by Augie | May 7, 2012 | Working With Sellers
I am often asked the best way to acquire investment properties; my answer is usually, “It depends.” Those who know me know I have a sense of humor… but this answer is not intended to be either evasive or funny.
My favorite acquisition technique is with owner financing, but that usually requires a free and clear property. How many of those free and clear properties come along with a motivated seller attached? Certainly there aren’t as many as I’d like. Then there’s buying with cash…I’d rather save that resource for the killer deals that have to be closed quickly in exchange for a massive profit.
For houses with an existing mortgage, my favorite way is to purchase the property “subject to” the existing mortgage. It’s a great way to buy pretty houses without spending a pretty penny. Simply put, I step into the seller’s position and begin making their payments at an agreed upon date. The ownership of the property is transferred to me or my entity and the mortgage remains in the seller’s name until I, or more typically my tenant/buyer, pays it off when they obtain new financing and purchase the home.
Close in a matter of days.
Why is this a good deal for the seller, you ask? The first thing you have to remember is that successful investors only deal with motivated sellers! This is a good deal for the seller because I can close within a matter of days as there’s no lengthy loan qualification and approval process. Additionally, I can typically pay them a higher price because I don’t have any financing costs.
Banks want payments, not houses.
When a loan, which is an asset, becomes delinquent, the lender’s income stream is interrupted. When their assets become non- performing, the lender is required by the Fed to increase their reserves. These reserves reduce the amount of capital available for new loans. So, does the bank prefer payments or would they rather foreclose and take the house back? The easy answer: with foreclosure costs running at about $40,000 per house and defaults at historically high levels, banks want payments, not houses!
Broadest range of exit strategies.
Finally, why is it good for the investor? First, we have no funding cost. Second, since the loan is not in our name it doesn’t appear on our credit report. Third, our creditworthiness doesn’t come into play because we are not qualifying for a new loan. But the best reason is that “subject to” transactions offer you the broadest array of exit strategies!
No limits.
Additionally, even if you have a super credit score, most lenders will limit you to a maximum of number of 4 loans (if you can get them) and you’ll be required to make a substantial down payment (25$– 30%). If the loans aren’t in your name and you don’t have to qualify for them, just how many of these transactions will you be limited to? That’s right, no limits! I met an investor from Ohio who has over 200 properties; not a single mortgage was in his own name. That’s quite a retirement portfolio he’s built.
My preference is to be a “transaction engineer” rather than a specialist in any one area of investing. I love finding profit opportunities in all types of transactions from pre-foreclosures, renovation projects, owner financing to split funding. But a core element of my acquisitions strategy is using “Subject to” transactions and it should be a critical part of yours.
To your success…
Augie
by Augie | Jul 19, 2011 | Exit Strategies, Market News, Thoughts, Working with Buyers, Working With Sellers
Only a few days remain to post your comment on the proposed rule changes that could be the death knell for seller financing. You can post your here http://1.usa.gov/pF9Fv0. The comments I submitted can be found below:
The SAFE ACT intended to protect consumers from big businesses and I applaud these efforts whenever they accomplish what they set out to do. My concern is when unintended consequences arise and citizens, American property owners as well as future American property owners, can actually be harmed. I am requesting that private individuals be exempted from the proposed rules changes and submit the following comment.
1. The seller did not construct the home to which the financing is being applied.
2. The loan is fully amortizing (no balloon mortgages allowed).
3. The seller determines in good faith and documents the buyer has a reasonable ability to repay the loan.
4. The loan has a fixed rate or is adjustable after 5 or more years, subject to reasonable annual and lifetime caps.
5. The loan meets other criteria set by the Federal Reserve Board.
Under this Act the only buyers who will be able to use seller financing are the buyers who can already qualify for conventional financing with perhaps the exception of how much of a down payment they need.
Seller financing has always been the alternative to government regulated financing. It is a meeting of the minds between two private individuals who negotiate an arm’s length contract to purchase property using an installment sale.
Seller “financing” provides housing for millions who otherwise could not qualify for conventional loans. It additionally, provides an outlet for properties that do not qualify for conventional or even GSE programs such as older manufactured homes that provide entry level and retirement housing for many Americans.
