Insights on Selling Owner Financed Homes / Notes

Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes

10y

Originally posted by @Account Closed:

I read a number of note selling threads and noticed some questions on how it works. So I want to post some of my insights and hopefully this could help someone who is looking to sell a house with owner financing or wants to get cashed out on an existing note.

(Your comments and insights are welcomed ;-)

You several ideas that are incorrect.

1. "With seller financing, your property could be sold at or slightly above market value because your terms are more feasible to the buyers than your price."
- Absolutely wrong. Financing does not increase or decrease the value of the thing that is being financed.
2. The tax statement of avoiding capital gains is a bit speculative in nature and the reality of it all depends on many things not actually defined prior to the statement.
3. The total interest a note holder receives depends on the interest charged and the term of the loan. At 7.2% the interest paid will be double the original balance every 10 years - generically. The rate can be less and the term can be less or more. Certainly not a given.
4. While it is safe to say that every note investor is indeed a different person - like minded folks tend to hold similar values for things.
5. The underlying mortgage should be but does not have to be paid off. It really depends on the deal and circumstances. If the existing loan is not paid off then any lien placed on title is subject to or junior to the existing lien.
6. Arranging for an investor to show up and fund the loan at closing is called "Table Funding" and is an act that requires a license. That is NOT Seller financing. It is brokering a loan. A license is required.
7. The ideas around another investor coming in and "eventually" taking over the note are not seemingly correct. Most of that idea probably needs to be omitted.
8. All newly originated loans have no payment history. Payment seasoning does not necessarily increase or decrease default risk.
9. Selling a loan at closing - bad idea. A Seller Finance loan that has intentions to transfer to another investor at closing has many issues and it is not a strategy that most SF folks should ponder. It will be way too much of a headache.
-if a seller has a desire to "originate with an intent to sell" that is not really Seller Financing. What they really should have done is sell the property outright to a buyer who didn't need seller finance.
10. FINANCING DOES NOT CHANGE THE VALUE OF THE COLLATERAL.
- it is more logical to assume any seller will only sell at or above X value. X value can be achieved with ANY financing or all cash.

Sneaky little commercial in the end. Some of those misconceptions you have would give me pause about purchasing a note that you directed to be originated. There is large chance you are creating defects that will increase the given discount on the loan.

Seller Finance folks need to be careful on who they take direction from in regards to setting up their financing and any sale potential in the future.

You can't table fund a Seller Financed deal - it is no longer a seller financed deal if another investor actually funds it at the table. Licensing applies and a lack thereof would cause discounts or rejection.

1 Reply

Account Closed

OP

Private Financing Consultant · Honolulu, HI · Member since 2010 · 132 posts · 27 votes

10y

For all members reading this, I did not intend for it to be long paragraphs that take your time to read and follow, but I must address to Dion’s comments because there seem to be some confusions.

Good Evening Dion,

Thank you for replying with your detailed comments shortly after my first post was submitted. I’d like to share my perspective and so perhaps it will provide some clarification.

1. Financing does not affect the value of the asset. You are correct, and I have never mentioned the property’s value is increased or decreased with seller financing. However, it could be sold slightly above it’s comparable if the buyer is willing to pay.

For example, 2 identical houses built right next to each other are both for sale for $200K. One is being offered to cash and bank financed buyers and the other one is being offered to buyers who can not bank qualify, the seller is willing to hold the note for 20% down, 7% interest, 30 year amortization. Financed ready buyers are not interested in the house with owner financing and they are more than likely offering something less than asking price, 90-95% in some markets ($180K - $190K). The non-mortgage ready buyers are not even able to consider the house without owner financing, their only option to own a house is to buy with terms. While some may negotiate for a lower price, some may not because they want to secure the purchase by buying at full asking price $200K. So hypothetically, the $20K - 10% difference between these 2 houses sold (one at $180K / one at $200K) is $133/ month more for the buyer buying at full price with 7% interest and 30 year amortization. This buyer is happy to own the home now vs. having to wait until he is mortgage qualified and either the house price or mortgage interest rates may increase in the future.

Back to my original post that house with seller financing could be sold slightly above its market value, the market value is determined by what people are willing to pay. Buyers, appraisers, real estate agents and other professionals involved in valuing the asset look for similar assets in close proximity that are sold recently to estimate the value of the subject property. If most sold comps with conventional financing are sold 90-95% of asking price and the seller financed house sold at 100% of asking price, then the seller has sold slightly above its value where it would have been 5-10% above that 90-95% sold price to asking price ratio.

2. Table funding involves a licensed loan originator - it occurs when the loan originator does not have access to the funds necessary to make loans and then hold them. The loan originator forms a relationship with a third party lender who provides the funds for closing and immediately takes the assignment of the loan. This is for bank financed buyers who take out mortgage loans to buy any house for sale.

