by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
I’m not so sure I want to play hockey against Bryant Tutas. He thinks like Wayne Gretsky.
I cautioned about the coming mortgage freeze and asked what agents might do to prepare for it. I’m a mortgage guy so I think in terms of institutional financing. I completely forgot about seller-financing. Bryant Tutas answered:
I’m ready for it. I just listed my 3rd property this month where the seller is offering financing. Seller financing is going to be very popular over the next few years. I’ve also been marketing to foreign investors with cash to spend. Once they purchase a home we turn right around and offer it for sale with financing. It’s a win all the way around.
Are you kidding me? It’s so time-tested but underutilized it’s brilliant. I forgot all about it!
What do you know about seller-financing?
First, you have to have a seller with some equity but…. ain’t nobody got no equity no mo’. What’s a hustler to do?
Foreigners are looking to pay cash for U.S. homes and are finding great bargains at auction. In San Diego, we see investors buy properties at auction and sell them for 20-35% higher, 60-90 days later. The problem with some of those properties is that they aren’t appraising. Seller financing doesn’t require an appraisal nor does it have those pesky underwriting guidelines. Bryant Tutas mentioned that he is prospecting foreign investors, to buy properties and sell them with financing terms.
This is the ultimate form of private financing. Before you embark on this strategy, you might advise your sellers to require the following when considering offers:
- a tri-merged credit report– you definitely want to check for tax liens, judgments, and large charge-offs. All of those can become liens on title
- It’s a good idea to require some income documentation– if your buyer’s housing expense doesn’t exceed 50%, you’re kosher in California but it’s probably a good idea to make sure that all of his/her debts don’t exceed 50% of gross monthly income
- A down payment is going to assure your buyer has something to lose if the deal goes sour. I might suggest you tier the interest rate offering to correspond with the down payment ( eg- 30% down at 6%, 20% down at 7%, 10% down at 8%)
I’ve sold a home on a wrap, which is basically seller-financing, and I found it’s best to have a title company service the loan. This helps the borrower when he/she goes to refinance the mortgage by displaying that they paid to an institutional servicer. You can have the mortgage rating reported on a credit bureau if an institution services it.
It’s a good idea to have an end in mind. In California, owner-occupied properties can’t be financed with a balloon payment less than 60 months. The plan should be for the buyer to be able to refinance that loan by the balloon date. One thing I did was to offer a discount from principal if the refinanced out of the debt early.
Most title or escrow companies can prepare a note and deed of trust (or mortgage) for your seller. Search high and low for an escrow officer with some gray hair and a voice cured by Pall Malls and whiskey. Those grizzled veterans were around in the 90s, when seller-financing was hopping. They are pretty well-versed in the documentation needed. (First American Title has an in-house, loan document preparation service).
If you buy properties correctly, you can really make a great return for an investor, One “flip” property I recently financed, was purchase for $225,000 and immediately sold for $300,000. Offering financing terms, if little institutional financing is available, might help you command a premium. This is a great idea to have in your arsenal when/if the institutional mortgage market shrinks, withers, or dies.
Al Lorenz says:
Foreign investors buying home and reselling them with financing is really cool. I hope it catches on.
August 17, 2010 — 4:24 pm
Broker Bryant says:
Thanks for the mention Brian. My son just bought his house with seller financing. It reminds me of the 80s when lots of sellers were offering wrap arounds to keep interest low. There’s always a way to sell property.
August 18, 2010 — 4:42 am
Missy Caulk says:
I did one land contract this year and am called frequently because I have blogged on it. I treated the buyer like a person getting a loan, credit pulled, etc…it was a great fit for my sellers as they put a lot down when they bought.
Also there is a company in the Metro Area, doing this buying homes at low, low prices…foreclosures and selling them back to buyers who have lost their home in foreclosure or short sale and can’t qualify for a loan.
August 18, 2010 — 10:59 am
Brian Brady says:
That “banged up” home buyer with cash” will not only be a growing market but a profitable one, too. The best part is that these “non-prime” loans are exempt from the FRA because they’re categorized as “seller-financing”. Someone will make a secondary market, buy those loans, and clean up
August 18, 2010 — 3:24 pm
Jb says:
I’ve had some investor buyer types recentl ask me about cash flow properties. Well here in California it’s hard to get properties to cash flow. I have a better idea, how about this you by a small proerty all cash say $200,000 and you rent it dor $1,000 a month with an option to buy for 3 years. If you put that same $200,000 in the bank right now you would be lucky to get 1.5% that’s $3,000 a year. Not good….with my scenario you’re getting $12,000 a year 4 x as much. Now intetest rates are going lower most likely and we aren’t going higher for a while> i think this is a pretty good investment.
August 19, 2010 — 2:58 pm
Brian Brady says:
“Thanks for the mention Brian.”
It is I who is grateful for the idea. Thanks for sharing it here, BB
August 19, 2010 — 6:23 pm
Teri Lussier says:
My broker has been in the business for 25 years, and has been discussing seller financing at our meetings for the past year. He recently began putting ads on craigslist, and we’ve been inundated with calls from buyers looking for this option. Any seller with equity would do well to consider this.
August 22, 2010 — 6:26 am
Brian Brady says:
“Any seller with equity would do well to consider this.”
Did you catch the next step, Teri? Create sellers with equity (like Bryant is doing). You might consider to use Craiglist to find cash investors to scoop up properties cheap (in SoCal, auctions seem to be the place to do that). Your broker has the buyers, you just need to provide him with inventory.
August 22, 2010 — 1:19 pm