Homeowners are neither bank officers nor mortgage lenders. By requiring them (many if not most of whom who take back a mortgage are older Americans) to qualify buyers using bank standards means they will simply refuse to sell with owner financing. Thus millions of people will be deprived of home ownership. This will have a near term negative impact on the current economy by reducing the number of sales which pay transfer taxes to our state and county governments and long reaching effects in terms of preserving property rights as well as one’s ability to freely buy and sell property. Even the Wall Street Reform Act saw fit to allow up to 3 seller-financed transactions per year without MLO requirements.Why should a buyer be required to divulge their income and assets to the very person with whom they are negotiating the terms of a sale? This is not required when there is a 3rd party lender. Requiring the buyer to turn over all their financial information to a stranger opens the door for identification theft and fraud. It also deprives American’s, both buyers and sellers, to use their free will to honestly come to a meeting of the minds and transact the purchase or sale of a property in a manner beneficial to the principals (not a 3rd party lender who may have no vested interest).
This also opens the door to an additional risk; predatory borrowing. This is where an unscrupulous buyer knowledgeable about the Dodd-Frank Act leads an uninformed seller (and this will be the majority of sellers) into negotiations not in compliance with the ability-to-repay requirements. That buyer lives in the property trying to resell it for a profit and if they are not successful within three years they rescind the sale and get all their money back. This will jeopardize the ability of many deserving people who may never qualify under bank standards (Federally mandated or not) to ever own their piece of the American dream because no one would accept that risk.
By not allowing a property owner to negotiate a balloon payment, there is a good chance that a seller 55 years or older will die before receiving all their equity. Many seniors have invested in real property with the intent of selling it using seller financing (an installment sale) in order to supplement their income in retirement, but also with the hope that they would not be stuck with a 30-year investment. The Dodd-Frank Act does the same thing insurance companies do that sell 30 year annuities to seniors. Our government has criticized this deplorable practice because seniors will die before they receive all their investment.
The restriction of no balloon doesn’t affect just seniors, it has financial consequences for anyone using seller financing. Under the Act community banks are allowed to originate fully amortizing loans with a five-year balloon. The rationale is that they hold these loans in their own portfolios and the government recognizes their need to hedge against inflation and rising interest rates. Yet, the Act does not recognize that private property owners who have 100% skin in the game need the same protection. If there has to be a restriction it should at the very least be the same allowance given to community banks of a balloon in 5 years.I have heard the suggestion that a seller financing the sale of his or her own property would completely avoid the issue of licensing by retaining the services of a licensed loan originator. If a mortgage loan originator (MLO) fails to properly follow the ability-to-repay guidelines the buyer still has three years in which to rescind the sale which leaves the seller at risk and will most likely bankrupt them. As I am sure you can see, the unintended consequences of these proposed rule changes, if accepted “as-is” without exempting individuals will negatively impact millions of American families.
This could be financially devastating to the seller. Let’s not forget that today’s buyer will be tomorrow’s seller. These sellers are a diverse group. They come from all walks of life: low income, high income, non-English speaking, seniors, widows, minorities, but this requirement places the same standards on individuals as banks and mortgage lenders, only with more risk – the banker is in the business of mortgage loan origination and factors that risk into his business plan, whereas the individual seller does not have capital reserves and doesn’t do this as a business. Also, unlike a bank, they do not carry errors and omission insurance.
My mother is 80 years old and owns two properties; a condominium and a co-op. Neither of these will qualify for bank financing in the current market. At some point she may need to sell and convert these properties into an income stream to provide for her long-term care unless she can find a cash buyer. A cash buyer will likely force her to accept a substantially lower price because she’ll have no other option available to her and she’ll be at risk that for up to 3 years, that a case of buyer’s remorse could reverse her sale. Is that in her best interest? Additionally, as her and many other seniors in a similar situation exhaust their reduced assets, the government will be forced to pick up the tab for her care, further exacerbating the federal debt or reducing the quality of life for America’s elderly.On behalf of my family and families across America I am asking that you clearly distinguish between banks who are lenders who actually lend money and property owners who are principals in negotiating an installment sale in order to collect their equity in the sale of a home. In a seller financed transaction both parties are consumers neither of whom need be disadvantaged by these proposed rules.
