Anyone use this as a way to get more potential buyers or increase the selling price? Here’s my scenario and thoughts:
I have $33k into the property. Realtor says I can sell quickly at $45-49k. Comps in the area are Low $60’s but those usually stay on the market for 6-10 months. There’s another rehab across the street for $68k. Holding for 6-10 months to try getting top dollar doesn’t seem like a great play.
I’m thinking $59k and offer to carry a 2nd of 20%. Basically, that’d get me the same initial profit as if I sold for $47k. Then I’d get the residual income on the 2nd. I realize if the buyer defaults I’d probably lose out since I’m 2nd position, but the way I see it is that is house money anyway. I’d still get the $47k which is about what I’d get if I priced to sell quickly. Would offering to carry the 2nd open me up to more buyers and give me a better chance of selling quickly?
Of course offering to carry a 2nd will open your property to more potential buyers. It is a selling advantage, but you must be diligent in screening your potential buyer. You will be assuming credit risk and could lose your entire 2nd investment if the borrower fails to perform and the house goes into foreclosure. Also consider the rate of interest you will charge on the 2nd relative to the return on other investments. I consider seller financing a win/win opportunity.
2nd notes are GREAT if you have the equity to do them.
As you’ve already mentioned, you could sell for price A and net X, or you could sell for higher price B and net the same X with a monthly income of Y as well. What’s to lose? Answer: NOTHING!
You don’t have a “2nd investment” as 71tr has mentioned. This 2nd note is fully 100% FREE income to you. It also gives you a ton of options.
You could sell the note for a few more quick bucks in your pocket. 2nd notes don’t have a high markup and the newer they are the less they are worth. However, you could easily get anywhere from 10-50% of it’s value at closing depending on the credit worthiness of the buyer and the notebuyer’s guidelines.
You could keep the note for longterm gain. A $12K note at 15% interest termed out for 30 years equals about $150/month income. Of course, you’d want a ‘call’ on the note of 2 to 3 years. Is that good? Well, in 2 years the balance due will be about $11,950 while they have paid you around $3600 in interest. In 3 years, balance due = $11,925, interest paid $5400.
What if they don’t pay? Who cares! They WILL pay for usually at least 1 to 2 years, before getting behind, missing or plan out stop paying. AND they will stop paying you BEFORE they stop paying the first, so you should have plenty of notice of a problem brewing. What can you do? 1) Offer to discount the balance in exchange for a quick lump sum of cash. How many of you would jump at the chance to pay off a $12K balance for $6K if you could come up with the $$$ in 30-60 days?
2) You could simply write it off as ‘bad debt’ and take a tax deduction that year (check with your tax pro). Additionally, this gives the non-payor that much more ‘income’ that he must pay taxes against. Tax write offs are good.
3) You could simply foreclose if you want. If the market is good, and the first lien amount is still a good deal, then foreclose on the prop and resell.
That’s exactly what I was thinking. There’s really no downside.
I’m working with a mortgage broker now. He’s looking for a program that’ll allow a seller 2nd. Lenders have really cracked down on allowing a seller 2nd. Once we have it I can run a newspaper ad: “House for sale. Zero money down. Seller helps with financing.” Whoever doesn’t get this house can go on my mailing/call list for the next one
After the sale, the mortgage broker works with the buyer and a credit repair specialist. He’ll try to refi the people in 6-12 months. That’s in the broker’s best interest since he makes money on the refi. I’d be happy since I’d get all of the money for the 2nd out on the refi.
It seems win-win. He just has to find the right program that allows a seller 2nd.
The reason that some lenders have ‘cracked down’ on seller 2nds is because all too frequently, they are hollow 2nds, which basically means that the seller never intended to collect a dime from them. They were only setting up the 2nd in order to get the 1st to finance, then they “forgave” the debt or forgot about it.
Most lenders will still allow a seller held 2nd if it’s properly recorded and performs as agreed.
Thanks for the info. I’ll be talking to him about it tomorrow. They have all the full legal docs for the 2nd to be legit and I’m going to have my attorney review them. I definitely want to collect the money.
You could finance the whole thing with a first and then sell the note at a discount. You could do the same thing with with second, if you went that route.
What is your interest rate? If you can get full value by holding on to it for 6-10 months, isn’t that still a better deal in terms of dollars? Of course, if you can redploy the capital elsewhere and turn it again, then that might make more sense.
Holding it 6-10 months and getting full value is the best option. I’d still get enough money up front that I can do the next deal.
I’m going to charge between 9 and 11% based on the credit of the applicant.
I have another option. If I “give” the 3% downpayment then my mortgage guy could get the person financed FHA. I’d just have to discount the price 3% to cover the downpayment. This seems like the best option. I’m going to run a newspaper ad after the holiday weekend.