Insights on Selling Owner Financed Homes / Notes

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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.) 

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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.