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GUIDE:
How to Use Owner /
Seller Financing to Sell a Property
In
response to
the many questions we receive on this topic, we’ve prepared a general Guide
to assist you in your decision-making. Shown below are some
of the highlights. For more detail and
additional information, you can download and view the complete Guide
in PDF format, as well as a Property
Sales Calculator in Excel.
After reading
through the entire Guide, please give us
a call - if you have additional questions or need help in structuring
your
planned transaction.
Here are
the
most frequently asked questions:
1. Should I
sell my property with owner / seller financing?
2. How do I
sell my property with owner / seller financing?
3. If I take
back a mortgage, how much will you pay for it?
Before
proceeding, it’s important to first define the terms and to understand
the
process. Typically, when
someone sells a property, the ‘normal’ method is to have an
institutional mortgage
lender (a
bank or mortgage company) provide the funds for the
buyer. This is done through a mortgage loan,
which consists of a promissory
note secured
by a mortgage deed or
deed of trust on the
property. The loan amount that’s provided by the
lender is based on a number of factors:
type
of property, credit of the buyer(s), use of the property, income to
debt
ratios, amount of down
payment,
etc. The lender analyzes all of this information to evaluate their risk
in the
transaction, to
determine whether or not the buyer can repay the loan.
With
owner-financing, the seller of the property is the
lender, thus is subject to
the same risks as would any
mortgage lender – but generally without the tools and level of
expertise to evaluate risk
to the same degree; or
to handle problems should they arise.
In many cases,
the party providing the owner-financing wishes to “cash out” - by
selling the mortgage loan
to an mortgage investor, rather than
just receiving the flow of monthly payments. The
investor
will in turn use those same (above) risk factors in determining whether
or not
they will buy the
mortgage loan, and how much they will pay for it.
Important:
If
the mortgage investor won’t buy the mortgage loan, then the holder
(you) can’t
cash out !
Q Should
I sell my property
with owner /
seller financing ?
A.
You first need to
compare the pros and cons of mortgage
lender (bank) financing versus providing the
financing yourself:
| Bank financing: |
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| Pro |
- You
receive all of the money from the property sale.
- Generally, will
provide a larger mortgage loan than an mortgage note investor will
purchase.
- Will pay off
underlying liens / mortgages at time of funding.
- The lender
takes all of the risk.
|
| Con |
- The approval
process may be time-consuming.
- Not all buyers
will qualify under lender guidelines.
- Closing costs
and or lender fees may be high
|
| Owner financing |
|
| Pro |
- It may
expand the market of potential buyers for your property.
- The approval /
qualifying process will likely be "somewhat" easier.
|
| Con |
- You take
all the risks, if the mortgage can’t be sold.
- You will take a
discount when you sell the owner-financed mortgage.
- You may not be able
to do a "simultaneous closing" - see below
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Q How do I
sell my property with owner /
seller financing ?
A. As
mentioned above,
with owner-financing, you
are the
lender. Just as the banks do, you need to pre-qualify the potential buyer.
In addition, you will be somewhat more
involved in the overall
structuring of the property sale transaction.
Offering
the property
for sale:
As a first
step, you need to know the real market value of the property you are
selling.
We
strongly suggest having
a full appraisal done, by a state-licensed appraiser. In considering
purchasing the mortgage
loan that you plan to sell, a mortgage investor (for the period of one
year
from the date of the
property sale by you) will use the lesser of the sales price
or the appraised value. For
example, if the property appraises at $ 100,000 and you sell it for $
90,000,
the mortgage
investor’s price to you will be based on the lesser property value.
Because
you’re providing owner
financing, selling the property at full or very close to the appraised
value is not unusual,
and the appraisal you’ve obtained supports that value.
To protect
yourself against committing to provide financing for someone who turns
out to
be not qualified,
you should consider stating in all your ads and subsequent Purchase
contracts: “Seller may finance, subject to
Seller approval” or similar wording
suggested by your legal advisor.
