Promoting a seller financed property?

Question

I'm currently selling a 5 unit property in PA. It is fully rented and paid-off, so it is not a problem to offer seller financing. Any suggestions on how to market this sort of property? I understand that there is a lot of demand for seller financing. Thanks!

Jon Holdman · Answer

Ben Bishop are you going to try to sell the note after you sell this property with owner financing?  I don't see that in what you wrote.  I think this thread has ran a bit off track.  Your question, as far as I can tell, was simply "Any suggestions on how to market this sort of property?"  Nothing about selling the note.  I'm afraid, David Beard and Bill Gulley that the thread has wandered a bit off track.  Good advice, but not what Ben was asking.

Ben Bishop · Answer

True, I was mainly interested in marketing ideas. The advice on reselling the note is really helpful as well though.

I just got a call from the loopnet people (trying to sell me on the premium listing). Have any of you sold through them previously? Any thoughts on it?

Bill Gulley · Answer

Ben Bishop, Beware that author David mentioned as posting here has given some poor advice concerning notes.

A "note consultant" seems to me to be a brand new term used here on BP, recently by the author mentioned I believe and then in this thread. Seems like a marketing term as it is not an officially recognized profession in the mortgage or banking industry, I've ever heard of, a guru type term and probably used to describe those who are not legal brokers. Sounds like an attempt to say advising is not originating, but it crosses the underwriting lines if advice is given to a specific note, check state and federal law.

IMO, there are only about 5 members on BP that have sufficient experience and knowledge of seller financing issues that would be giving good advice on originations and the other 4 have not posted in this thread, we have several who speak as if they have expertise.

Jon Holdman had a good comment.

There is no statistical evidence that a properly originated 3 year balloon note is a foreclosure waiting to happen, that is an opinion and just not true, my foreclosure rate was less than 10% including junk originations that had been done by others. Many note buyers, including me, seek short term notes, the quicker the payoff the higher the yield from a purchase and the shorter the time frame money is out and at risk, there are many if not most who are "in and out" investors. Institutional investors operate differently, but they still do a pass-through. Longer term notes will take a bigger hit on the discount, great for those "pros" but here I'm speaking as to the note originator/holder's best interests, there are two sides to this matter.

For your first seller financed deal, you don't want to get into bed with some investor long term, like ten years being tied in, there are loan issues that can make you wish you had never done the deal, like a bankruptcy and the borrower reaffirming the debt and the court doing a cram down keeping the note in place. Leave those to the "pros", another reason to use a loan servicer, BTW. You can go 3 or 4 years and then refinance as many times as you like. This is what we in the real financing business call a re-pricing opportunity. With the refi you can change the rate, the amortization or any other aspect. You can also build in the refinancing opportunity to be refinanced at a set rate structured subject to there having been no issues of default or late payments beyond a certain grace period.

David did bring up a good point of deferring gains, but that may not always be a key factor, interest income and marketability of a property are also key factors. Some properties aren't bankable.

Seller financing is not institutional financing or a "cash loan", it's an installment sale and other rules apply, you will need to check about any pre-payment penalty built into a seller financed transaction. In some situations you can agree that the borrower will become liable for any tax liability difference in paying off the note early, use that in your sale contract with the agreement to survive the closing, see your attorney.

Again, look for a broker, they buy and sell notes, they also do originations, some underwrite seller financed deals and even service them as I did, they may have thousands of notes under their belt as opposed to some individual out there having done far, far less or just a few deals who reads about notes or writes books.

Ben, your note is not subject to the SAFE Act, (FYI for other readers)but if it were you'd need to use a broker for a lawful note, so suggesting some consultant who may not be a broker will really kill the marketability of a note, no investor will buy a note originated illegally. BTW, an attorney can be used, but I have not met or heard of one who was really a loan underwriter. I suggest a note broker/mortgage broker, not just an originator but one who does seller financed transactions and commercial  transactions. Then use an attorney who is local. :)

Ben Bishop · Answer

Thanks for all the great advice - especially the Rickabaugh book. I was just planning to hold the note, but it certainly would be nice to have the option to resell.