Please feel free to contact me directly at Augie@PACTProsperity.com
Your decisions will impact millions of American families. Thank you for your consideration.
by Augie | Jul 15, 2011 | Experienced Investors, Market News, New Investors, Working with Buyers, Working With Sellers
This just in from The Paper Source Journal – Proposed changes to Regulation Z could threaten the future of property ownership in the United States. Imagine selling a property and giving the buyer three years to change their mind?
RED ALERT — Seller Mortgages May Be Effectively Outlawed…You Must Act NOW!
by W. J. Mencarow
July 13th, 2011
From THE PAPER SOURCE JOURNAL, July, 2011:
The Federal Reserve, which received sweeping new authority under the Obama regulatory reauthorization, wants to effectively eliminate seller-held (a.k.a. purchase money) mortgages. It will do this by enacting a rule for the Dodd-Frank Act prohibiting property sellers from taking back a mortgage unless the buyer essentially can qualify for conventional financing!
What’s more, Ma and Pa Homeowner, who create 95% of seller-held mortgages, won’t be able to qualify buyers under the same underwriting standards that banks are required to perform, and therefore the cash flow notes won’t be created.
If this is enacted it also will remove access to housing for millions of Americans, because seller “financing” is the only way people who can’t qualify for conventional loans can buy a house.
Moreover, it would allow a buyer a three year right of rescission (they can cancel the sale) if the seller did not properly qualify them. The right of rescission also applies to anyone who buys the note.
We have precious little time to try to stop this. The deadline to comment is FRIDAY, July 22. See the information below, then go to snipurl.com/AbilityToRepay Please do it TODAY!!
(Thanks to Ric Thom [www.SecurityEscrow.com] for alerting us.)
Submit your comments at snipurl.com/AbilityToRepay — scroll down that page for the comments link.
THE DEADLINE IS FRIDAY, JULY 22!
Here Are Some Points You Can Make In Your Comments:
- Seller “financing” provides housing for millions who otherwise could not qualify for conventional loans.
- Homeowners are not bank officers or mortgage lenders. By requiring them (many if not most of whom who take back a mortgage are elderly) to qualify buyers using bank standards means they will simply refuse to sell with owner financing. Thus millions of people will be deprived of home ownership.
- Why should the buyer be required to divulge their income and assets to the very person with whom they are negotiating the terms of a sale? This is not required when there is a 3rd party lender.
- Requiring the buyer to turn over all their financial information to a stranger opens the door for identification theft and fraud.
- This also creates the opportunity for predatory borrowing. This is where an unscrupulous buyer knowledgeable about the Dodd-Frank Act leads an uninformed seller (and this will be the majority of sellers) into negotiations not in compliance with the ability-to-repay requirements. (An example of that could be a balloon, an interest rate greater than 1.49% above a standard mortgage, or the seller did not know how to calculate the income-to-debt ratio correctly, or know what residual income means). That buyer lives in the property trying to resell it for a profit and if they are not successful within three years they rescind the sale and get all their money back.
- By not allowing them to negotiate a balloon payment, there is a good chance that a seller 55 years or older will die before receiving all their equity. A lot of seniors have invested in real property with the intent of selling it using seller financing (an installment sale) in order to supplement their income in retirement, but also with the hope that they would not be stuck with a 30 year investment. The Dodd-Frank Act does the same thing insurance companies do who sell 30 year annuities to seniors. Our government has criticized this deplorable practice because seniors will die before they receive all their investment.
- The restriction of no balloon doesn’t affect just seniors, it has financial consequences for anyone using seller financing. Under the Dodd-Frank Act community banks are allowed to originate fully amortizing loans with a five year balloon. The rationale is that they hold these loans in their own portfolios and the government recognizes their need to hedge against inflation and rising interest rates. Yet, the Act does not recognize that private property owners who have 100% skin in the game need the same protection. A five year balloon is predatory lending. If there has to be a restriction it should at the very least be the same allowance given to community banks of a balloon in 5 years.
