Real Estate Marketing & Beyond
Most agents are well aware that creative financing often closes a deal that otherwise won't get done. Here we take a look at how sellers can improve their profit point and marketability by offering seller financing and still getting all of their money in a relatively short period of time. Of course, sellers are reluctant to carry the contract when they have to accept long drawn out installment payments. What agents fail to tell sellers is there is a huge and active secondary market for private mortgages.
Adding the phrase "seller financing" to a listing will at least double the number of prospective buyers. Seller financing also gets top dollar for the property because it's the only way many otherwise slightly under-qualified prospects can buy in today's continuing conservative bank lending environment.
Seller's can walk away from the closing table and go directly to the secondary note market but that isn't necessarily a good idea. Although, in these days of 1% or 1.5% savings account interest rates, discounting notes on the secondary market happens less often, seasoning a note makes it easier to sell at full value.
Discounting a note means selling it on the secondary market for less than the face value. A seller financed note with a face value of $150,000 might be discounted to $140,000 to reward the private investor buying the note. Obviously, that eats deeply into a sellers' profit.
However, because of the low interest being paid by banks for federally insured investments it's become more common for investors to pay full face value for interest returns in the 8% to 10% range that aren't insured. One way the seller can make a full face value purchase more enticing is by seasoning the note.
Seasoning the note only means holding the note for a year or slightly more. This demonstrates to the secondary note buyer that the person making payments on the note does so on time and is not likely to default on the note. Private lenders are willing to pay full face value for seasoned notes.
Another way a seller can use creative financing is with a balloon payment. Perhaps seller financing of a $100,000 loan at 10% that amortizes over 30 years but has a balloon payment due in 5 years. However, many buyers don't want a balloon payment and sellers take a risk that the buyer won't be able to find refinancing.
An alternative to a balloon payment is increasing the payment being made each year for 5 years. This reduces the amount of time it takes to pay off the loan. A $100,000 mortgage at 8% amortized over 30 years would start out with a $733.77 monthly payment. If this amount were increased by $100 each of the first 5 years, the loan would be paid off in less than 13 years instead of 30. The ending payments would be $1233.77.
If the loan was increased by $150 each year, the loan would be paid off in less than 11 years with an ending monthly payment of $1483.77.
The whole idea here is finding alternative ways sellers can offer seller financing that is a win-win scenario to both the seller and the buyer. Another creative financing technique many agents don't have in their toolbox is breaking the note up into multiple notes. Instead of one big $100,000 note, break into 5 $20,000 notes. The seller will find these smaller notes much easier to sell on the secondary market.
If the buyer can depend on a regular annual bonus from his or her employer, instead of increasing the monthly payment each year, a single substantial extra annual payment can be a way of reducing the amount of time required to pay off seller financing.
These are only a few of the creative financing techniques that agents should have available to close difficult deals.
Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.
Good article. I've been using creative methods to put deals together that makes sense for buyers and sellers in Southern California. By having the buyer terms reflect the existing amortization; the payoff is greater not requiring extended contracts for big principal reduction and earlier pay off to the seller benefiting all parties.