WHAT IF WE COULD MAKE YOU A FULL PRICE OFFER?
Question: If you’re going to deposit proceeds from a property sale into an investment fund or money market, which could be risky, why not keep the money in your safe asset and earn a fixed 5% return paid up front in monthly installments? You’ll save 15% or in Capital gains tax as well!
Example: Property sale proceeds $300,000
– $45,000 (15% capital gain tax)
1 year simple interest x 2% (if you can find it)
$5,100/12 months = $425 a month
Owner Finance position $300,000
1 year simple interest x 5% (our rate / no cap gain tax)
$15,000/12 months = $1,250 month
Cash out when you choose. We will finance 1 – 5 years or longer with a
balloon payment at end of term.
The number one fear for most first time sellers who provide financing is…
What if the buyer stops paying?
Read on and hear what experienced investors have tosay about the Advantages of Owner Financing
1. You can sell faster and for significantly more even in a down market
(We pay Full price for most properties)
2. Your interest rate (return on your money) will be significantly higher. We
offer up to 5%
3. NO Capital gains tax (currently 15%) for years to come
4. Owner Financing is secured by the property and handled by Mortgage
Servicing Companies the same as traditional mortgages if the buyer stops
paying you get the property back, all interest, tax and insurance payments
made up to that point. Servicing companies handle the financing, collecting
payments, sending notices, charging fees and even handling the eviction
process if needed.
5. You are no longer responsible for taxes, insurance, maintenance, etC
6. You Retain title: If the buyer defaults, you keep any payments made and
improvements that may have been done to the house.
7. Can sell “as is”: Sell without making costly repairs that traditional lenders might require.
8. A good investment: Earn better rates on the money you raised from selling your home than you would from investing the money elsewhere.
9. Lump-sum option: The promissory note or your entire portfolio can be sold to an investor just like banks sell mortgages to other banks, providing a lump-sum payment right away.
10. You Can Grow or start a portfolio we may be able to purchase additional properties you own
11. Sell faster: Sell and close faster since buyers avoid the mortgage process.
12. Income: It’s a form of passive income. You collect monthly interest checks.
Many investors actually look at a buyer who stops paying as a good
thing because they have the interest payments made on the front end,
savings on the tax payments made and any upgrades/maintenance done
on the property. If the buyer stops paying, they can have them removed,
and they can actually go ahead and resell it again with seller financing
and typically for even a higher price at that point. If needed, they’ll have
the money they received on the front end to put into any maintenance or
repairs. Worse case scenario (or as some investors look at it, best case
scenario), if a buyer does stop paying, the process is very simple
because we have structured the seller financing where the title does not
transfer to the buyer until after they make all of the payments to pay off
the note. Similar to a car loan.
A note and mortgage is a secure form of financing and is the same structure banks use when lending on a property. The seller creates a note outlining the amount borrowed and terms for repayment. The mortgage securitizes the seller with the property in the event of default. The buyer is put on the title with a deed and the mortgage is typically recorded in public records.
A land contract can also be called a contract for deed or agreement for deed and works similarly to a note and mortgage. However, instead of the buyer gaining title to the property, the seller remains on title until the debt is repaid in full.
Some sellers prefer the structure of a contract for deed because it can be faster and more cost-effective to regain title in the event of default. Many states allow eviction or forfeiture, which are faster and cheaper than a full foreclosure. The procedures in the event of non-payment vary from state to state.
It’s up to the buyer and seller to determine the terms of the deal, such as the length of the loan, the amount of the down payment, the interest rate, and if there’s a balloon payment. Some sellers have specific terms in mind, while others are open to negotiating. However, you need to decide on four main factors.
Length of the loan
This is the period over which the buyer will repay the loan. It can be 1-5, 10, 15, 20, or 30 years — or anything in between. While 30-year mortgages are sometimes used in seller financing, it’s more common to see shorter terms, such as five to 10 years, with a balloon payment at the end. Even if a balloon payment is agreed upon in year 10, the loan can be amortized for 30 years to keep the buyer’s monthly payment low and increase the interest collected by the seller.
- ● Fixed-rate loan: The interest rate and payment stay the same throughout the entire term. The principal balance of the loan is gradually paid down with regular payments.
- ● Adjustable-rate mortgage (ARM): The interest rate adjusts periodically.
