Tag: Owner Financing
WHY SELL YOUR NOTE?
Several months ago a man called me. He received a letter from me about selling his note. He began the conversation by saying he would be crazy to sell his note because he was getting 7% when the bank would only give him 1%.
Plus, his buyer was well known in town, ran a small and successful business, gave him a 15% down payment and has made every monthly payment on time. So, why in the world would he want to sell his note to me at a discount when he had such a great deal? He would be nuts, he told me.
He finally took a breath and I had a chance to speak. I simply said “I understand and I agree.” He vented a little bit more, got it off his chest. I listened some more and we finally said good-bye.
This conversation got me thinking about why people sell their notes. The bottom line reason is always the same – better use of the money.
But the specific reason is always personal to the circumstance of the seller. So I reviewed several of my recently closed transactions.
Here are the reasons the sellers gave me for wanting to exchange their monthly payments for cash:
1. Opportunity to buy an investment property
2. Buy a new home
3. Pay a big income tax bill
4. Pay off medical bills for a family member
5. Pay expenses for elderly parents in a Living Care facility
6. Change of life – selling a business, liquidating assets, etc.
7. Pay off mortgage on an investment property
8. Buy a new SUV
When opportunity or crisis presents itself, and people need cash, they will examine their options to determine the best source of that cash.
If they hold a note, they may have been compelled to carry back the note in order to complete the transaction.
Carrying the note was not the 1st option. So, it becomes easier for the seller to liquidate this asset in order to get the cash needed, as long as the price offered solves the problem.
My job is to align the needs of the seller with the realities of the marketplace, and help him move on with his life.
Denny Stanz, Note Broker, CA #01915404. (760) 245-5366, Email:
DennyStanz@verizon.net. Website: www.CaliforniaNoteBuyerLLC.com
It’s Not Forever!
Let’s assume you are selling a property. You can’t find a “qualified” buyer. Your real estate broker suggests you may want to consider owner financing. You respond with a definite “No Way.”
Two primary reasons: One, you want to cash out now. Two, you don’t want to be – in your mind – a landlord.
But suppose you knew that you could cash out shortly after closing – say, 1-3 months.
And, as a consequence, you will not be a landlord forever. You just will receive a few monthly payments from your buyer, then cash out and move on with your life. Would this make a difference in the way you think?
Well, maybe – maybe, not. Right? But a little information and knowledge can sometimes change the thinking of the most reluctant seller.
Let’s take a quick look at how you might be able to sell your property to a qualified buyer at your price, and not be a landlord forever. Being willing to owner finance could accomplish the following:
1. More Potential Buyers. In a tight credit market, there will be more “qualified” buyers for your property. Why? Because a little glitch on a credit report may negate a bank loan but still make your buyer a very attractive prospect.
2. Attract 1st Time Buyers. 1st time buyers have been on the sidelines the past few years, waiting to get into the game. The real estate market needs them. Owner financing helps the overall real estate market.
3. Neighbors Are Happy. We all want friendly, caring and invested neighbors. Your neighbors will be pleased knowing their new neighbor was vetted by you and is as committed to the neighborhood as they are.
4. Note Buyers Will Want to Buy Your Note. If you structure your note properly, you will attract note buyers who will be willing to pay the highest price possible. Your broker can help by checking your buyer’s credit scores and history. Someone like me can assist in suggesting note terms.
5. You Can Move On. If you have strong note terms, you may able to sell your note after receiving only one monthly payment. You don’t need to be a landlord forever. You don’t need to hold the note to its term. You can move on!
True, your note will be discounted – the inherent risk means you will receive less than the principal balance. But, you are getting cash today. You do not have to receive payments over the next 20 or 30 years.
And, perhaps most importantly, you can have peace of mind.
Think about it!
For years, the world of owner financing was the Wild Wild West. The seller and buyer essentially came up with terms that each could live with. No more.
As of January 10, 2014 the Consumer Financial Protection Bureau (CFPB) issued new regulations that apply to mortgage lending and owner carry transactions. These rules were a reaction to the mortgage meltdown, and an attempt to remedy the process that allowed people to get loans from lenders they did not qualify for.
The rules now require stringent procedures and licensing requirements for loan originators, now referred to as Mortgage Loan Originators. Unfortunately, owner carry transactions were included in the mix, even though these sellers and buyers played little or no role in the meltdown. It’s important to know the rules if you plan on doing an owner carry transaction.
Here is a brief summary:
The One Per Year Rule
If you are an individual, a trust or an estate and you do just one owner carry transaction in a calendar year on a property that the buyer will use as their primary residence, then:
1. Your note may have a balloon payment.
2. You do not have to prove or document your buyer’s ability to pay.
3. The note must have a fixed interest rate for five years. After the 5th year, the interest rate can increase no more than 2 points per year with a cap of 6 points above whatever you started at. You have to use an index like a T-bill or prime rate in the beginning.
The More Than One Per Year Rule
The second category applies to individuals, trusts and estates that do more than one owner carry transaction per year when the buyer will use the property as his primary residence. It also applies to any owner carry transaction – even one – where the seller is a Corporation, LLC, Partnership or other legal entity when the buyer will use the property as his primary residence. The rules here are:
1. The note cannot have a balloon.
2. The note must have a fixed interest rate for five years. Same as #3 above.
3. The seller must determine the buyer’s ability to repay.
4. If the seller does 3 or less transactions per year, he does not have to become a Mortgage Loan Originator(MLO).
5. If the seller does more than 3 transactions per year, he must become an MLO.
These rules apply only where the buyer will use the property as his primary residence. If the buyer does not live there, the rules don’t apply. If you sell land, an apartment or commercial building, these rules do not apply.
Most people can easily meet these rules. Most people will do one and only one owner carry transaction in their lifetime. But, mom and pop transactions should not be lumped in with those of major lenders to begin with. Mom and pop should not have to worry about becoming licensed to sell a home they own and want to sell by offering to carry the note. Mom and pop don’t lend money – they offer to sell their home by accepting a down payment and monthly installments.
For more background and detail, please visit www.savesellerfinancing.org. Ric Thom leads this note industry group and has met several times with the CFPB trying to get them to understand our business and how it differs from traditional mortgage lending. Please read the White Paper, sign the Petition and make a pledge if you can.