Doing Owner Financing Correctly

[Mike Hartzog]

I am a mortgage note investor and end up with a fair number of non-performing notes.  A percentage of these will turn in to REOs.  I typically sell my REOs off-market for cash to investors or on-market in the conventional manner, depending primarily on property condition.

I would like to begin offering some owner financing on the off-market investor sales to help the investor get in easier with less cash up front. I am thinking of doing a non-recourse loan with a longish amortization and a balloon a year two out. This type of thing seems to me to be very similar to a standard PML/HML funding of a fix and flip deal, the difference being that I am also the seller. I thought this group could help me understand the proper process to follow.

If I were originating a consumer loan, I would use an RMLO.  My understanding is that this is not necessary with a commercial non-recourse loan.  So my question is, what are the steps required to get the deal done once I have a buyer lined up and vetted?  My best guess at the moment is that I would execute a PSA with the buyer and then use a title company to create the note and security instrument, issue title policies, and record the deed and security instrument.  What am I missing?

[Bill Gulley]

You better check with your attorney, a good finance attorney, if you take the property through foreclosure your borrower can expect you to obtain the best price possible in an attempt to obtain any excess equity above what is owed to you. Doing an installment sale isn't a sale that attempts to obtain excess equities.

Need to expose your foreclosed properties to the market, not sell from backroom deals.

Selling to an investor for cash is fine, an equity loan is a horse of a different color, residential or commercial.

Now, if you take a deed in lieu of foreclosure, you then own the property as you accepted the property as payment, the lien is extinguished and the borrower abandons any claims of excess equities.

The reason lenders have sale requirements is to keep a lender from going into the real estate business, there becomes an incentive to foreclose and go into RE sales, you are a regulated lender, not a private investor.  

If you are in a title state, look into courts of equity which can still apply as to fairness for your indemnification of a cash loan.

About the only difference in residential and a simple commercial note is the heading saying "Commercial Loan" or "Commercial Note". Usury laws usually won't apply. Any personal property, if any, is secured by a UCC filing. Commercial sales should break out the land value and value for improvements. Stick with a HUD-1, it works for a small commercial settlement. You must have a complete accounting of settlements for commercial, you don't have to use a HUD-1, but it is simpler on small properties.

You don't have Dodd-Frank issues in commercial but you can have basically the same areas of concerns with predatory lending/dealing, ability to pay, short fused balloons, management or experience is more of an issue for a borrower, level of sophistication is higher.

As a broker, do you do loan servicing? Check with your state finance dept and see if you can service under you license, you may need a servicing license.....this isn't your home you're selling/financing, you're in the business. Some states require a license for commercial loans, your RMLO might meet that and it may not.

Another aspect, loan classifications in your state may not be totally defined by a borrower's intended use, the property type can make a difference. A residential property sold alone may not meet their opinion of commercial. 

I held the property for sale, listed. If it doesn't sell in 30 days an investor can make an offer, you can accept the offer, your money investor can finance that investor or you can, you're not a bank. That new loan carries the next project and clears off the old loan, you can loan more than the defaulted loan payoff. When that loan is paid off it becomes cash available for operation. On these I never sought any deficiency judgment. I could also get a wavier of equity claimed in return for a release from the judgment.

Time to wholesale is before a foreclosure, I don't want title from a lien interest, allow the borrower to sell and you can do so without recourse.

But, non-recourse loans have been a kick around here for several years, especially with one syndicator type, most housing investors here really don't cross the threshold for non-recourse in commercial and if you have investors as your source of funds, you're toying with their legal abilities to collect. I might let someone off the hook, but I'd never make it non-recourse from the beginning with someone else's money as a broker. I don't know what your risk management level is.

While it may be obvious that you can get a house back that was improved, what if your borrower drops dead and you then get into the construction business too, bankruptcy, incapacitation is even worse! And, you get another REO having to go that route all over again. Good luck :)