- There are a lot of small builders that have a spec house or two that they can’t sell unless they offer great terms using seller financing. Otherwise they have to let these properties go back to the bank, which does not help housing or the economy.
- It has been said that a seller financing the sale of his or her own property would completely avoid the issue of licensing by retaining the services of a licensed loan originator. If a mortgage loan originator (MLO) fails to properly follow the ability-to-repay guidelines the buyer still has three years in which to rescind the sale which leaves the seller at risk and will most likely bankrupt them.
My Comments To The Federal Reserve
By Ric Thom, www.SecurityEscrow.com
The Dodd-Frank Act does not exempt property owners who wish to use seller financing (installment sale) even though no money is lent, there is no table funding, and under the Truth and Lending Act they are not considered creditors. The Dodd-Frank Act (ACT) does exempt property owners who offer seller financing from having to become Mortgage Loan Originators (MLO) provided they only sell 3 properties or less in a 12 month period and they follow the restrictions below. Yet, the Act subjects the property owner to the same liability as an MLO:
Title XIV Section 1401 (2) (E)
1. The seller did not construct the home to which the financing is being applied.
2. The loan is fully amortizing (no balloon mortgages allowed).
3. The seller determines in good faith and documents the buyer has a reasonable ability to repay the loan.
4. The loan has a fixed rate or is adjustable after 5 or more years, subject to reasonable annual and lifetime caps.
5. The loan meets other criteria set by the Federal Reserve Board.
Under this Act the only buyers who will be able to use seller financing are the buyers who can already qualify for conventional financing with perhaps the exception of how much of a down payment they need.
Seller financing has always been the alternative to government regulated financing. It is a meeting of the minds between two private individuals who negotiate an arm’s length contract to purchase property using an installment sale.
The following is a breakdown of these restrictions. I listed them in order of greatest impact on property owners, buyers and the economy:
The seller determines in good faith and documents the buyer has a reasonable ability to repay the loan. The implication is that the seller must use the ability-to-repay underwriting requirements when offering seller financing consistent with the Dodd-Frank Act which amends the Truth in Lending Act. This new, proposed rule is 169 pages long: snipurl.com/fedrule
The Consumer Financial Protection Bureau has spent a lot of energy developing a new, easy to read, two page mortgage disclosure form. It is unreasonable to expect sellers and buyers to fully understand and apply this 169 page rule. If buyer’s and seller’s negotiations deviate in the least the buyer has up to three years to rescind the sale and demand back all money paid to the seller, or anyone that the seller might have assigned rights and interest to, or any bank that takes the note as a collateral assignment.
This could be financially devastating to the seller. Let’s not forget that today’s buyer will be tomorrow’s seller. These sellers are a diverse group. They come from all walks of life: low income, high income, non-English speaking, seniors, widows, minorities, but this requirement places the same standards on individuals as banks and mortgage lenders, only with more risk – the banker is in the business of mortgage loan origination and factors that risk into his business plan, whereas the individual seller does not have capital reserves and doesn’t do this as a business. Also, unlike a bank, they do not carry errors and omission insurance.
Unlike banks and mortgage lenders, both the buyer and seller are consumers. They should both be equally protected. The buyer is purchasing real property and the seller is investing in/creating a financial product where they receive their equity over time. The seller is relying on the buyer to make monthly payments and maintain and protect the property. Terms are not dictated to either party, but rather they are negotiated between the parties.
Requiring the buyer to turn over all their financial information to a stranger opens the door for identification theft and fraud.
Furthermore, why should the buyer be required to divulge their income and assets to the very person with whom they are negotiating the terms of a sale? This is not required when there is a 3rd party lender.
This also creates the opportunity for predatory borrowing. This is where an unscrupulous buyer knowledgeable about the Dodd-Frank Act leads an uninformed seller (and this will be the majority of sellers) into negotiations not in compliance with the ability-to-repay requirements. (An example of that could be a balloon, an interest rate greater than 1.49% above a standard mortgage, or the seller did not know how to calculate the income-to-debt ratio correctly, or know what residual income means). That buyer lives in the property trying to resell it for a profit and if they are not successful within three years they rescind the sale and get all their money back.