Seller financing is NOT for the seller to provide any actual funds to the closing for a buyer to purchase seller’s home, or any other homes on the market. The seller has the right to offer terms to the buyer based on his equity in the home so the buyer can pay off the seller over time. Seller does not need a license to offer owner financing (seller held mortgages).

In the event that the underlying mortgage must be paid off as title transfers, for example, ($100K pay off amount for $200K sold price), if the buyer only came up with 20% down payment ($40K), there is not enough funds seller has otherwise to pay off the $100K underlying mortgage. At this time, seller holds a promissory note that the buyer shall pay $160K, 7% interest, for 30 year amortization, seller has the option to sell the note to a private note buyer in order to receive a lump sum of cash that is enough to pay off the remaining $60K to the underlying mortgage and the rest is his cash to keep from selling the house & note. Neither the seller or private note buyer needs a license. If the seller does not personally know a private note buyer, an intermediary knowing the wants and needs of both sides can help introduce and make connections so they can deal directly with each other and make the transaction work. The intermediary is a introducing party and does not need a license.

3. If a seller has a desire to “originate with an intent to sell” - The word you used “originate” seems to be associated with loan origination, and that is a process which requires license, origination fees, processing fees, underwriting fees, etc. and it is for a buyer to obtain new loans from the mortgage lenders. I used the words “created seller financed notes” to avoid confusion. Again, the purpose is to have “I owe you promissory note” to pay off the seller’s equity in terms of principle and interest and whatever stipulations in the event of default.

It is always good to have exist strategies as you never know when a lump sum of cash is more valuable to the note holder than holding it for all of the future payments. Banks sell notes all the time and private note holders sell their notes all the time.

Should seller just sell out right to cash or mortgage ready buyers? It depends. From the record of a seller data services company, there are 116,178 seller carried back loans with balances $30K or greater in 2014 in the US (10,137 in your state Florida). Each one of them had a reason to sell with seller financing.

4. I agree that some other points of discussion depend on individual circumstances, I have provided the general idea and already made statements that there are variables affecting outcomes and also to check with CPA for individual tax scenarios. Just like a bank may offer to the general public 3% fix rate for mortgage, whether the borrowers can get that type of loan depends on their credit, income, down payment, expenses ratio, type of asset to be purchased, and many other factors.

5. “Sneaky little commercial at the end”. I believed the Bigger Pocket forums allow mentioning or referring to a business or service as long as the discussion mainly benefits members who want to exchange knowledge and advice. If this does not comply with the rules, I would rather consult with the forum’s moderator and have that part edited.

6. “Notes that you (I) directed to be originated... There is a large chance you are creating defects that will increase the given discount on the loan.” I DO NOT originate loans or direct anyone in setting up their financing for potential sale. The website I referred to is strictly for note holders to get quotes and possibly be lined up with a note buyer if buy prices are favorable. Quotes are free and no obligation and yet no one discourages parties doing business directly to do their own due diligence.

Dion, your comments seem to be attacking me personally.

I have not done any business with you in the past and you do not know me personally. However, your comments seem to be based on your own assumptions rather than how I actually handle business and you are scrutinizing me every chance you can. If your false statements damage my reputation in anyway, I would consider seeking legal remedies. But I hope that was not your intention.

1 Reply

Dion DePaoliPro Member

Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes

10y

@Account Closed

First and foremost - nothing in my post attacked you personally. It did however call into question the direction you gave and asked for feedback on. Sort of the point to the boards.

In response:

1. The statement I made twice is financing does not increase the value of the collateral. Nothing you typed changes that. Further much of that story is contrived to attempt to suit your narrative. You are specifically defining the roles of the parties and the rational behavior of the Buyers in an attempt to make your point. The problem is you omit other rational behaviors that would also occur. Either way, the statement you made which was specifically: "With seller financing, your property could be sold at or slightly above market value because your terms are more feasible to the buyers than your price." - is the statement of issue. Offering to finance the purchase doesn't make the property worth more than market value. That is a predatory lending act. Period.

A seller doesn't rationally hold out for SF if the intent of the Seller is to sell. He/she simply holds out for the right price. In your example you assume qualified buyers won't offer a price of $200k which is an input into the equation to suit your narrative. Both sellers 1 & 2 can hold out for the same price. Further your assumption that a buyer seeking SF won't seek a similar discount to that of a conventionally qualified buyer seems flawed.

2. Table funding is when a loan is capitalized by a third party at the closing table. This does indeed require a license. It is not limited to banks or conventional financing. It applies to all.

