Mortgages & Creative Financing

How to Sell Your Properties With Owner Financing (and Avoid Dodd Frank!)

Expertise: Business Management, Mortgages & Creative Financing, Landlording & Rental Properties, Real Estate Investing Basics, Personal Finance, Real Estate Deal Analysis & Advice, Commercial Real Estate, Personal Development, Real Estate News & Commentary
228 Articles Written
for-sale-by-owner

Last weekend, as I attended this year’s Note Expo in Fort Worth, TX, there were plenty of opportunities to mingle with other note investors and to gain the best strategies for working through deals, especially non-performing first liens and REO properties (i.e. bank owned property) based on the current market conditions.

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For example, maybe you recently purchased a non-performing first lien but your estimated value at the time of purchase, based on your BPO (broker price opinion a.k.a. drive by appraisal), was a little off. Or maybe your ARV (after repaired value) came in lower than anticipated because the market value in the area dropped by the time you foreclosed on the property.

Let's say you've already gone through foreclosure, and you now own the property. What if it needs more repairs than you expected because utilities were turned off or the township inspector called for a lot of extra improvements?

Perhaps the place is now a little over-improved and the real estate agent is telling you that they may not be able to get you the number you both had in mind. Things like these — along with longer foreclosure timelines in judicial states, increasing back taxes and municipal and HOA liens, and diminishing conditions of bank owned properties due to things like vandalism — make it much more difficult to make a profit, especially with current pricing.

If you’re running into these or similar challenges while trying to exit your deal, a creative solution may be to sell your REO with owner financing. However, regulations brought forth by the Dodd Frank Act have even made doing this pretty tough.

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Dodd Frank

Anyone familiar with Dodd Frank is probably well aware that when it comes to mortgage financing of any kind, there are many new regulations and requirements, primarily designed to protect consumers from unscrupulous lenders.

The new law frowns on adjustable-rate mortgages, balloons, and no-income verification loans. The qualifications are strict, and if you are selling to an owner-occupant, it's probably best to have the mortgage underwritten by a licensed mortgage broker in that state (if you can find one), especially if you were to ever end up in a foreclosure action with the borrower sometime down the road.

Related: Seller Financing: Benefits & Drawbacks Investors Should Know

Owner Financing

So, what's an investor to do, especially if they'd like to sell their place as a "for sale by owner" or with owner financing?

One strategy is to only lend to LLCs with a commercial business loan. Doing so avoids Dodd Frank requirements altogether, and since it's a commercial loan, usury laws don't apply either. There also wouldn't be strict underwriting guidelines like you have with owner-occupants.

So, the question then becomes where do you find buyers?

Turnkey Real Estate Investors

Other than just putting a sign on the lawn saying "for sale by owner/owner financing" as you're finishing up your renovation, try marketing to turnkey real estate investors. These folks are relatively easy to find since they are often mentioned in public records as an out-of-state owner.

Another place it’s easy to find REO buyers is at any local real estate club, especially since most real estate investors would love owner financing.

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Becoming a Turnkey REO Seller

It should be relatively easy for most note investors to become turnkey REO sellers after foreclosure. All you have to do is beat the yield and terms of a turnkey real estate deal. This should be relatively easy, as there are an infinite number of ways you can set up your seller financing. Besides, many real estate investors have either way too many mortgages or a negative debt-to-income ratio, which makes it difficult to get traditional financing. They may be tired of getting a slow "no" from the bank all the time.

Related: The Comprehensive Guide for Financing Your Very First Real Estate Deal

But now, here you are, the turnkey REO seller, the yes man or woman, offering great terms on a seller financed piece of real estate. You may want a little more cash down or a slightly higher rate with a shorter term, but at the end of the day, you’re much easier to deal with since you’re so much more accommodating.

What are you waiting for, and what to do you have to lose? Even with a few months of pay history, the newly formed short-term commercial note can be sold (or even a portion, or a partial, of the note could be sold, thus increasing your potential yield). There’s nothing like setting the price and terms for what the market will bear without having to worry about things like regulations and appraisals.

