In previous issues, the best method
for selling a home in a tough market with seller financing was explained. The
benefits to the seller from involving a qualified cash flow finder with a
seller financed deal and having a note buyer "on board" before the
note is created were also covered. While using seller finance techniques to
sell a property are no more difficult than a traditional real estate closing,
following a logical and proven plan is the best method for ensuring a successful
real estate sale with seller financing.
The sellers' misconception
Many property sellers stay away from seller
financing because they mistakenly believe that creating a note is not a viable
solution for selling their home. After all, if they can't walk away with enough
cash to provide the down payment on another property, they'll be powerless to
replace the property they're selling.
As a consequence of this common misunderstanding,
many sellers feel compelled to stick with conventional real estate methods,
limiting their options and missing out on the benefits that seller financing
could offer them.
In actuality, many notes created through seller
financing are quickly sold and the seller ends up with the cash they need. Even
better, if the note is created with buyers' purchasing criteria in mind, the
seller could walk away from the closing table with cash in hand. This means
that the net result is almost exactly the same as with a conventional real
estate sale!
In the cases where the note holder does have a
problem selling their monthly payments, the difficulty in liquidating the note
is typically a result of one general problem: the note was not created with the
buyer in mind. Instead, it was created with only the payer in mind. To ensure
that a newly-created note will be attractive to potential buyers, it is
important to recognize that their purchasing criteria are important as well.
Too good of a deal
For property sellers looking to sell their note
immediately, it would be a grave mistake to create the note by prioritizing
only the payer's demands. A buyer must have a compelling reason to agree to
collect payments in order to buy a note, such as a substantial down payment, a
respectable payer's credit score (to minimize risk), a competitive interest
rate, or a fairly short term.
An example of a "bad note" from a buyer's
point of view would be a seller financing situation where no down payment was
collected, the payer's credit score was not checked, and the interest rate is
fixed at 3%. Basically, this is TOO good of a deal! Even payers that qualify
for loans from traditional lending institutions would jump at this offer with
no out-of-pocket money required and a rate below prime.
Clearly, the note payer and note buyer are looking
for very different things. Payers would love a "no money down"
purchase with financing at a low interest rate, but most buyers wouldn't want
anything to do with this sort of note simply because it is a bad deal for them.
In a situation without a reasonable down payment there
is nothing holding the payer to their obligation. After all, a payer involved
in a "no money down" purchase could walk away and lose almost nothing
financially. Abandoning their obligation to pay may hurt their credit score,
but it was their substandard credit that forced them into a seller-financing
situation in the first place.
When there is no equity in the property (buyers
will use the lower of the property value or the sales price to calculate
equity), all offers to purchase the secured note will be discounted
substantially in order to compensate for the buyer's risk of default. A heavily
discounted buyout offer often means the seller will not be able to get the
money they need.
If the seller of a private note needs a large
amount of cash immediately, they must be able to sell the note as soon as it
has been created. And to quickly find a buyer, the note must meet the
general buying parameters of these people, which include a solid down payment,
a decent interest rate, and typical terms.
Creating notes that can be sold
Every buyer has their own criteria that determine
what they will or won't buy, but a down payment of at least 10% is a good
minimum figure when creating a note. This upfront payment immediately creates
equity in the property which acts as the buyer's safety net in a foreclosure. A
competitive interest rate is important because it will make it easy for the
buyer to purchase the note and yield the desired profit without much of a
discount to the note holder. Finally, keep in mind that people typically avoid
notes that do not follow a traditional term (amortized over 120 months, 180
months, etc). A two-year, interest-only balloon term is a perfect example of a
note that most buyers would avoid.
The points described above are only a rudimentary
starting point for note creation; there are certainly other things that buyers
look for when considering a note. It is always a good idea for the seller to
contact a qualified note finder in order to get the specific information they
need.
The finder will be able to utilize their experience
in working with buyers to give the seller general guidelines about what should
meet most buyers' parameters. Of course, there are no absolute guarantees of a
quick sale, but when the seller creates a note with the buyer.s needs in mind,
it should not be a problem to locate an interested buyer who will give the
seller the cash settlement they need.
