "lenders" and can not create or originate
loans. They
only purchase existing notes and that is why the seller will use Temporary
Seller Financing to first create the note and, in turn, sell that note to
the investor. Again, this is all done, basically simultaneously, at the closing
table.
There are fewer investors who will
actually buy the note simultaneously but rather like to see at least the first
payment come in. Thus “Temporary seller
carry”.
Example (1) - Sammy Seller wants to sell his
$100,000 house for CASH as QUICKLY as possible. There is $50,000 in equity.
Billy Buyer wants to buy the house by putting $20,000 down with $80,000 left to
owe. Billy doesn't want to go through the red tape and the time that it takes
to get a loan from a bank or… he doesn't qualify.
Here is how you can help Sammy get his house
sold for cash fast. You advise him to create a note for the $80,000 that is
secured by the house. Billy pays off the note with whatever terms that Sammy
and Billy agree on (this is called an "Owner-Financed Mortgage
Note/Contract"). Then the investor will buy that note from Sammy for cash
at the same closing. This means that there are two transactions taking place
simultaneously in the one closing procedure in this order:
1. The sale of the house itself, from Sammy
to Billy.
2. The sale of the $80,000 note, from Sammy
to the investor.
Now, everybody's problems are solved. Billy
gets the house he wanted without having to apply or qualify for a bank loan,
Sammy walks away from the closing table with the quick cash he needed, and the
investor gets a good investment. It is a Win/Win situation for everyone.
Example: Sales Price (full appraised value)
= $100,000. The deal that might be offered: 20% down ($20,000) and an 80% First
Mortgage Note ($80,000) @ 9.0% interest for 360 months. Monthly payment would
be $756.77 (P+I). Remember . . . this note may be purchased for
approximately $72,500 . . . add the down payment and seller gets a total
$92,500 . . . less your realtor commission and normal closing costs to cover
appraisal and title work. The
closing costs will often be paid by the buyer but it is important that we get
an appraisal and title insurance policy in addition to the credit report on the
buyer.
Simultaneous close FSBO script
FSBO sellers
will often be middle income “average”
Often they are
doing FSBO because they do not want to “share” a commission with a realtor.
What are their
needs?
What are their
desires?
People are
likely going to build a new home to live in.
Hi is ______
there? ‘This is he.’ John, I’m calling
about the ad you are running for a property for sale.
‘Yes I still
have it.” -Why have you decided to sell right now?
“I am not an
agent. I am not calling to get a
commission from your sale.”
“However, in
the investing work that I do, I may be able to help you get more for your home
than what you expect”
I may be able
to get your home sold faster than the traditional selling will do for you.
If they are already offering
seller finance then use this script:
“Is this
something you have done in the past or that you do often?”
If yes then ask
if they have thought about selling any of the existing notes.
If they answer
no and state that this is a one time or first time deal then ask if they plan
on holding the note and receiving small payments over time or would you rather
have all of the cash now?
This will work well if they
do not need all their money now or who seem to understand investing and think
more like an investor:
“What is the
sale price of your home?”
“How would you
like to make more than your home is worth?”
For articles and
investor info click here:
Important! For next week you must download the
simultaneous close worksheet from the link below:
This is an interactive
worksheet that you must have on your computer in order for us to do our next
session. Please be sure and download
it.
Click
here to download the worksheet for the next session.
We will be talking about how to show a seller to do a
partial sell of their note
and realize more than the sell price of their home in
the end.