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,JayHey 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:
$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.
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).
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.
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,
(sorry for the jumbled post. The copy and paste didn't work well)
First, I have to tell you, your franklymls.com its great, after trying every free option available, and some paid for, I think this is the best for this area. Now to business. Me and my wife own (and live in) a townhouse that we bought in the worst possible moment, back in 2004,
Frank reply> Only 2005 is worse.
when the prices were close to > burst, it was stupid, but it seemd like a good idea at the time.
Frank reply> Kinda like now (based on yout email below)
We own more to the bank than the current value on the market. > We both work full time. My wife works for a company and makes > XXk/year. I own my own company that I started back in 2008, > less than a year ago. I am the only employee. My total income as per the 2008 taxes is around > XXXk. We filed joined taxes for XXXk last year. This year it should be > better. My last salary for another company was XXXk/year.
> We would like to buy a detached house in the coming months, now that the > market is down, seems like a good moment to buy, we do not want to sell the > townhouse for the same reason, and I am not even sure that we would be able > if we wanted to, we owe (~XX%) more than its worst.
> We called a loan officer that a friend recommended, she seemed really smart.
> She said that because we have no equity on the townhouse and are not selling > it, but buying a new one, and have no equity on it, we need to prove that we > can afford to pay both mortgages, which we think its still possible. But > then she said that because I have my own business, that business would have > to be in business for a year or two before I can use that income to apply > for FHA loan, and that the only option for us was a "sub prime" loan, which > does not sound too exiting. > Is she right?? What would you recommend? > thanks > Eric >
Frank reply> In my opinion, you are crazy. What you are proposing is SUPER risky. Ever been to Vegas? Lose $100 on the roulette table? What is the best way to win it back? DOUBLE DOWN. That is what you are trying to do. One is down, so you want to double down. What if things still go down more? You will be wiped out. Way to risky. If you sell your place and move UP and buy a bigger house, you will be ahead. Yes lose 10% or $30k on your sale, but on your purchase you also save 10%, but on a bigger home, that is $50k below. The total benefit is $20k ahead. If you can't sell, then rent. Rent your place and rent a bigger place. Even after taxes it is cheaper to rent, even in this market. And subprime. Don't even think about it. That is nuts. That extra 3% you get charged... no way. Yeah yeah , you plan to refi, but if the market goes down, you are stuck with a horrible high priced loan. I have a blog on subprime and how subprime people should never buy. But that is just my opinion.
Sure you could make a killing with what you propose, but it is super high risk speculation.
Hope that helps.
Hello Frank, I found your site through an internet search for seeking short sale real estate agents in Alexandria. In summary, I own a house that has an estimated value of about $400k (maybe even less) but I owe about $450k (a little less actually) on it through two loans (mortgage + line of credit), putting me $50k in the red. I am not late on the loans, but I am under a lot of pressure to sell it. I was hoping, after seeing all my options, to secure a short sale. But I'm not sure if the bank will agree to it because I pay so well. The first bank is Suntrust (owe about $250k, pay $2000 a month), the second is Countrywide (owe about $100k, pay $1000 a month). The main reason I want to sell is because living in that house causes emotional distress. My dream scenario (that would at the same time be realistic)? Someone would invest in the house by buying it for fair market value, but paying off all my debt and then setting up a payment plan for me to repay back the difference, perhaps at a rate higher than typical house loans. Played out: Corporation X buys the house for what I owe ($450k) and then makes out a loan that I have to pay back for the difference between what was paid and FMV ($50k). My monthly payment goes down, or perhaps stays the same (around $4000 a month) but then I pay back the loan in 24 months and then I'm done with the house, my credit worthiness intact, in two years instead of 25 more. Furthermore, my debt is reduced from $450k to $50k, paving the way for me to buy another property. Can you help?? Regards, SamuelHey Samuel,Good brainstorming, but that dream will never happen. But you are CLOSE! What may happen is you agree with your banks to pay them back part of all of the difference. So if it sells for $300k, and you sign a promissory note for $50k difference, then you might have a shot. I can help you, but what I can't do is do what I did with the last 2 emails like this, which is spend hours on it, and then the person just stops replying. So I need to know that this email wasn't copied and pasted to 5 agents. I would also recommend a 3rd part short sale negotiation company that knows EXACTLY how to make you look in front of the banks and they might be able to cut that $50k note by 25-75%. It all depends how much you have in savings and how distressed you really are financially. But no, no investor in their right or wrong mind would agree to the arrangement you proposed. Frank
Question in regular font, answers in purple bold
. This is just a typical email. I thought I'd share with you my typical reponse.Hi, Frank, I'm just an average Arlingtonian (XXXfair housing details removedXXX, owner of a 2br/1ba condo near Court House) who reads your blog from time to time and likes to think he is learning a little something about owning/selling/buying a home. (When it's time to list, you're definitely the guy I'm gonna talk to, by the way.)Thanks, sometimes I wonder if anybody is reading. Kinda like Seinfeld's "Is this thing on"I'm finding out that I'm not much suited for living in a multifloor building -- what with all the neighbor sounds, smells, sights, etc. And in fact, I'm not much suited for *owning* in a multifloor building -- what with all the condo association drama that can go on.I can see that being a drawback for some. Some buildings have less than others of course.So I'm not even keen on continuing to own while renting it out.Yes, it can be harder to be a landlord then many people think. If the toilet has a problem, guess who they are gonna call? And it ain't ghostbusters.