As for marketing, I have it up on Loopnet now, but haven't paid for the premium listing so I haven't had much interest. This is in a college town area, so there are some local investors, but the pool isn't as deep as a metro area.

David Beard · Answer

A local mortgage broker is not likely to know much about the optimal construction of a note from a sellability standpoint.  Pros recommend balloons of 5-10 years.  Balloon notes inside 5 years are panned by note dealers due to the statistically low likelihood of the borrower being able to refinance out of the note that quickly.  It's a setup to a foreclosure scenario, and a note buyer will not give credit for a payoff at a 2 to 3 year point.  In fact, your note might not be marketable.  Remember as well, you are going to get top dollar by offering seller financing, and it may also take awhile for the appraised market value to catch up with your selling price, which is just one more reason why the buyer will need some time.

No need to see nefarious intent behind every bush.  A note consultant knows fulls well that you will shop your note around when/if you wish to sell it later (after all, they're educating you on how the note market works).  To state that they're running around recommending note structures that will allow them to screw you out of your note at a later date is silly.

Also note that a KEY part of the reason you are seller financing is to defer the recognition of cap gain taxes.  You don't want to get paid out in 3 years, and you also need prepayment penalties in there to discourage this!  Your hometown mortgage brokers are not up to speed on all of these implications.  I'd highly advise that you educate yourself, as the involved dollars are no doubt very large, and the link I provided is a good start.

Yes, you need an in-state attorney involved in drafting the documents in compliance with local law, but the standards for how to optimally construct a note are pretty standard.

Bill Gulley · Answer

With seller financing, you do not simply offer financing as a canned product, the deal needs to be viewed on a cases by case basis.

I suggest you get with a mortgage broker for assistance, not a long distance "note consultant" as there always seems to be slanted toward their strategies. For example, they may suggest a 10 year balloon, well, that would be discounted under the same conditions more than a 3 year note due to the longer term, in other words it may be something that fits an advisor's plan especially if they were to offer to buy it, but not great for you.  Use a local mortgage broker who does commercial loans to advise you. An RE attorney can draft it.

I also suggest you use a loan servicer, might search here on BP as to the services.

All you need to say in any ad is that "Seller will consider financing", that should bring investors out of the bushes.

I'll bet you get offers with seller financing, many will probably be newbies (less than 5 years in the business), so select your buyer carefully and look to their ability to manage and their track record, 10% down can be eaten quickly and they can run off tenants, lose them all in some situations and while you may get a building back, you may lose money......so look into the underwriting the deal carefully with a qualified underwriter (mortgage broker/banker). :)

Jon Holdman · Answer

Are properties like this on the MLS in your area?  Loopnet?  With local apartment brokers?  I don't think you need to do anything too fancy.  Get it into whatever conduit is used in your area.  That's where potential buyers are looking.  Add comments that owner financing is a possibility.

David Beard · Answer

I would advise that you first research the features that will make your note attractive to buyers should you want to sell it down the road, or your heirs need to liquidate it (but hoping that you outlive your note!!).    You may even want to hire a note consultant to advise you.

Here are some bare minimums:

* Good down payment - at least 10%, preferably 15-20%
* Healthy interest rate - at least 8%
* If you want to put a balloon feature in, make it 7-10 years out
* When you assess the borrower, pull their credit report and keep it with your file
* Use a note servicer to establish a verifiable record of the timeliness of the payment history (or keep meticulous records yourself with copies of all checks)

I thought this below was a good read, and I basically plagiarized the above from it.  I notice that the author Dawn Rickabaugh has posted here a few times lately.  She apparently consults on this stuff all day long, so might be worth considering given the dollar amount involved with your property.  [No, I don't get kickbacks and have no affiliation, lol.]

http://www.scribd.com/doc/134120853/Seller-Financing-on-Steroids-Dawn-Rickabaugh

Promoting a seller financed property?

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