Just another tool to add your tool belt when traditional financing will not work or is not desired for some reason.
For those who want to BUY property:
I recently helped a man buy several rental properties. He had decent credit (620ish) and 10% cash down from a cash-out refi. He was newly self-employed and couldn’t prove 2 years self employment for traditional financing purposes. He contacted a rehabber that had multiple properties for sale. This rehabber was happy to sell this man these properties at a discount because he was buying several of them (and he had a nice chunk of profit on each from his own labors). At this point we had a good buyer and a seller willing to discount the properties. We structured the terms so that the seller would take the 10% down (on each) and create seller- financing notes for the balances BUT then we bought the carry back notes from the seller at the closing table. Seller financed notes are always bought at a discount depending upon the type of property, the note terms, and particularly the credit of the buyer. So… we structured the actual sales price high enough to cover the discount, but lower or equal to the appraised value. The seller was happy because he got the cash he needed at closing. The buyer was happy because he was able to purchase several new investment properties that he couldn’t have otherwise attained. The buyer paid a higher price for the property than the original discount the seller agreed to take - but it worked out to be about the same for him because there are no points or PMI with seller financing. This was a win-win-win situation.
For those who want to SELL property quickly:
Offering owner financing can widen your pool of buyers and help you to sell your property quickly. The problem is most sellers don’t want to carry the note. They want cash to pay off existing liens and/or to purchase new property. Sellers can easily set up owner financing for their buyer (imagine the responses you will immediately get)… and then sell the note at, or right after closing. All notes are always purchased at a discount depending upon the type of property, the note terms, and especially the buyer’s credit. We can help sellers structure the note to minimize the discount and get the cash they need at closing. This can also work for flippers whereby the flipper structures seller financing for his end buyer and we purchase the note from him. The funds are used to pay off the original seller and the difference goes to the flipper.
The first thing everyone wants to know is how much the discount is. After all, that basically determines how much cash goes in the seller’s pocket. Like everything involving mortgages, the answer is dependent upon many variables – but I’ll try to give you a rough idea.
If the buyer has decent credit, and minimal down payment, is an owner occupant for a single family residence, and the note is structured properly… the seller should expect to receive around 90% of the note balance. If the terms are less favorable, the discount will be higher and possibly vice versa. So… if the seller is willing to accept some amount below the appraised value, we can pretty much structure the deal so that the seller gets the total amount of cash he is expecting. We do that by increasing the Sales Price enough to cover the discount. As long as the property appraises for that final Sales Price value, this technique works.
A commercial deal is a different beast all together. We usually like to see a 70-75% first note. The remaining should be made up with buyer’s down payment and a seller 2nd carryback note, if necessary. The NOI should be good, the payor’s credit should be decent, the terms should be set up to be favorable. All said, the seller could expect 85-90% of the first note balance with this type of setup.
I am a principal investor of seller carry-back mortgages and trust deeds. I either purchase for my own portfolio or I work directly with private investors that I outsource to. I am available anytime to discuss strategies or options for anyone on this website. I have references available upon request. I am also a CPA and I am held by an ethical code of conduct.