Making Sense Of Seller Finance In 2016
By JD Esajian on March 11, 2016
Is seller financing still possible in 2016? If so, what are the best ways to tackle it?
Dodd-Frank has seriously disrupted the real estate and finance industry in many ways. One of the most notable has been the evaporation of seller financing, which has been compounded further by low interest rates, and subprime type lending programs. Yet, the biggest issue really appears to be uncertainty and fear of making a mistake. So can investors, owners, and sellers still offer private financing? What are the best ways to do it? What are the alternatives?
The Advantages of Seller Financing for Sellers
Offering owner financing has big benefits, especially in the current market. Right now it is hard to generate significant returns outside of real estate, lending is still a major pain for buyers, and many sellers are still lean on equity, yet realize this may be an opportune time to sell. Cash on hand is a big risk right now. Financing a property that you know well, and generating an above market return and stream of passive income might be the very best possible outcome.
Owner financing can enable sellers to achieve a premium price for their properties, sell faster, and with almost no hassle and uncertainty compared to conventional methods. It is a great way to serve the community and help a new generation of homeowners. There are many owners that need this option too. Some are aging and are finding property management challenging, others can’t afford Realtor fees or to wait, and some new investors have cornered themselves into deals which they can’t afford to finish or sell in another way.
Seller financing is Still Legal
In spite of the confusion out there, seller financing is still possible and perfectly legal under Dodd-Frank. There are limitations, and licensing requirements for those that do a significant number of these deals, or are operating as a business. Yet, most individual owners, and even part time investors who only do these once, or occasionally, are perfectly within the law. It is important to be careful and to apply current best practices, but don’t think seller finance as a whole has become illegal across the board.
Multiple Options
There are several variations of owner financing out there. It is always smart to check the latest laws and regulations before writing a deal, but some of these arrangements worth exploring may include…
- Seller held mortgages
- Rent to own
- Lease options
- Rent with the option to buy
- Contracts for deed
When You Can’t Commit to Seller Financing
Sellers must distinguish between offering financing when it is beneficial to them, and when they just can’t sell. Don’t sign an agreement that you can’t keep to. For example; selling for less than you owe, putting yourself in a negative cash flow situation which you may not be able to maintain (including room for escalating costs), or if the property is being lost to foreclosure, and the new deal won’t halt the foreclosure. The ability to transfer clean title may also be an issue.
Don’t Overestimate Your Market
One of the biggest mistakes being made in this space is investors and sellers blindly taking advice from the inexperienced, when it doesn’t apply to their situation, or trying to copy the advertising of others without knowing that it really works.
You’ve got to provide a deal that is actually appealing and feasible for buyers in your market, and that are a good fit for your property. One of the big blunders here is expecting too much in down payment. Asking for $10,000 down on a $60,000 mobile home or low end property is probably unrealistic in most cases. For a start, many of the buyers in that rice range will never have $10,000 all at one time, in their lifetimes. That’s way most ‘mobile homes’ get left behind; because most owners can’t afford the few thousand dollars to move them. Then look at current mainstream loan programs serving that niche – they are currently asking 0% to 3.5% down. And they’ll typically get better rates on those loans, and feel more secure than with you. You’ve got to be competitive.
Structured Exits
A second common mistake in this arena is sellers structuring short term arrangements, without really planning for the exit. In the past they have given buyers 3 to 5 years to settlement outstanding balance or to refinance. Yet, unless these buyers have a structured plan from the beginning and have a system laid out for building credit and setting aside more money; that often ends in disappointment and frustration.
Summary
Learn the law and get an attorney in your corner. If you don’t want to sell your property cheaper, bring in a partner, or just rent, there can be great benefits of seller financing. Offer good deals and you should have plenty of prospects. If you are not getting the action you anticipated, research your market better, avoiding looking like other scams out there, and overcome those objections in advance in your ads.