- ● Interest-only loan: The buyer only pays interest for a set period, then usually makes a large balloon payment toward the principal.Fixed-rate interest loans are most common because of the ease in record keeping. Adjustable-rate mortgages fluctuate over time and, if not actively monitored, can lead to changes in the principal and interest being miscalculated or missed altogether. Interest-only loans are most commonly used with investors, especially for fix-and-flip loans.
Various owner-financing structures can affect the buyer’s security in the property and the process for regaining title if the buyer defaults.
Promissory note and mortgage or deed of trust
A promissory note and mortgage (or deed of trust, depending on the state) is the most common form of owner financing. This is the same structure a bank would use and is what people think of when they think mortgage.
The note outlines the amount the buyer borrowed and terms for repayment to the seller. The mortgage is a separate document that securitizes the seller with the property in the event of default. The buyer is put on the title with a deed and the mortgage is typically recorded in public records. A promissory note isn’t recorded and the original should be held by the seller.
A note and mortgage is the most secure form of financing for the buyer and the seller.
Contract for deed
A contract for deed can also be called an agreement for deed or land contract installment, depending on the state of issuance. It’s structured like a note and mortgage, but instead of the buyer receiving a deed and being placed on title, the seller remains on title until the debt is repaid in full.
Some sellers may choose this structure because it’s less time-consuming and more cost-effective to regain marketable title of the property if the borrower stops paying. Many states allow eviction or forfeiture, which are faster and cheaper than a full foreclosure. The procedures for this vary from state to state and contracts for deed aren’t recognized in some states.
The legal instruments or contracts used for the seller to retain control of the property (Land Contract or Contract for Deed) contain a clause called a forfeiture process. An attorney would process a notice that’s sent to the buyer, giving them 30 days to correct the situation and pay all the fees that are due for the missed payment. After 30 days, it can actually be turned over to the eviction process.
When title doesn’t transfer, that’s possible. If you did an all-inclusive trust deed, the title does transfer in the buyer’s name, and you have to go through a foreclosure process which sometimes can take three, four, five, even six months.
The contract for deed and the forfeiture process with the eviction is typically about two months to go through. Sometimes even a month and a half. Again, it allows you to be put into a position where you have the control. You have control over the title, you have control over the property, and you can turn around and sell that again if needed. I hope this is helpful in exploring again. It’s not as likely that the buyer will default because there’s so much skin in the game, especially if they’ve been in the property for a period of time and have made improvements, but it does happen so it’s important you’re educated on that.
A servicing company handles the important tasks:
● Payment collection, including recording payments with the balance due, paid-through. date, and other important loan information. Servicing companies will report payment history to the credit bureaus, which is often beneficial for the buyer.
- ● Buyer outreach, which may include payment reminders, monthlystatements, or delinquency notices.
- ● Loss mitigation, or the collection process on the loan if the buyer stopspaying.The buyer signs a promissory note to the seller that spells out the terms of the loan, including the:
- ● Interest rate
- ● Repayment schedule
- ● Consequences of default
Servicing companies charge a nominal monthly fee depending on the status of the loan, such as paying or not-paying. A servicing company will keep you compliant with the current laws, which makes for a more passive, hands-off investment.
With seller financing in place, you have essentially been upgraded from a landlord to a lender or investor. With nothing to do but collect interest payments, you will have capitalized even further on your original investment.
A mortgage servicer is the company that handles the day-to-day administrative tasks of your loan, including receiving payments, sending monthly statements and managing escrow accounts. This is different from your mortgage lender, which is the financial institution that gives you a home loan.
When the loan servicer receives your payment, they distribute the money:
- ● Principal and interest go to the bank or the investor that owns the loan.
- ● Taxes go to the government.
- ● Homeowners insurance premiums go to the insurer.
- ● Mortgage insurance premiums go to the mortgageinsurer.
- ● Condo or homeowners association dues go to the association.
- ● Any other fees are disbursed to wherever they’re supposed to go.
As you can see, seller financing can be a great investment. Owner financing is not new, in fact property owners have been using this method for generations. Popularity of seller financing grew in the early 1980’s when interest rates were as high as 21% and it was a challenge to sell a property. It’s also a very popular method with investors today.
Please feel free to contact us with any questions or concerns you may have.
We welcome the opportunity to discuss other creative options as well.