Updated about 10 years ago on . Most recent reply
Insights on Selling Owner Financed Homes / Notes
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 ;-)
The advantage of offering seller financing on a for sale listing is that the seller is attracting a pool of buyers who may not be ready or want to go through the process of conventional mortgage underwriting. You create your own "seller's market" while you are one of a few owner financed listings available to more buyers who are not mortgage ready.
In a straight forward transaction where most sellers and buyers are accustomed to, buyers either comes up with all cash or borrow money from mortgage lenders to pay off seller at closing. For these cash sales, your listing is competing against many other listings on the market for those ready buyers, and you could possibly be selling at a discount to minimize your days on market.
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. You could also avoid some short term capital gain and receive long term income from the notes you hold. (Consult your CPA for individual situations). If you are willing and able to hold the notes for its entire term, the total with interest you would have received over time could be 2-3 x your sold price. (Financed buyers see the truth in lending disclosure from their lenders, they would pay 2-3 x the price over the years of the loan.) Instead of the mortgage lender receiving the extra money from interests, you are.
While considering seller financing, consider the possibility that some day down the road you may want to get a lump sum of cash from the notes and not wait until the note is paid off. Here is when the note is up for sale and a note investor pays you off and become the new holder of the note.
There are many factors influence the buy price of your note. The investor who pays you a lump sum of money is looking to profit from the future payments, but at the same time risking borrower's default and subsequent dealings with foreclosure and resell process. The location, type, current market value, loan to value ratio, down payment, payment history, type of occupancy are the most common things a note investor would evaluate and determine what is a reasonable buy price to offer to you. Every note is different and every investor is different, it is hard to have a set formula for note buying quotes.
Seller financing can be offered with the sale whether the property is free and clear or not. The seller can hold the owner financed note long term if there is no underlying mortgage or due on sale clause on the mortgage. If there is an underlying mortgage that must be paid off as title transfers, 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.
As newly created notes with no payment histories are considered more risky, it is likely that the note buyer needs a reasonable discount on the note's face value if you must sell that note at the same time the real estate transaction closes. The end result could be very close to if you would have sold your house to an all cash buyer for a quick sale.
If you currently have a note for sale or considering selling a home with owner financing, get a free and no obligation quote from http://cashpaperbuyer.com/sellersolutions/ So you can get a clearer perspective of how it works for you specifically. (Private note holders please, this site is not for institutions looking to sell pools of notes.)
Most Popular Reply
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.