Real Estate Investor · Mechanicsburg, PA · Member since 2013 · 17 posts · 7 votes
I'm trying to sell a flip in Harrisburg, PA and my business partner and I have only received seller finance offers. We've new investors flipping with cash so we really would prefer not to a seller finance because;
1. We aren't comfortable with the process
2. We want our cash out to do the next deal.
The question is, can we sell the deal and have someone else manage the financing? Below are some deal stats.
List/sell price: $85,000
Down payment offered: $10,000
Terms: 5% interest over 15 years with a balloon at 3 years.
Is it feasible sell it for $75,000 and get our cash out sooner?
I didn't understand what you mean by manage the financing.
Could you write a Seller mortgage for $75k and sell that off? Yes.
Is the loan you propose attractive ($75k @ 5% 180/180) No, I don't think so.
That is a loan at 88% LTV with close to market interest rate. (15 year rate is close to 3.75% right now I think).
The audience of investors who would look at buying your note are going to want a little more yield. I think you need at the least 7.5% and could go as high 12%.
We don't understand what the actual credit profile of the borrower is, but if we assume it to be around average I can purchase similar loans to this for 10% to 12% yield with a little more equity insulation than your offer.
Don't get me wrong, it is a good and viable idea to recapitalize yourself. It is not your primary disposition, which would be just sell it outright but as a secondary option one to explore. That said, recognize the deal you are making/getting for what it is, non-bank financing at a high LTV. Other private capital is getting 9% for 65% LTV. I think you can use that as a barometer of the market.
As your LTV increases, there is more risk so the rate should also go up. Even if you had a great credit borrower, you do not have underwriting guidelines that are systematic or coincide with conventional loans, so a loan written by you is riskier than a loan written by a typical lender. So if the typical lender is 4% interest, your rate should be higher due to increased risk.
You really need a par bid, that is, write the loan for $75k and sell the loan for $75k. You will get more looks at 12%. Many note buyers will discount your Unpaid Principal Balance (UPB) in order to get their desired yield. So if you write for 9% and they want 12%, they will offer you $65k to purchase. (making that number up) There is market interest around 12% yield and I think you can find some folks who will take some risk with 12% that might allow you to sell at par.
If this 4% number is coming from the potential Buyer. I would simply deny that number, tell them you would consider Seller finance around 10% to 12% depending on down payment and credit. If they want a 4% loan, they should go apply at a bank. You are not a bank.
If you think of it another way, in the event you have to hold this note yourself. What rate on your money would you want? 5% or 12%? Perhaps that will help you price the situation out a little better too.
Dion, he wants to sell the house and have that buyer sell it with seller financing I believe. Yes, that can be arranged, but you'll need a mortgage originator since it's non-owner occupied unless PA allows SF of such, usually the exemptions are for owner occupied. You could also sell the note, you may find a local investor to bite at a 10K discount. You may have other problems with the interest rate, 5%.
You should look into a loan servicer as well, they take care of the note maintenance, collections and some will buy the note as well. Look for "Loan Servicer".
You might get someone to buy it and sell it on a contract for deed too.
In a double transaction you'll have the PA transfer tax to deal with too.
As Bill mentioned, you could do a CFD. I was thinking more along the lines of a lease option. Finance the house to get most of your cash out and sell it on a lease option. Make sure the rent comps will more than cover the mortgage payment. Collect a nice option deposit so you know you have a serious buyer on the hook. Give them a short but reasonable fuse to buy on, maybe 6 to 18 months. And I'd run they by a credit repair specialist to make sure that they have the potential to qualify within the given time frame. Also, I'd have the sales price set at a premium, but not to exceed the appraised value or the tenant/buyer will not be able to get the loan. And you're off to go do your next deal.
I think you need to focus on your flipping business. Selling with seller-financing should be way down the list of exits (and it's not really an exit for that matter). Why are you getting only seller-financing offers? Do you have it listed with a great realtor? Or are you trying to market it yourself in a quest to save the commission, thus encountering all these buyers that can't get bank loans and want to you to carry paper?
That paper will be of uncertain value, and since you don't really know what you're doing, chances are good that the note will end up worth less than you expect, as your end note buyer will be looking at borrower credit, payment history seasoning, initial down payment, current LTV, rate, term, balloon feature (and whether refinance at balloon date appears feasible), etc.
Thanks for all your help! I'll definitely look into some of these options. The 5% was kind of a made up number so if we go down this path I'll definitely push for something closer to 10%.
@David Beard I actually totally agree with you. I don't have interest in owner financing. I'm just getting impatient and looking for an exit. We are listed with a very good realtor and I listed on craigslist. The seller-financing offers have come through craigslist.
We listed too high to start which hurt us. I think we're priced right now but we can't get people walking through. If anyone has suggestions to increase activity I'm all ears. We do have room to continue reducing the price but we'd like to keep some margin.
Are you sure you have a great realtor, with lots of retail sales in the immediate area? Have they shown you their marketing plan for your property, with dates and sequence of activities that they are undertaking to get your property sold quickly? Your target sales price seems weak for a typical retail flip, so you may be below the sweet spot and in an area with too many distressed sales and not enough retail activity, but that doesn't matter at this point.
The realtor gave you a bad listing price, not a good sign (assuming you didn't override their advice), but sometimes done by agents to get their foot in the door so they can then tell you in a month that you need to drop the price. Did this agent give you the comps and a rehabbed CMA on the front end before you purchased?
Are you getting showings? What is the feedback? If you're comfortable with the realtor, what good choice to you have but to cut the price, take a smaller profit (hopefully not a loss), chalk it up to experience and move on. If you need to move up to $125k properties to get into the sweet spot, then accept that and find financing if necessary, even a HML. Don't stay in a cheap area that is not great for flipping just because your cash only extends that far.
@David BeardI know our realtor from helping me buy a house and have referred him many times to friends/family to buy/sell and they've all been happy. We probably should interview a few more to see if they have some ideas. Our guy is out of ideas and we didn't see a marketing plan or sequence of activities, though we didn't ask. (lesson learned)
What do you mean by "the target sales price seems weak for a typical retail flip"?
Our initial selling price was inflated from what we anticipated when we bought the house because a rehabbed comp sold near ours for a lot higher than we expected it to.
Here is a link to our listing in case you're curious.
We haven't had many showings and the showing we had we had minimal feedback. Basically saying they liked the house but they were going to go in a different direction.
There are Realtors who specialize in listings and as buyer's agents, different talents required for most. Sounds like overpricing was the mistake as only the non-qualified seller financing buyers are willing to go there. Check the market closely and price the home to sell. It might be better since your property has already been exposed at a too high of a price to take it off the market and rent it, sell it later when the reputation goes away. :)
What do you mean by "the target sales price seems weak for a typical retail flip"?
David, all I meant here is that an exit price of $85k indicates that you are in an inexpensive neighborhood. In my market, the vast majority of flipping is done in the $110-200k range on exit price. This is the "sweet spot" for first time home buyers throughout the midwest and south, and there are usually lots of retail sales in neighborhoods of this price range. Of course flipping can be done in cheaper neighborhoods, but it's a matter of improving your chances of a good result by going where more of the qualified buyers are.