You see where this is going, right?: I look forward to the day when I can sell this thing and move on to greener pastures -- like, maybe, Fairfax County.You can get a ton of green grass for the price of a condo.The sticky thing is that I bought about two years agoYou are F-ed.-- when things were starting to topple off their peak a little bit, but still pretty high.At least somebody bought for more than you, so that is a little consolation. Like me, I bought in 2005, aka, at the top!And I put down a big down payment. So I'm thinking that if I were to try to sell any time soon, I'd be selling at a loss. (Bye-bye, down payment -- or a big chunk of it.)Yes, a big loss. How much you put down has nothing to do with how much you lose. It has to do with how much you bring to the table.So I guess my question(s) to you is: What's a guy near the Orange Line to do?Rent a place with a yard in Fairfax, and rent out your place. If you buy and keep your condo, I call that "doubling down" like in Vegas. Very high risk. If you are up for it, great, but if the market keeps going down, you are double hosed. If it goes up, you are a genius.Just wait it out?The other problem with renting it out is you will lose money per month (remove from the equation the big down payment, that is like a TARP bail out and that should not go into your equation. Calculate your mortgage assuming 5-10% down. The difference between rent and your mortgage at 90%, is your true loss per month)
I know some condo owners that waited 12 years to break even!
(And for how long do you suspect that those of us on/near the Orange Line will have to tough it out?Dunno. Equal numbers of signs going in each direction.I thought that this corridor was supposed to be somewhat immune (an easier sell) than other places in the DC area -- and in the rest of the country.)Yes and no. People that tell you a great location will never go down... those are called... Realtors! Times Square... the #1 location in the USA. Probably went down. The higher you go, the more you can fall. So really, that is just brainwashing.
But yes, we did MUCH better than Prince William county which dropped 50-60% overnight.
I'm OK selling at zero profit or at a loss of a couple grand.You should not only be OK<>But how likely is that scenario in the near term?
Nothing immediate. Still have short sales and bank units hitting. For a moment I think it slows down, and then BANG, four more hit. THe key is stopped those from hitting the MLS.
Are things picking up along the Orange Line?
For the right price, there are 5-10 offers on places. But that price is $50k under resellers.
Is there a silver lining for this neck of the woods?
Yes, and you heard it here first... a buyer said to me the other day "I feel like I need to hurry up, or I might miss the boat and miss the bottom." It was the first sense of panic that I have heard.
Or do I just need to keep owning until my condo's value gets back to near-2007 levels?
(Another three years or more?)
I would be surprised if it rocketed up in under 2 years, but if Obama can freeze foreclosures and let the Short Sellers refi, it actually is very possible. Real Estate is supply and demand. Cut off the bank units and you will have a couple months of NO sales, but then the buyers will say "screw it, I'll just take one of these 'break even' resellers."
And does having a 2br within walking distance to the Metro change the equation?
***I realize my question might make good fodder for your blog. If you want to use my question/scenario, please don't use my real name.***
Great Idea. Please add your reply as a comment... "George".
Hopefully I could be of help. Hope you will spread my blog around, and make sure you subscribe to the main blog.
I had a listing that I owned personally. I wanted to dump it.
It sat for 90 days and 3 people saw it.
But then the unit 3 floors above listed for $40k more
. The exact unit. Dunno what they were thinking, but thank goodness.
Mine looked like a bargain... I got an offer for $50k under list from an eager buyer that called all my agents to find me. I called his bluff, countered full price... he bought it.
Moral: Don't use actives to value a home. Just because you like a place that is $50k under the neighbors place, doesn't mean that both aren't $100k and $50k overpriced.
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