Selling Your Home in a Slow Market

As explained in the last issue, seller financing can be an extremely useful option to sell a house in a slow real estate market. Unconventional private lending is a great way to increase the overall sales closing ratio. When the property owner is willing to "carry back" a note, it is often possible to obtain a higher selling price and reduce the time needed to find a buyer. Plus, creating a note secured by real estate can give the seller a steady, interest-generating income stream for their long-term future.

The Challenge: A Different Demographic

Home owners who are ready to offer a private loan in order to sell their houses are still faced with a stumbling block: how to find buyers in need of seller financing. Most property owners don.t have any experience in finding individuals interested in buying a "high ticket" item like a home directly from the owner.

When property sellers work within the established real estate agent process to find buyers and close a deal by "traditional" methods, it is generally safe to assume that the vast majority of these customers will qualify for bank financing. In order to pursue private seller financing to sell a home, however, a property owner will need to attract home buyers who do not have adequate credit to buy real estate - a significantly different demographic.

The key to successfully orchestrating a seller-financed real estate deal is getting the right buyers through the door - just like a traditional property sale.

In order to get motivated buyers interested, the seller will need to use a targeted marketing technique designed specifically for the "unconventional buyer's market". The most effective advertising method to tap into this distinctly separate pool of buyers is surprising to some.

Most purchase-money transactions are negotiable. Sellers and buyers are free to negotiate the terms of the owner financing, subject to usury laws and other state-specific regulations.
While there is no standard down payment required, many sellers want a sufficient down payment to protect their equity. Down payments can vary from little to 30% or more. Sellers feel their equity is safeguarded by the buyer's down payment because buyers are less likely to go into foreclosure if they've invested a lot of money upfront.
Some variations of owner financing include:
* Land Contracts.
Land contracts do not pass legal title to the buyer, but give the buyer equitable title. The buyer makes payments to the seller for a certain period. Upon final payment or a refinance, the buyer receives the deed.

* Promissory Notes and Mortgages.
Sellers can carry the mortgage for the entire balance of the purchase price (less the down payment), which may include an underlying loan. This type of financing is called an "all-inclusive mortgage" or "all-inclusive trust deed" (AITD). The seller receives an override of interest on the underlying loan.

A seller may also carry a junior mortgage, in which case, the buyer would take title subject to the existing loan or obtain a new first mortgage. The buyer receives a deed and gives the seller a second mortgage for the balance of the purchase price, less the down payment and first mortgage amount.

* Lease Purchase Agreements.
Selling on a lease purchase agreement means the seller is giving the buyer equitable title and leasing the property to the buyer. Upon fulfillment of the lease purchase agreement, the buyer receives title and typically obtains a loan to pay the seller, after receiving credit for all or part of the rental payments toward the purchase price.

Unconventional Marketing

The seller's best strategy for finding their credit-challenged buyers would be to list the property in places that are frequented by individuals that do not have a real estate agent. The newspaper is one of the best places to start putting out the word.

The majority of home buyers looking for seller financing start by searching the "For Sale By Owner" ad listings in the local paper. Seller financing originated and took off via this print medium. Even in today's Internet-dominated business world, newspaper advertising continues to be an effective means to reach those looking for seller financed deals, so it makes sense to start the advertising here. A simple sale ad including the line "seller financing available" or "credit issues OK" should help to generate genuine interest from the right potential candidates.

Owner Financing Benefits to Buyers:

* Little or No Qualifying.
Even if the seller demands a credit report on the buyer, the seller's interpretation of buyer qualifications are typically less stringent and more flexible than those imposed by conventional lenders.

* Tailored Financing.
Unlike conventional loans, sellers and buyers can choose from a variety of payment options such as interest only, fixed-rate amortization, less-than-interest or a balloon payment. Payments can mix and match. Interest rates can adjust periodically or remain at one rate for the term of the loan.

* Down Payment Flexibility.
Down payments are negotiable. If a seller wants a larger down payment than the buyer possesses, sometimes sellers will let a buyer make periodic lump-sum payments toward a down payment.

* Lower Closing Costs.
Without an institutional lender, there are no loan or discount points to pay. No origination fees, processing fees, administration fees or any of the other assorted miscellaneous fees that lenders routinely charge, which automatically saves money on buyer closing costs.

* Faster Possession.
Because buyers and sellers aren't waiting on a lender to process the financing, buyers can close faster and get buyer possession earlier over a conventional loan transaction.

Owner Financing Benefits to Home Sellers:

* Higher Sales Price.
Because the seller is offering owner financing, the seller may be in a position to command full list price or higher.

* Tax Breaks.
The seller might pay less in taxes on an installment sale, reporting only the income received in each calendar year.

* Monthly Income.
Payments from a buyer increase the seller's monthly cash flow, resulting in spendable income.

* Higher Interest Rate.
Owner financing can carry a higher rate of interest than a seller might receive in a money market account or other low-risk types of investments.

* Shorter Listing Term.
Owner financing attracts a different set of buyers. If a property is not selling under conventional methods, offering owner financing is one way to stand out from the sea of inventory and move a hard-to-sell property that otherwise might not sell.
In closing, before entering into a transaction with owner financing, consult a real estate lawyer and obtain competent legal advice.

Orchestrating the Deal

Once interested buyers start coming around, the seller can choose to work with the party that brings the most to the closing table in terms of the down payment. Of course, larger down payments are better than smaller amounts, but it is entirely up to the property seller to decide what is acceptable.

Once the details of the initial payment, payment term, interest rate, and any necessary clauses are established, the buyer and seller could create a new seller-financed note. If the seller needs money immediately to pay their down payment, the note terms can be specifically tailored to ensure that it's attractive to cash flow buyers. Once the newly-created note is sold, the property seller will have "cashed in" their future monthly payments for an immediate lump sum of cash.

The details of the note creation are easily handled with standardized boilerplate or the assistance of an attorney; some note sellers are able to manage the sale of their home without any paid legal counsel at all. In fact, once the seller understands the potential advantages of seller financing and takes the proper steps to market the property to the target buyers, the final steps in cementing the note deal are usually much easier than expected.

A short sale in real estate occurs when the outstanding obligations (loans) against a property are greater than what the property can be sold for. Short sales are a way for homeowners to avoid foreclosure on their homes and still be able to pay off their loan by settling with lender.

1) Verify the value of your property. If you are selling the property through a real estate broker, your broker will provide you with an estimate of market value. If you are selling the property yourself, do your own market analysis of the area and your property.

2) Add up all the costs of selling the property. If you are using the services of a real estate broker, the broker will provide an estimate of closing costs. If you are selling the property on your own (for sale by owner), call a local title company or real estate attorney and ask, as a seller, what the closing costs will be.

3) Determine the amount owed against the property. This will be the total of all loans against the property.

4) Do the calculations. Subtract the total amount owing against the property from the estimated proceeds of the sale. On a short sale, this will be a negative number.

5) Contact the lender or lenders. Talk to someone in the customer service department and tell them the situation. They may direct you to a specific department. Talk to a supervisor or manager if possible; this person will have more authority.

6) Ask the lender what its procedures are for a short sale. Some lenders are willing to work with you by reducing the amount owed or making other arrangements. Others will look to the agents involved (if any) or anyone else who's making money off the transaction to see if they are willing to make concessions to make the transaction happen. Still other lenders will tell you that your debt is your responsibility, one way or the other.

7) Sell the property.