The SAFE Act does not put in place the ability to repay requirements, or any other requirements, unless the individual habitually and repeatedly uses seller financing in a commercial context. It is HUD’s position that Congress never intended under the SAFE Act to restrict private property owners from using seller financing, unless they did it as a business.
The loan is fully amortizing (no balloon mortgages allowed). By not allowing them to negotiate a balloon payment, there is a good chance that a seller 55 years or older will die before receiving all their equity. A lot of seniors have invested in real property with the intent of selling it using seller financing (an installment sale) in order to supplement their income in retirement, but also with the hope that they would not be stuck with a 30 year investment. The Dodd-Frank Act does the same thing insurance companies do who sell 30 year annuities to seniors. Our government has criticized this deplorable practice because seniors will die before they receive all their investment.
The restriction of no balloon doesn’t affect just seniors, it has financial consequences for anyone using seller financing. Under the Dodd-Frank Act community banks are allowed to originate fully amortizing loans with a five year balloon. The rationale is that they hold these loans in their own portfolios and the government recognizes their need to hedge against inflation and rising interest rates. Yet, the Act does not recognize that private property owners who have 100% skin in the game need the same protection. Obviously the Act does not recognize that a five year balloon is predatory lending. If there has to be a restriction it should at the very least be the same allowance given to community banks of a balloon in 5 years.
The loan has a fixed rate or is adjustable after 5 or more years, subject to reasonable annual and lifetime caps. This restriction is reasonable, but it will eliminate the ability for any buyer to wrap an existing obligation that has an adjustable rate even if they believe they can afford any rate increase. This is again inconsistent with the SAFE Act.
Moreover, if the seller does not know about the ability-to-repay requirements and that they are not able to have a balloon, they certainly will not know that you have to have a fixed interest rate for the first five years.
The seller did not construct the home to which the financing is being applied. There are a lot of small builders that have a spec house or two that they can’t sell unless they offer great terms using seller financing. Otherwise they have to let these properties go back to the bank, which does not help housing or the economy. There is also that group of unemployed construction workers who built their own homes when times were good and now need to sell. This takes away their ability to use seller financing.
Builders are in the business of building; not of originating loans.
Using a mortgage loan originator to facilitate a seller-financed transaction creates additional risk and expense for both the buyer and the seller. It has been said that a seller financing the sale of his or her own
property would completely avoid the issue of licensing by retaining the services of a licensed loan originator. If a mortgage loan originator (MLO) fails to properly follow the ability-to-repay guidelines the buyer still has three years in which to rescind the sale which leaves the seller at risk and will most likely bankrupt them.
Furthermore, there is no provision in a MLO’s errors and omission insurance that covers seller financing. None of the continuing education classes or the exams that an MLO must complete has a single chapter or question regarding seller financing.
Who is supposed to pay the MLO? MLOs can charge a flat fee or up to 3% of the transaction. The only advertisements I have seen so far advertise a flat nonrefundable fee of $450. This fee has to be paid in advance, which makes sense, because why would a MLO spend hours and hours on an installment sale transaction which might not close? If the buyer pays the fee, then this is a forced origination fee never before imposed on buyers seeking seller financing. Why should the buyer have to pay money just to have an offer presented to the seller?
A lot of buyers use seller financing because they are low income individuals, and seller financing, up to now, has been an inexpensive way to purchase property. If the seller pays they will have to pay money for the simple act of the MLO forwarding them the installment sale offer. If the seller receives multiple offers this could easily run into thousands of dollars in MLO fees just to sell their property.
A lot of sellers are also low income individuals. The MLO will have to be a part of every offer and counteroffer because the sale and terms of an installment sale are one and the same and cannot be separated. For instance, the buyer might be willing to pay a higher interest rate if the seller is willing to come down on the price and down payment.
A lot of seller financing takes place in rural areas that are underserved by mortgage lenders and banks. It is going to be very difficult to find a MLO in those areas who are also willing to take the risk facilitating a seller financed transaction.
This has the potential of pushing seller-financing underground – not a desirable result.
