Seller financing and note Buyers

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Seller financing and note Buyers

Michael R.
Real Estate Investor · NY · Member since 2008 · 313 posts · 87 votes

Well I started buying properties 3 years ago or so and now I am up to 12 houses. When I first started investing I planned to buy and hold forever and live off the cash flow. Now I own most of my properties free and clear because I bought for real cheap and did the rehabs myself. I am beginning to think I should consider unloading some properties and stock up on some cash in the bank. I also have a other business besides investing. I listed one property back in November and have not had much action. I am now thinking that maybe I should try to market this property with seller financing and then if someone takes it I then sell the note at discount to a buyer. So I have a few questions. what discount will I typically have to sell at? What seasoning would be required by the buyer? How should I structure the note-are longer terms better or does it not matter? I did do some research on here but I wanted to see if anyone here does similar transactions and can offer pointers of how to structure the note so I it will be more desirable to a note buyer.

forgot to add- I deal in cheap properties under 50k. Is this going to be a issue to the note buyers as well?

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Loc R.
Note Investor · Pasadena, CA · Member since 2009 · 849 posts · 544 votes
15y

If you're holding the paper you can charge whatever you want.

If you're going to sell it then appraisal/comps come into play. I want to buy at a true 65% ITV max, not some # based on an inflated sales price.

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  • Loc R.
    Note Investor · Pasadena, CA · Member since 2009 · 849 posts · 544 votes
    15y

    6 months of seasoning.

    20% down minimum.

    Shorter amortization is better. 15 years max. Keep it simple (i.e., no balloons, full amortization).

    Charge as high of an interest rate as possible without violating your state's usury laws.

    Have your payor's credit score & report ready to go. Obviously higher is better. 580 is the bare minimum.

    Cheapies houses aren't a problem. Bad deals are.

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  • Bob Coleman
    Real Estate Investor · Hemet, CA · Member since 2009 · 6 posts · 1 vote
    15y

    I've heard that if you can get good terms like what "SolidReturns" said, you can get 70-80% of the note in cash. I was told by one note buyer that after 6 months you could get 70% and possibly 80% if you have it seasoned for 1 year and there are no late payments.

    I have a duplex I'm selling at 60K, asking 7K down and will finance the remaining 53K at 7% interest, interest only, to balloon after 5 years.

    I'm hoping to get 80% for the note after 6 months to a year of seasoning. The balloon seems like it would make the property more enticing to the note buyer. When I start buying notes, I know balloons will look extremely desirable to me...

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  • Marc Faulkner
    Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
    15y
    Originally posted by Bob Coleman:
    I've heard that if you can get good terms like what "SolidReturns" said, you can get 70-80% of the note in cash. I was told by one note buyer that after 6 months you could get 70% and possibly 80% if you have it seasoned for 1 year and there are no late payments.

    I have a duplex I'm selling at 60K, asking 7K down and will finance the remaining 53K at 7% interest, interest only, to balloon after 5 years.

    I'm hoping to get 80% for the note after 6 months to a year of seasoning. The balloon seems like it would make the property more enticing to the note buyer. When I start buying notes, I know balloons will look extremely desirable to me...

    Bob-I would not recommend that you structure your note in the way that you are contemplating-if you want 80 cents on the dollar. Most note buyers do not like interest only notes as we like to see the buyer/payer having the ability to build equity which adds value to the note. I am not sure what note buyer you are talking to but, they are leading you astray with a bunch of regurgitated guru mumbo jumbo. I would also charge more like 9 or 10% so that you take less of a discount when you go to sell the note. I would also forget about using balloons in this market, even though most note gurus still teach this. I suggest a fully amortized, shorter term note You can get 75 or 80% when you sell a note but, please consult with someone that knows what they are talking about before just jumping into seller financing. Also-please note that a lot of note buyers will tell you anything you want to hear until it comes time to fund :roll: Whoever told you that it is real easy to create notes that you can sell for 80 cents on the dollar right now is not in touch with the real market. Banks are selling grade A paper at 80% right now-all day long. If your are not getting 20% down with buyers that have scores in the low 700's or better, then you are not selling grade A paper. The note market is a buyers market right now and there is plenty of notes out there competing with yours. Balloons are now considered to be defaults waiting to happen-nobody wants to buy i/only notes as these were not set up with the buyers interests in mind and usually structured to make an unaffordable situation-affordable-for a buyer that will eventually fail to pay off the balloon because they do;t have any real equity and can't refi. I suggest setting them up in a position where they might actually be able to refi so that you don't have to take a discount on the note at all if possible. Why set them up to fail :roll:

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  • Marc Faulkner
    Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
    15y

    Solid returns said," 20% down Shorter amortization is better. 15 years max. Keep it simple (i.e., no balloons, full amortization). He did not say get about 10%, down, charger interest only and make sure you include a balloon LMO.... With that said-we don't mind notes with a 20-25 year term as I should still be alive by then.

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  • Michael R.
    OP
    Real Estate Investor · NY · Member since 2008 · 313 posts · 87 votes
    15y

    Thanks for all the replys! One last question. Does sale price come into play? If it comps at 18-20k and I sell for 25k and hold the paper does that make it a bad deal?

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  • Loc R.
    Note Investor · Pasadena, CA · Member since 2009 · 849 posts · 544 votes
    15y

    If you're holding the paper you can charge whatever you want.

    If you're going to sell it then appraisal/comps come into play. I want to buy at a true 65% ITV max, not some # based on an inflated sales price.

    1Reply
  • Marc Faulkner
    Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
    15y

    There is certainly no need to discount your sale price of the real estate when using seller financing but, most buyers won't buy in unless the payer has at least 10% or more REAL equity. I personally don't oversell the property, just because I am offering to finance the sale. I like to set up the buyer in a good position so that they have no problems paying for what they bought.

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  • Howard Streckert
    Houston, TX · Member since 2011 · 9 posts · 0 votes
    15y

    Michael, I would get away from the idea of selling to institional buyers, if someone is only making 2% on there money, the opportunity to make 10 -13% on a note is something many people will jump on. I have sold notes at 100% of value. The buyers love the steady income stream. They don't use an institutional buyers matrix, so the credit score, LTV, down, aren't looked at the same way. Think outside the box.

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  • Kevin Kaczmarek
    Real Estate Investor · Fishers, IN · Member since 2009 · 408 posts · 196 votes
    15y

    Michael,

    You are getting the best advice out there from Marc and Loc. I have a great deal of respect for their insights.

    Knowing this is a note buyers market, and knowing property values are lower than they were 3 years ago, I guess my question is if the properties are cashflowing, why would you want to sell right now? I'm not sure how the local market is where you are at, but I sure would be inclinded to keep those properties for a few more years and then approach selling with better prices.

    If you are just looking to get out of the game all together, I can tell you that moving notes on the secondary market is going to be really tough to get started in. Do though what Loc and Marc have said if you go down that route. Also, call several note brokers to learn as much as you can. I received my education on this stuff from talking with people and like everyone else making mistakes along the way.

    Good luck!

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  • Howard Streckert
    Houston, TX · Member since 2011 · 9 posts · 0 votes
    15y

    Michael,
    I sold my first owner financed note in 1984. On small properties you can sometimes get a family member to carry the note, they become the bank, cash you out, also, I've had table funded closings using an investor thats happy with a yield of 11% , on small properties their pi is still kept low. There are many ways to do it.

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