I did not say Seller Finance requires a license for all transactions. There are exemptions on a per state basis where a Seller may offer financing to a Buyer and be exempt from license requirements. HOWEVER - that does not include table funding. Table funding a loan, even if the Seller acts to originate, is a licensed act. It is a third party ultimately offering financing. In order to work with a borrower and a lender for a fee a license is required.

All I did was respond to your statement: "...seller should arrange a note buyer to come up with cash in order to pay that mortgage off at closing as well as take over the risk and benefits as the eventual note holder." - Which for the record, is table funding.

You are adding in Subject To details that really do not need to be included.

An intermediary who finds an investor to table fund a loan requires a license. That is the definition of brokering a residential loan and in all 50 states that act requires a license to loan to consumers.

3. Just because you want to use different words to describe the act doesn't mean the act is something different. The world doesn't work that way. In Seller Financing the seller originates the loan. If an RMLO is used the RMLO is the originator and the Seller funds the in equity. A third party stepping to table fund the loan is subject to Lending license requirements since they are not funding in equity they are funding in cash. If the Seller acts as an intermediary there, they require a license. If a third party acts as an intermediary they require a license. Those are textbook definitions - see SAFE Act.

Further, to say "...paying off the Seller's equity.", is not really correct. The act of selling creates an opportunity for a Seller to realize their equity. Debts are paid off. Equity is not debt.

4. ---

5. Advertising for companies to buy or sell something is restricted to the Marketplace. It is in the rules of the boards. Just calling a spade a spade.

6. The commercial you posted says: "If you currently have a note for sale or considering selling a home with owner financing....."

That sort of implies you are trying to assist with table funding. As stated above, that is a licensed activity.

Again, no where did any of my responses attack you personally. In conclusion of my post I stated:
"Some of those misconceptions you have would give me pause about purchasing a note that you directed to be originated. There is large chance you are creating defects that will increase the given discount on the loan."

That statement is fairly clear, I buy loans often and know a thing or two about a thing or two about them. Based on the discussion in this thread, I would take pause on loans that heed your direction as some of the concepts you hold are not the best and some of those ideas could cause defects in the loan which will warrant a discount. Examples of such defects include: (1) Attempting to justify SF as a means to increase the value of collateral (2) Not properly understanding origination standards and licensing requirements (3) The Subject To information which doesn't really belong here (4) Most of what I said in my first post.

You posted on the boards and asked for experienced folks to give you feedback. I did. If you choose to be offended by my post that I suppose is your prerogative however my post was meant (and I believed delivered) to give you detailed feedback on your post just as you asked. An alternative to be being offended by my post is perhaps working on those ideas which are brought to light to improve your understanding and operation. That however is your choice.

Good luck.

0 Reply

Brian Gibbons

Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes

10y

@Account Closed just posted is about as clear as you can get it

If you really want to understand technical note brokering and licensing & regulation issues, I would follow Dion and read everything he has written, there is nobody better on this BP board

0 Reply

Account Closed

OP

Private Financing Consultant · Honolulu, HI · Member since 2010 · 132 posts · 27 votes

10y

The purpose of discussion is to share insight and open up options and creativities for those who are trying to make things work more efficiently. In some cases, what is tried and truth to one may have been an absolute no way for another. Or a blind spot could be addressed from a different angle so the person involved can see a clearer way.

The market is fluid and every day there are many buyers and sellers with various motivations. I work with more than a dozen realtors in a number of states to evaluate sold properties and I am confident to say that the majority of sold to listing price ratio increases from all cash, financed, and seller financed. (Term sales being the highest). Is that an absolute rule? No, of course it depends on each individual transaction, but many have worked that way.

Comments on the subject are definitely appreciated, but twisting arms and making false assumptions seem true is not being courteous. My post suggested some common reasons of why sellers have sold via seller financing, what options they may have for exit strategies, and what to expect from a note buyer. I did not choose to be offended by your post because I expect to see all different points of views. However, your tone was very critical and you repeatedly diminish my credibility by saying things that you have no reference to how I work.

Therefore I replied, because I can not agree and accept a comprising position based on your false assumptions.

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Dion DePaoliPro Member

Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes

10y

I dont know what much of that means but trust me, there is nothing 'new' in real eastate financing. There is nothing creative or magical about financing. It is, what it is. Financing things has rules. Ignoring those rules and you will get you in trouble.

As far as the offense idea. I have mentioned more than once, if you choose to take things personally, that is your option, I comment to offer insight to readers. If you choose to disagree, that is indeed your option.

I wont stop being critical of ideas which are of concern. Again, sort of, one of the points of BP. You may choose to ignore it but others may not.

Thanks for the discussion.

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Insights on Selling Owner Financed Homes / Notes

Insights on Selling Owner Financed Homes / Notes

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