Transcript What Is Seller Financing?

Seller Financing and Notes in
The Dodd-Frank Era
Stop Discounting Real Estate!
Sell Fast with Unlimited Benefits and
Maximum Sales Prices
Investor Presentation
Phone: 480-831-5067
[email protected]
The Bank of YOU! Be The Bank!
The Bank Wins!
The Seller Finance Step by Step Process
Agree on Terms
& Sign Papers
Buyer, Seller
Agrees on Seller
Financing
Hire Pinnacle
Investments
Move into new Home
Everyone
Wins
Seller Sells note for
cash
Make Monthly
payments to Seller
Point of maximum
risk in investment
Euphoria
Denial
Excitement
Optimism
Fear
Panic
Hope
Optimism
Despondency
Source: Westcourt Funds
Depression
Point of maximum
opportunity
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•
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Solution Always is Seller
Financing
•
Seller Becomes the Bank
•
Money Exchanges Hands - Down Payment
•
Buyer Signs Promissory Note and Security
Instrument
•
Remaining balance is carried as a loan
Seller Financing History
 1970’s
and 1980’s Seller Financed Transactions
Dominated Market
 Seller
Carry Market Cooled With Continued lower
interest rates over 30 years and easy loans.
Seller Financing Today

Tenuous Financial Markets

Ever Tightening Number of Qualifying Buyer Pool

Slipshod Appraisals

Increases Flexibility Of Transactions

Increase Yield Over Traditional Investments

Avoidance of capital gains taxes
Regulatory Issue
SAFE Act - 2008

Requires licensing for consumer credit transactions

Licensee is mortgage loan originator

Must register through Federal mortgage licensing system

Sellers offering seller financing “may” need to be licensed

Real estate brokers arranging a loan/ negotiating terms
need a license
Dodd Frank Financial
Reform Act - 2010

Disclosures required for sellers/brokers involved in certain seller
financed deals

Amends TILA to require disclosures for seller financed
transactions

Sellers have to meet very strict guidelines to be exempt from
disclosure requirements

Brokers have the same standards for exemption as the SAFE
Act but must be careful with compensation
Exemptions
SELLER FINANCE CONSUMER EXEMPTIONS UNDER DFA:
One (1) OR three (3) properties in any 12 month period WHEN:
(1)The seller is a natural person.
(3) or, Corporation, LLC, partnership, trust, estate, etc.
(1,3) The seller did not construct the property
(1,3) The financing has a fixed rate and does not adjust for the first 5 years
and No negative amortization
(3) The borrower has a reasonable Ability To Repay the loan
(3) No Balloon Payment
ALL OTHER SCENARIOS REQUIRE A SFC MLO
Seller Financing Future
 Large
Growing Market for Buyers With Less Than Perfect
Credit After The Foreclosure Crisis
 Market
Share Increases In Rising Interest Rate
Environments
 Perfect
For Properties Not Qualifying For Institutional
Financing
 Retiring
sellers need steady reliable income
2010 California Transactions
2010 Sales
Traditional ~230,000
Seller Financed ~8,200
REO ~80,000
Short Sale ~100,000
Data from 2010 NAR:
Number of Seller Finance
Transactions have already more
tripled in less than 3 Years
Seller Financing Myths
 Only
desperate people carry notes
 Only
bad properties require seller financing
 “I
need all cash at the closing so I can’t carry
the loan”
 Only
unqualified buyers want seller financing
Seller Financing Underwriting
 Require
 Check
 Assure
A Down Payment
Credit
Regulatory Compliance
 Possibly
Require A Personal Guarantee
 Document
Pay History
Sellers Benefits Include
 Seller
saves on closing costs, repair credits and fees
 Parties
negotiate interest rate, repayment schedule,
and other conditions of the loan
 Defers
 Keep
capital gains taxes
equity at work at interest rates higher than the
bank is paying and more than historical appreciation
rates
Seller Benefits Continued
 If
the buyer stops paying, the Seller keeps everything and gets
the property back
 If
seller or heirs need money, they can sell all or part of the note
for cash
 Fast
Sale and Maximize the sales price by offering terms
 Adds
 The
liquidity to properties that don’t qualify for bank financing
property could be sold “as is” so there would be no need for
repairs
Seller Financing Strategies
1.
2.
3.
4.
5.
6.
7.
8.
AITD (Also Referred to as a “Wrap”)
Title Holding Trust
Stand Alone Second
Land Contract
Lease Option
Lease Purchase
Contract for Deed
Purchase Subject To
Sample Note
 $420,000
 80%
Purchase Price / Owner Occupied SFR
Note
 $336,000
 8.22%
Face Amount
Note Rate
Why? This Makes Sense For
Borrower
•
The up front FHA insurance is 1.75%
•
Loan origination is 1-2%
•
Down payment is 3.5%
•
That is a 6.25-7.25 minimum investment in down
payment on an FHA loan
•
On top of that there's a 1.35% add to the rate over
the life of the loan.
•
So if interest rates are 4.5% the effective rate on
•
FHA will be 5.85%
A Creative Solution Equals
A Better, Safer, Smarter Sale:
 $2519.94
in Monthly Income
 $139,196.40
in Total Income Over 60 Months
 Potential
$40,000+ Increase in Sales Price
 Potential
Savings of $12,000+ Property Repairs/ or Credits
 Potential
Savings of $12,000+ in Buyer Closing Cost Credits
 Potential
Savings of 33.33% in Capital Gains Taxes
 No
More Taxes, Tenants, Termites or Toilets
Most Current Seller Financed Investor
Deal
Repair Estimate
 Repair
Estimate for
 New roof: $16,000
 Kitchen: $10,000
 Bathrooms: $12,500
 Ext Paint: $5,500
 Stucco: $17,000
 Landscaping: $3,500
 Int Paint: $6,500
 Int Texture: $4,600
 Elec Panel: $2,500
 Carpet: $3,900
 Wood Flooring: $3,400
 Bathroom
Tiles: $1,600
 Dumpsters: $2,500
 Demo: $2,000
 Doors: $1,850
 Contingency: $4,000
 Total: $97,300
Maybe a Wholesale Deal on
“Steroids”
 Consumer
buyer offer
 $437,500 / 30% down
 $306,250 @8% 30/5
 Listed
Price $350,000
 Investor offer accepted by
estate@ $350,000
Buy and Hold or Flip: That is The
Question
 New
investor $350,000
 Flips to $437,500 buyer
 30% down
 Note for $306,250 &
$218,750 in the deal
 Payment $2247.15
 60
month IRR 17.40%
 Net $222,320
 12 Month IRR 44.77%
 Net $114,464
 Sell the note 3 months
 3 Month IRR 152.59%
 @12% yield and make
$84,491
The Bank of YOU! Be The Bank!
The Bank Wins!
The Seller Finance Step by Step Process
Agree on Terms
& Sign Papers
Buyer, Seller
Agrees on Seller
Financing
Hire Pinnacle
Investments
Move into new Home
Everyone
Wins
Seller Sells note for
cash
Make Monthly
payments to Seller