The real estate market is constantly changing and a huge issue confronting property sellers is the lack of buyer financing. This has led to a dramatic increase in Owner Financing, also known as Seller Carry Back. At this time, all properties are competing for qualified buyers. The standard belief of many real estate agents is to lower your price to sell. This will not solve the problem. The house that offers “make sense” owner financing is the one that will have buyers lined up.
It's no secret that Banks and lending institutions are overly conservative when it comes to their lending guidelines. Today's buyer could have a great down payment but not qualify at the Bank. It's so opposite of what lending should be. Large lending institutions somehow believe that the digits of a FICO will secure the bank on their investment. Is that really true? I have provided key answers to questions that most sellers have when looking to finance a note.
How to Offer Seller Financing
As a Real Estate investor who is going to arrange a seller financed note, you must ask yourself these series of questions:
Question #1: What type of note terms are investors looking to buy?
Answer: Typically, your term would be a 30 year fully amortized loan with a 7 to 15 year balloon note at the end (remember that you are looking to sell this note right away, not in 15 years). The range of interest is normally 8% to 12%.
Question #2: Is that rate too high compared to what rates are right now?
Answer: Bottom line for all buyers is an affordable monthly payment. They normally don't balk at these rates. It could be an interest only loan or principle and interest loan. Most buyers plan on refinancing when their situation and market conditions improve anyways. Remember you are looking to create an attractive note for the next investor to buy, so keep it simple.
Question #3: What information should I check on to make sure the buyer is a good fit for my financing?
Answer: It's very important to run a credit report and ask for a copy of the last 6 months of bank statements and any other financial documents. Verify the buyer's employment along with other sources of income. Remember, you are looking for the buyer's ability to pay.
Question #4: Is there something to record on the property that will protect my loan position?
Answer: Make sure your loan is secured to the property on title. In California they call it a “deed of trust” and in other states it can be referred to as a “mortgage”. This will protect your interest just in case you have to foreclose and evict the buyer if he or she defaults.
Question #5: How do I choose the sale price and still protect myself if the buyer defaults on his payments?
Answer: Set the purchase price at or below the appraisal value and ask for a minimum down payment of 10%. This is called “equity protection”. The worst case scenario is the buyer defaults and you have to foreclose. As a lender, you want to be able to cover the loan amount along with any fees that may occur during the process. As an investor you're in the business to make money, not lose it!