The Dodd-Frank Act allows a property owner to use seller financing without having to become a mortgage loan originator as long as they don’t use it more than three times in a 12 month period and comply with the above restrictions. In the SAFE Act there are no restrictions to the number of times seller financing can be used as long as you are not in the business of being a mortgage loan originator. The coauthor of the Dodd-Frank Act, Representative Barney Frank, sent a letter to HUD on July 22, 2010 urging it to place the maximum amount of seller transactions that an individual could do before becoming a MLO, or
having other restrictions on them, at five in a 12 month period. I would propose that the Dodd-Frank Act adopt that same number and place no restrictions on seller financing until 5 is surpassed. The only restrictions that should apply to 5 or less are those restrictions that the states already impose either through state statute or case law.
Under The Act loan officers at community banks do not have to become a Mortgage Loan Originator if they originate 5 or less transactions in a 12-month period. The rationale is that this is burdensome, costly and there is not enough volume to create a systemic risk. Ma and Pa on Main Street should be granted those same allowances. The Act puts more restrictions and risk on Ma and Pa than it does on financial institutions.
In watching the debates in Congress last summer it was repeatedly said that the Wall Street Reform and Consumer Financial Protection Act would not negatively affect or over-regulate Ma and Pa on Main Street. If this doesn’t negatively affect and regulate seniors, minorities, and lower income individuals on Main Street I don’t know what does. These restrictions will all but do away with seller financing, which will have a negative impact on housing, existing property owners, those desiring to be property owners and the economy.
Ric Thom is owner and president of Security Escrow Co. He is recognized as one of the leading authorities in seller financing on real estate contracts. www.securityescrow.com
Many thanks Bill Mencarow and Ric Thom and to all of you who submit comments seeking protection to property owners who are also consumers and who also deserve to be protected, not penalized for providing seller financing.
by Augie | Jun 29, 2011 | Market News, Working with Buyers, Working With Sellers
One of the greatest challenges facing agents, investors and even the general public today is the fact that qualifying for a bank loan has become increasingly difficult, if not down right impossible for many American families. In spite of historically low interest rates many deserving families are being turned away.
What if we didn’t need the bank’s approval? What if there was another way we could help sellers sell and buyers buy? How would that impact your bottom line? Not to mention, start a housing recovery that will lead this nation out of the current economic mess.
So the $64,000 question is, “How do we do it?
Answer:
- Stop letting banks kill your deals
- Stop letting bogus appraisals kill your deals
- Learn legal, ethical alternatives to bank financing that work
There are alternatives to banks. Don’t get me wrong, they are a good solution for some people but in today’s economic climate they aren’t the solution for a great many. My grandfather used to say the only time you can borrow money from a bank is when you don’t need it.”
I’m excited to tell about a great Alternative Financing Workshop that is being offered in Celebration, Florida on July 28th at The Bohemian Hotel. With more loans getting declined than approved, NOW is the time to learn the tools, tips, strategies and techniques for buying and selling houses using alternatives to bank financing
As a result of this workshop you will be able to:
- Pre-screen sellers who are able to provide financing alternatives…even when they weren’t aware of it!
- Offer different buying solutions, even when the buyer cannot qualify for bank financing today
- Earn commissions on a new set of transaction types
- Close more deals!
Take action now and register at www.alternativefinancingworkshop.com :
Using these very same techniques I have bought and sold hundreds of houses and have become a nationally recognized speaker, author and real estate trainer. Because I believe there is more than enough opportunity for everyone I have trained thousands of agents and investors across the country.
Most recently, I was honored to be designated as the national trainer for the CARI designation, Certified Agent for Real Estate Investors, by the National Real Estate Investor Association. In spite of all of this, my primary business remains houses and I continue to use these very same techniques day in and day out.
So take control of your business and join me for the Closing More Deals With Alternative Financing workshop and go to www.alternativefinancingworkshop.com.
You’ll be glad you did!
To your success…
Augie
PACTProsperity.com is a well-known and well-respected company specializing in Home Study Programs, Seminars and Workshops aimed at helping Real Estate Agents and investors succeed in today’s market. We are here to help you take your results to a whole new level!
Please visit our website for additional information www.alternativefinancingworkshop.com.
Filing papers in court
Once we locate the executor it is now time to pre-screen him or her and go take a look at the house. Probate properties are often a “perfect storm” for a great deal.
