Seller financing - interest rate???

Question

My mom is handling her mother's estate which includes a lot with an old trailer in Cle Elum, Washington.  She has an offer on the property but the buyer wants the estate to carry the contract.  We are going to give the buyer a 5 year contract with a balloon payment to give him time to finance it with a bank.  The sales price is $42,000 with a down payment of $9000.  What is a typical interest rate to charge for something like this?  Would you recommend interest only or a normal amortization?  Thank you.

Bill Gulley · Answer

Tim, in this case, you are probably exempt from the origination restrictions selling from an estate assuming the trailer wasn't in a business entity, from owner occupied property. But, there is no exemption requiring notes be serviced, so I suggest you find a loan servicer.

I still suggest you talk to a mortgage originator even if you are exempt.

A note to a owner occupant can still be seen as predatory even if you're not required to follow the origination requirements, this can come into play with a balloon requirement.

If that is an old trailer, the value will be in the land only. If your borrower has decent credit, loans on lots or land are generally no more than 50% of the value of the land.

Next, mortgage lenders have minimum loan amounts. It's rare to get $50,000, harder to get less in some areas.

Basing the balloon requirement on his ability to finance under undisclosed or difficult terms, where it is an impossibility for even a decent borrower to perform can have issues and be considered predatory lending.

In 5 years he needs to have the original balance half way paid off under the SAFE Act. Again, while you may be exempt, that will be viewed as the base line for prudent lending to an owner occupant. That balance also needs to be at a level that the borrower can reasonably perform, meeting the customary LTV requirements and loan amounts in that area.

So, you also need to speak to a bank and see what that future may hold.

This also means that your buyer needs to qualify to the extent of meeting the future obligation. So, while you may be exempt, going through a mortgage originator is still advised.

Another aspect, in the event you wanted to sell that note, having it properly originated and documents will increase the value of a seasoned loan, more than the cost of having it done, IMO.

The interest rate is relative to the risk assumed but other factors as well. The higher you go from current rates for similar loans the more the predatory flavor  kicks in. You may have usury laws as well, again the MLO. can advise you as to state requirements.

As a beginning point, I'd consider 6% to 8% I'd say over  3 to 5 years, but that is also depending on the buyer's ability to pay at that rate.

Basically, doing seller financing you need to justify the terms and conditions of the contract and ensure that you are not seen as taking advantage of an owner occupant. It doesn't mean they can't be held to reasonable expectations either. The buyer should have reasonable disclosures as to any credit issues and informed as to how to cure any credit problem.

When it comes to owner occupied residential lending, by a regulated lender or a seller, it's not the wild west anymore, things have changed, so don't rely on advice from the good ole boys who did these deals for 20 years as if it's old hat stuff. You need to do your due diligence. See an attorney, a MLO and a loan servicer, probably your tax advisor too. Good luck :)

Bill Gulley · Answer

No, there is no requirement to hire a 3rd party lender, issue is, sellers aren't servicers, they don't have the capacity or ability to service in compliance inside their servicing department, so the only alternative to be in compliance is to go to a third party servicer.

Much like what I explained as to the lending issues and attempting to follow as mush of the origination process as possible, reasonable, even with exempt originations applies to servicing as well.

There are some exemptions for small dealers, I've seen that, to say a seller financed transaction will qualify, I can't say, I have not dived that deep but I've not seen anything that leads me to believe compliance is not required. If you have it, maybe you could post it up and we could go over it.

As to servicing, frankly, no individual should attempt to do servicing without specific collections and compliance training, it's foolishness. I realize that there are some investors who think they can look up something and comply as a DIY venture, but one who represents himself has a fool for a client.

The standard set has changed, I may be exempt from some aspect but that doesn't mean that my conduct or level of service or due diligence is expected to only meet the levels required 20 years ago. If my borrower makes certain demands or requests, the requirements to respond properly and correctly will be held to current and customary expectations. The intent of laws are not evaded by exemptions so much as conduct and standards have risen to a higher level.