Qualifying the
potential Buyer(s):
As
the lender,
you need to know as much as possible about the Buyers in order to (a)
determine
whether they
qualify as buyers; and (b) if so, for you to use this information as a
basis in structuring the
overall deal.
Form 1003. Uniform Residential
Mortgage Loan Application. Your can
download this free form off the
internet; keywords “form 1003”). The applicant should fill our all personal
information - except for the
details of the requested mortgage loan -
and sign and date the Form. The
information provided, among other things, tells you whether or not they
have
the down payment
money.
Credit Report: Used in conjunction
with the amount of the actual cash
down payment, this is the single most
important factor in determining the marketability and value of the
owner-financed loan that you
intend to sell. Simply asking, then getting the reply, “My credit’s very
good, etc.”
doesn’t work. All mortgage lenders and mortgage investors work with
actual
credit reports and
credit scores, as should you. In general, and in today’s market, a
credit score below 650 is
not considered to be “good.”
Along with the
completed Form 1003, you should require that the potential buyers
provide you with a copy of
their current credit report. They can obtain their report for free or
at a
nominal charge over the
internet from a number of websites, including www.annualcreditreport.com,
(tel:
877-322-8228); www.experiandirect.com, www.freecreditreportasap.com,
Structuring the
Property Sale and Mortgage Financing:
One of the
factors involved in analyzing risk is the loan-to-value
(LTV): the amount of the
(new) mortgage
balance divided by the value of the property; i.e., $ 75,000 mortgage
loan / $ 100,000 sales
price = 75% LTV. Acceptable LTV’s vary, depending on the type of
property. A single family
owner-occupied property will allow for a higher LTV than will a
commercial property or a
land-only property.
Note:
Please see the full Guide for additional information and
examples.
Q If I take back a mortgage, how much
will you pay for it?
A Every
mortgage note is evaluated on a case-by-case basis, taking into account
all of the various risk factors:
type
of property, occupancy of the property, credit of the buyer(s), use of
the property, income to
debt
ratios, amount of down
payment,
etc.
The bottom line: Once the mortgage
investor has done
their analysis of the risk factors, the price
that will be
paid for the mortgage note then comes down to
the lesser of:
• The maximum amount
they wish to put into the specific deal; and
• The price they need
to pay to obtain the yield that they desire.
Conclusion: Based on all of the
above, it should be clear that all of
the above “risk factor” information
is
needed to provide you with an accurate quote.
We hope the
above information has been helpful to you. As you can see,
“Owner-financing” is
not quite as simple
as it’s sometimes made out to be. The key to using it successfully is
to first
obtain all of the
necessary information – before committing
yourself to being the lender. Then, based on the
quote you
receive from us, you can determine whether or not owner-financing is
the best
sales / financing vehicle for you to use.
Reminder:
Before calling us, and for a fuller understanding of what is involved
in the owner - financing process, don't forget to first download and
thoroughly review the complete Guide
; and also try some
tests of the numbers using the Property
Sales Calculator.
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Disclaimer: The information
provided herein has
been provided as a response to reader’s questions, and is
intended as a
general Guide only, and is not be construed as a quotation, or as
legal,
accounting or financial advice.
American Funding Resources, Inc. shall not be held liable for any
improper or
incorrect use of the materials or
information contained and assumes no responsibility for any user's use
of them.
In no event shall
American
Funding Resources, Inc. be liable for any damages, whether direct,
indirect,
incidental, special, exemplary or
consequential (including, but not limited to, business interruption or
loss of
use, data, or profits) regardless of
cause, and on any theory of liability, whether in contract, strict
liability,
or tort (including negligence or
otherwise) arising in any way out of the use of the materials and
information
contained herein.
Users are
encouraged to consult with
appropriate and
accredited professional advisors for advice concerning
specific matters before making any decision, and American Funding
Resources,
Inc. disclaims any
responsibility for positions taken by individuals or corporations in
their
individual cases or for any misunderstanding
and losses, directly or indirectly, on the part of the users.
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