by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
Real estate agents have consistently used pricing as the primary mechanism to sell your home. Don’t forget owner-financed terms as a selling feature. Let me give you an example of how to offer a seller-carryback (and cash it out):
You listed your home at $500,000 and it isn’t selling. You are getting nervous and your real estate agent thinks you should lower the listing price to $460,000 to attract more potential buyers. You’ve already come down $50K. Don’t drop the price… just yet! Try offering a seller-financed second mortgage at 12% for $150,000. You can sell that note as early as one day after COE (settlement). You may only get 80 cents on the dollar when you sell the note but that is only $30,000 (less than the proposed reduction). If the home was fairly priced at $500,000, it might make sense to offer terms before reducing the price.
Let’s see how this would work:
Buyer obtains a 70% first mortgage for $350,000 (that isn’t too hard to get, even with lousy credit). You offer a $150,000 second mortgage at 12% and sell it for $120,000 after closing. You net $470,000.
When you offer terms, you open the property to people with recent bankruptcies, past credit problems, and hard to verify income. Seller-carrybacks significantly expand the pool of buyers. Your real estate agent can advertise in the paper and attract many buyers who need this help.
Realtors: Customers who buy on “owner terms” are grateful and become excellent referral sources. You will also develop quite a list of buyers from your advertisements to call when your next listing is not moving.
So what’s the downside?
1- You have to have equity in your home or you’ll be bringing cash to the closing.
2- You have to employ a savvy mortgage broker (or note broker) to market that owner-financed note. The secondary market for private mortgages is not large and highly illiquid.
3-The seller may have to hold that note for a period of time (and collect 12%).
4-The buyer may eventually default on that note and the seller now has to service a first mortgage to protect his interest.
Resources for private mortgages and secondary note markets:
Finance with Owner
California Mortgage Association
Mortgage Investments Website
J.G. Wentworth
American Settlement Funds
Marty Van Diest says:
Brian, have you been able to consistently find buyers who will give 80 cents on the dollar for seconds?
What criteria would a note buyer need to give 80% for a second note. My experience has been that we are lucky to get about 60%. Of course, over the last few years the places we sold with owner financed notes were only the properties that didn’t qualify for a mortgage. But it has been difficult finding buyers for a second, let alone 80% buyers.
It may be different in the civilized world…I’m in Alaska
January 20, 2007 — 11:37 pm
Brian Brady says:
Alaska does present a problem, Marty, because it is definitely “off the neaten path”. I’ve seen notes sell for as much as 1% over par if they’re low LTV notes and first liens.
Here is an unscientific but estimated pricing guide:
CLTV Price (percentage of par)
100 80
95 85
90 90
80 95
70 100
60 102
Again, it’s just a ballpark from my experiences. You might try developing a market of buyers for these notes who live in AK; that should get you better prices
January 21, 2007 — 12:30 am
NVmike says:
So what’s the downside?
For the buyer, the downsides are that s/he’s overpaying for the house and then getting reamed a second time with a 12% second mortgage.
January 21, 2007 — 1:19 pm
Brian Brady says:
Ah, Mike. Just when I thought we were making some progress here.
January 21, 2007 — 7:11 pm
Drew Nichols says:
This is a new and interesting concept to me. I’m also new to the business, so take that comment for what it’s worth.
I’m wondering how easily the “savvy mortgage broker” will be able to sell in an illiquid market. How illiquid are we talking, here?
Thanks for a thought provoking post.
January 21, 2007 — 8:57 pm
Brian Brady says:
I’m glad you asked, Drew. A “savvy mortgage broker” or professional note broker can get you a quote and commitment during the escrow process and prior to closing. Refer to the “rough” pricing 4 comments above.
January 21, 2007 — 9:04 pm
jf.sellsius says:
While not directed solely to real estate negotiation, this author has listed the 10 commandments of negotiation and not dropping the price is one of them. Then again the author might not have been faced with a DOM of 240.
http://tinyurl.com/269zev
January 21, 2007 — 9:15 pm
Danilo Bogdanovic says:
So many sellers (and agents) get stuck on price alone and forget how important the remaining terms are. There’s a reason why the paragraph about the sales price is only 1 out of 33 paragraphs in the sales contract in Northern VA.
If I had two offers on the same property where one was for $380K, had a strong lender letter and excellent credit while the other was $390K with a weak lender letter, mediocre credit and a request for 20% seller financing, I would recommend the offer for $380K to my clients all day long.
My clients may have the opportunity to make more money, but they’re gambling on actually selling or collecting.
After all, there is a reason why the buyer has mediocre credit and couldn’t secure more financing or come up with a higher down payment.
January 22, 2007 — 9:42 pm
Brian Brady says:
…and you’d be right to advise them that, Danilo.
My solution is for when you have NO offers on your listing and want to control the financing. After all, 70% financing is easier to obtain from an institution than 100%
January 22, 2007 — 9:59 pm
Danilo Bogdanovic says:
I see your point and that may work better in other markets. But you don’t see it often in the market I’m in and sellers don’t like the notion of taking on the added risk of seller financing.
In the end, it always comes down to price. If it’s not moving, it’s not priced correctly for what it is. Trying to get a buyer to pay a higher price just because your offering seller financing won’t work unless the buyer and their agent is a complete idiot. And if they are stupid enough to overpay, would you really trust them with paying back your loan?
January 22, 2007 — 10:14 pm
Brian Brady says:
“But you don’t see it often in the market I’m in”
That’s a short-term memory, Danilio. Seller financing was often used in the 90’s in Northern Virginia; it’s the tool for tough markets. That’s why I posted it.
Pricing IS a function of terms. That’s why prices are sensitive to interest rates. Interest rates affect affordability. When you make a property more “affordable” to a buyer who can not obtain financing under institutuonal terms, you can charge a premium for that property.
Alternative financing methods are used for buyers who have good credit, also.
January 22, 2007 — 10:28 pm
Brian Brady says:
Investors trade notes for downpayment all the time in 1031 exchanges. It’s often a way to avoid “cashing out” of a property. That, however, is an issue for Jeff Brown.
January 22, 2007 — 10:29 pm
Danilo Bogdanovic says:
And that’s selective memory, Brian. In the 90’s, there was only a tiny fraction of the loan options available today, the main reason why seller financing was so much more popular. It’s currently a tough market, but I have not come across seller financing even once during this tough market.
You’re correct that price is a function of terms, but it’s only one piece of the puzzle. Sellers needs to weigh the pros and cons of the entire contract, not just the paragraph that lists the purchase price.
There are hundreds of loan options and sub-prime lenders available today. If the buyer isn’t approved for that high of a purchase price, there’s probably a good reason why and the buyers shouldn’t go overextending themselves by getting seller financing.
But overextended buyers is a whole different discussion in itself…
January 22, 2007 — 11:06 pm
Brian Brady says:
Well, Danilio, I’ll defer to your opinion. My selective memory is more frequent as I am entrenched in middle age.
Wait a minute…didn’t Yogi Berra say “It’s deja-vu all over again?”
Just getting you prepared for the coming credit contraction, Danilio.
January 22, 2007 — 11:51 pm
Danilo Bogdanovic says:
I must that I do enjoy the debates we seem to always get into and they definitely keep me on my toes at all times.
And I hope that they’re at least entertaining to those who come across them.
Till next time!
January 23, 2007 — 10:06 am