Yes, Dodd-Frank has servicing requirements and I'm pretty sure that the CFPB will not go for a servicer says "na, na, de, na na, my loan is exempt from your authority"  They, as well as any judge will look to what the standard of care and attention is in the current environment that may apply to actions or the lack of actions taken.

I'm very sure that any exempt dealer (real dealers, not RE dealers) will pay close attention to collection practices currently in effect and make every reasonable effort to comply from their contract servicing centers. An example might be a Rent-To-Own chain of stores that sells household goods. These are financing agreements as much as any seller financed RE deal. There is no requirement to get a 3rd party servicer, but the level of care in servicing is still expected as the servicing function is not so much contract related as it is to the acts of conducting collection activities on a consumer basis. They are separate issues.

So, that's why I suggest people get a servicer involved, because there is no way in reality they can comply with level of compliance expected, unless they run to an attorney every time something occurs other than getting a payment.

10 years ago, the Fair Trade and Collections Act didn't target an individual seller in an installment deal. But still, calling the borrower and threating to break his legs to collect would get the hammer lowered on that seller under that Act, so would calling the borrower at work or calling friends or tracking him down in a public place. The Act set standards for what is expected and just because the seller was exempt as a dealer didn't give him reason to violate what was expected or accepted conduct.

Your note being exempt or not, if a borrower disagrees with the application of funds from a past payment, you better be following the procedures for the application of funds!  You better be giving a timely response and the proper accounting. It boils down to what is applicable and expected. Now, OTH, I doubt the CFPB will request the telephone recordings of an individual attempting to collect a debt as required by servicers, but they may ask for a log of activities, that is something an individual could and should do.

I certainly hope my point got across with all this!

If you have a seller financed note, get a servicer, enjoy life, don't stick you neck out to take unnecessary risks and having to constantly keep up with current collection practices. :)

Tim Haag · Answer

Bill Gulley

Kristine Marie Poe

Great info.  Thank you both.  We do have an estate attorney.  I'll make sure we do the contract either thru him and/or get with a real estate attorney as well to make sure we are legal.  I'll have to check and see if they buyer plans to remove the trailer and build or if he plans on rehabbing the trailer.  Its been vacant for a few years, had a small fire, and probably has mold.  If he does plan to build, then I'm sure we can get him to wrap the property up with the construction loan and pay off the estate once its complete.  I think I need to get some more info on the buyer's intentions.

Tim Haag · Answer

Bill Gulley

So glad I joined this site.  Great information.  I really appreciate the time you spent explaining everything.

Account Closed · Answer

See above.  I've read lot of the CFPB charts on servicing rules (some of which do exempt small entity lenders), but I do not see a requirement that states a lender must hire a 3rd party servicer.  Is there such a rule?

Account Closed · Answer

You mention the servicing requirement a lot.  Is this in Dodd Frank or elsewhere?  Can you point me where this is outlined and if there are any exemptions?

Bill Gulley · Answer

At this point in time, meaning 2/13/14, do not rely on a real estate attorney as most are not familiar with new financing requirements nor prudent lending practices, these are two separate worlds. (Unless that attorney can explain Dodd-Frank and the SAFE Act and the intent of the laws)  2 years ago RE attorneys cranked out notes and installment contract right out of their library of forms, common stuff, such may not (probably not) applicable today. See a licensed mortgage loan originator, they have the financing requirements, between the two, they can put your deal together. :)

Bill Gulley · Answer

Dodd-Frank took effect 1-10, it requires seller financed financing agreements (notes) to be serviced as of that date, there was no exemption as to the origination date of a loan from the servicing requirement, so obviously I can't point to such an exemption. Are you saying you read Dodd-Frank and never saw servicing requirements? It's a chunk of the Act. :)

Account Closed · Answer

Calling it a loan servicing "requirement" is confusing. There is no actual rule that requires a seller financing lender to hire a servicer.  However, there are "servicing rules" that apply to loans whether or not you hire a servicer.  Lenders making less than 5000 loans and holding their own loans are considered small entities and are exempt from various servicing rules.  But unless you want to keep track of all the laws that apply to servicing, you are probably better served by hiring a servicer to keep you in compliance.

Seller financing - interest rate???

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