Tuesday, May 19, 2009

Seller financing? Listen to Donald Trump?

Just got this email today:
Hi Frank,
I was watching Donald Trump on Larry King Live and Donald was promoting the idea of buying utilizing seller financing. I went to google and found dry descriptions of seller financing. Then I went to your blog to look for an insiders perspective on seller financing. Unfortunately, there's nothing there!

Is seller financing worth writing a blog post on? Maybe it's a waste of my time. It does kind of seem like I could hear about it on a late night infomercial. Your thoughts?

Thanks,
Jay

Hey Jay,
Not only do I love the Donald (I applied for the Apprentice, met him and got to the semi-finals in the selection process), I LOVE creative financing. But they rarely work out.

For seller financing to work, the owner has to have enough, or all, equity. With people being underwater now, that isn't too likely. Also rarely do desperate people own their house 100%.

Example for Partial Seller Financing:
$500,000 home.
$200,000 loan on the home.
$300,000 equity in the home.

The buyer gets their own loan.
Option 1) Buyer gets a 50% Loan to value ($250,000 loan) and the buyer puts down (their own money, cash) anywhere from 0% to 45%. In other words the seller can hold a note (loan) for a much as $250,000. They become the second trust, the second lender.

Option 2) Buyer gets a 80% loan. This is a more typical loan. But then they don't have the 20% cash to put down. In this case the seller holds a note for anywhere from 1% to 20% of the home's value. Leaving the buyer putting down anywhere from 0% to 19%.

Hurdles: The lender has to allow for this. They might not allow a buyer to put ZERO MONEY DOWN. They want the buyer to have some skin in the game.

OR
FULL Seller Financing: A buyer finds somebody that owns the house outright. No loan. They can lend you the entire amount. As in 100% down. No lender can tell them what to do. Or they can do a loan for 95% or for 90%. The more the buyer puts down, the more likely the seller will feel comfortable giving the buyer a loan (if you miss a few payments they get the house and keep the down payment).


What rate?
Then you have to ask at what rate. This can be anything. It can be HIGHER or LOWER than market rate. The seller might want the buyer to refinance. One way to do this is to say "Ok, I will give you a rate of 7%, and you get your credit in order and pay it off as quickly as you can."

Or they might give a LOWER rate than the market. Why? Well if their alternative is 2% or 3% in a CD, they might be ok with a 4% loan to the buyer. Also watch out for a prepayment penalty. The seller might not want you to refi (except when you sell).

Also you have to look at the big picture. A seller might give a 0% loan on $50,000 (a part of the purchase price) with a one time balloon payment in 5 years. Why? Well he might do that to keep things simple. For example if the price is $500,000, but you all agree to $505,000 with a 0% loan.... it starts to work itself out (watch out for tax consequences or interest payments vs a balloon payoff).

Why would the seller do seller financing?
If you are in an area that many buyers can't qualify for a loan, this can double the number of buyers. If you are selling a $200,000 home and you would need to drop it to $150,000 to sell it, you might instead keep it up at $200,000 but offer aggressive terms like a 2% loan. So those that only care about their monthly will be attracted to the offer.

Why would the buyer do seller financing?
The buyer might not qualify for a loan any other way. They might have 10% or 20% to put down, but their rate might be 8 or 9% because they can only get a sub-prime.


Conclusion:
So while it sounds like a great idea, there are very rare instances where it can be used with FULL seller financing. But Partial seller financing can be an option. Also look into Options to buy, rent to own and Lease Purchase. There are MANY scams in these categories, but if done correctly, it can be a great alternative to the banks.

You can also search FranklyMLS.com for Seller Financing in the remarks. There are 88 in Virginia under $800k

Hope that helps,

Frank
Broker FranklyRealty.com