Have you ever utilized or considered seller carried financing to improve your ROI?

[AJ Wong]

There are not many markets where seller carried financing is a feasible or an available options for buyers or sellers. 

Very rarely do owner carried transactions occur in more densely populated and competitive markets like San Diego, San Francisco or Los Angeles. This can be due to a variety of factors, including the seller's original base cost (often very high) or there is no necessity as investors and developers have access to the capital to purchase without financing or a third party lender as generally the re-development potential typically outweighs the risks for experienced investors and builders.

In Oregon and specifically on the Oregon Coast, seller carried Transactions are more common. In the past four years I have successfully helped myself, friends, buyers and sellers utilize mutually beneficial terms, often for properties that were either not financeable or the cost of financing was too prohibitive for buyers to be incentivized. 

A seller carried transaction is one in which the seller acts as lender. Instead of a third-party (bank, lender or hard money) qualifying the borrower, assessing the property and essentially dictating terms, with owner financing the current owner holds the note or borrower's mortgage. 

For certain properties; older manufactured homes (not conventionally financeable), properties with deferred maintenance, commercial properties or even vacant land, owner carried transactions can be incredibly useful and profitable for both sides. 

For example: Let's look at a transaction for a MFH on acreage in Bandon Oregon last year, from the perspective of both buyer and seller.

Buyer: Excellent credit, income and down payment. The challenge was she was unable to verify the continuation of her income beyond 36 months and was ineligible for conventional financing and private or 'hard' money loans are incredibly prohibitive for long term plans. For example a hard money loan can typically run 3-4-5% in Points or closings costs and typically 10-12% interest. For a purchase price of plus or minus $375k, even with 25% down, that could equal monthly payments of at $25-2800 per month or more. 

Seller: $400k asking price for older MFH that will be difficult at best to finance. The seller's base is essentially $0, purchased twenty years ago, has provided stable and accelerating rental income for the duration and has considerable other investments, which minimizes the need for total property proceeds and would face tax consequences on gains should he received the entire balance at closing. 

In this example, both parties have mutual interest. Tough for the buyer to obtain workable borrowing terms and a seller that has made his return on the asset many times over and would have difficulty re-investing the capital safely in a higher yielding or more familiar asset. 

The process went like this...

-Would the seller consider an incentivizing or friendly owner carry for a 2-3-5 year balloon? 

-Buyer & Seller analysis - What makes 'cents' for both parties? 

-Proposed Terms.

Ultimately the agreed upon terms were $385k with $85k down and a owner carried note of $300k @ 5% interest only ($1250/mo) on a 3 year balloon with the option to extend for another year at 6% interest only ($1500/mo). 

Buyer: Puts less down, lower monthly payment, reserves to make improvements, saves on appraisal, closing costs, time and hassle. 

Seller: Receives equivalent of 5 years of previous rental income up front. Holds $300k lien on familiar property. Defers capital gains. Earns $15,000/yr interest income (times minimum of 3/yrs = $45,000) PLUS his original $385k or $430k TOTAL for a property that was originally listed for $400k. 

The owner carry eliminates the intermediary, accelerates transactional efficiency and provides buyers and sellers considerable room for price and down payment compromise as the seller earns lower taxed interest income and often can sustain the income the property produced as a rental while transferring ownership and responsibility. 

Just to be clear, once the property is sold and the deed records, the new buyer owns the home. The seller has no entitlement to the property, they only hold a lien or note against the property (just like a 'regular' mortgage) that must be satisfied or paid off prior to property sale or transfer. 

Owner financing provides real estate investors options that can make a deal work much more favorably and conveniently and are particularly useful for developers looking to minimize capital commitment or sellers that have a difficult property to finance. 

Seemingly the biggest challenge at present to the market is horrendous or unattractive financing terms, particularly on commercial, multi family or luxury purchases. Rates are prohibitive but conversely interest rates to depositors are a joke. Banks are charging 6-7-8% for mortgages and remitting .05% to depositors in monthly interest. Even the highest yielding CD's are not outpacing inflation at 4-5%'s. 

A safer bet would be for sellers to hold onto the assets that have produced and they are familiar with. Transfer ownership and responsibility to a new party, but maintain an interest, in actual interest. Why should banks make the MOST from our assets? 

Sellers can also sell their note at any time and likewise buyers and sellers have an open door of communication should terms need to be mutually tweaked. It's not like the bank, it's better :) 

Oregon is friendly to seller carried transactions and has standard forms for terms. 

I would strongly advise always using a third party intermediary to collect, remit and account for payments between buyers and sellers. 

Typically a third party title company will administer or 'service' the loan, sending tax statements and payment histories to each party and advising each when the note is coming due. Once satisfied (through payment, sale or refinance) the seller's note would be satisfied and due the full balance. 

Have you had any successful seller carry experiences? Please share!