Knowing about, and being comfortable with, seller financing is increasingly becoming an important skill set for real estate professionals. Here’s an email I received and responded to recently:
Dawn, I would like to carry up to 90% of the loan on my property and be the banker. My property is currently listed at $1,547,000, and I have a couple of people flying in to take a look at it this weekend.
I can carry the paper because I own the home outright, and I would prefer to carry paper for the right borrower because I feel it’s a good investment with loan interest at 5% and CD’s at 2.5%. How can I utilize you to help me close potential buyers? My current agent is not qualified to help and I will have to make a change. Please advise directly, Ronda
Dear Ronda, Your plan makes a lot of sense to me, and I know I can add value to what you are trying to accomplish. You need to have the best chances of attracting the right buyer, so how you advertise and communicate with potential buyers and their agents is important.
Depending on the situation, I act as a real estate broker, and/or a note broker, and most often, a consultant. I help sellers understand not only how to meet their needs now, but how to prepare for contingencies in the future. Many times, sellers don’t understand how important it can be to create not one, but two notes.
This provides long term flexibility and wealth preservation if there’s ever a need for a little cash down the road. Although it sounds straight forward, there are many ways to set up a seller carry back transaction, and I help sellers understand which strategy would work best for them, and help them intelligently underwrite potential buyers.
Banks have whole underwriting departments helping them make good lending decisions . . . sellers need to hire their own underwriter to make sure they don’t overlook an important aspect that will have unpleasant ramifications.
A nice, safe 5% return is only good when you’re getting the payments. If someone defaults, your return is meaningless. Whenever you make a loan, you need to think about what you will do to minimize the chance of default, and if it happens anyways, you need to have a plan for dealing with it.
For this reason, I advocate the use of a Title Holding (Land) Trust when there is less than a 20% down payment, and it can be useful for other reasons as well.
With the trust there is no exposure to foreclosure, and if you have to ‘take the property back,’ you will retain your property tax basis. There are many elements to consider when negotiating a seller carry back, because every aspect of price and terms is flexible and dynamic. You would want to have someone negotiating on your behalf on a transaction this size.
At the very least you need to be sure that you clearly understand the short and long term implications of how you set the transaction up. I also help in the marketing and advertising department, and many times help sellers coordinate services with their real estate agent if they have one.
I believe it is worth our time to get on the phone. If you concur, I have between 1-3, or after 5 today. Best wishes, Dawn
Always consult with your CPA, tax attorney and/or financial advisor before selling any real estate.
Dawn Rickabaugh is a real estate broker with expertise in seller financing and real estate notes. www.NoteQueen.com; 626.641.3931; firstname.lastname@example.org