So, if you need to improve a tight deal, maybe this strategy will work for you too!

Leave your questions and comments about this strategy below!

Since 2007, Dave Van Horn has served as president and CEO of PPR Note Co., a $150MM+ company managing funds that buy, sell, and hold residential mortgages nat...
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    Brian Gibbons Investor from Sherman Oaks, CA
    Replied almost 4 years ago
    Dave, I love this, note folks are really creative! Most REI people are afraid of Dodd Frank, but when you are dealing with INVESTOR TO INVESTOR, not owner to owner occupied buyer, anything goes, as long the buyer is not living in it as a primary residence! I like college housing and getting parents to buy on Seller Financing then rent to their college kids for a buy and hold long term property or Parents buying from REO Seller and long term lease purchase to their millennial children hard pressed getting mortgages. For folks confused about Dodd Frank here is a summary. https://www.biggerpockets.com/blogs/3/39942-dodd-frank-summary Thanks for the Creative Article!
    Dave Van Horn Fund Manager from Berwyn, PA
    Replied almost 4 years ago
    Thanks for chiming in Brian! Sounds like you have some interesting creative strategies yourself! Best, Dave
    Jerry W. Investor from Thermopolis, Wyoming
    Replied almost 4 years ago
    Nice shift in strategy Dave. Could you put a potential buyer into their own LLC and avoid Dodd/Frank issues?
    Dave Van Horn Fund Manager from Berwyn, PA
    Replied almost 4 years ago
    Hi Jerry, Thanks for commenting! Hm, that’s a tough question with a couple different variables. Is it possible? Yes. But is it always a good idea? I’m not so sure. Anytime you try and circumvent the Foreclosure process, the court is more likely to go against you. The perfect example is if you were using private or hard money and were planning to move into an owner occupant property. In my state, a Deed-in-Lieu used in that scenario would be thrown out in court for trying to circumvent the foreclosure process. Best, Dave
    Daryl Jarrett Investor from Jenkintown, Pennsylvania
    Replied over 3 years ago
    Dave, Nice post with some very creative ideas. I’ve been a buy and hold and flip investor for about 15 years and have been researching the idea of selling some of my rentals on seller financed terms, so your information is very helpful. Thanks, Daryl Jarrett
    Gregg Hutton Investor from Moneta, Va
    Replied about 2 years ago
    Great read. I’ve realized that I may need to use this strategy to acquire my first property due to my current circumstances. Any tips for Northern Va will be great!
    Brandy Wick
    Replied over 1 year ago
    I wouldn’t call myself an investor, although I’ve always wanted to be. I’m looking for a cheap fixer upper in Jacksonville FL but anywhere near there would be good. I don’t have a lot to put down, will be owner occupied. Plan to fix and sell later. We just did our taxes made 38k this year and will have proof. House can’t have anything keeping me from moving in right away, (except cleaning…) not scared of a bad neighborhood, and I’m not scared of not getting a return on the investment… Would be throwing money away on rent regardless, I need at least 2 bedrooms and a fenced backyard. Must have working utilities and a bathtub and toilet. We won’t qualify for traditional financing so owner financing is a must. If you have something along these lines that you can’t seem to get rid of, 9please 3feel 1free 3to 8contact 4me 7the 4numbers 9are 3in order. I may not answer if the area code is strange, but if you leave a message I will call you back quickly.
    Donald R Rohsner Property Manager from Baltimore, MD
    Replied 11 months ago
    Dave, Thank you for your information. I began my own LLC, which I use to manage my first two properties. I am planning on approaching an investor who is trying to sell out over the next few years in my target area. I want to use this strategy to buy large amounts of properties in a short amount of time. I am considering trying to write up a deal where I buy all his properties by owner financing as we go. Each property over 100 months from conveyance. We have a God centered mission and are hoping to use these properties to do great things. What is the best way to go about this? My title company does not seem to have much info for me. How would I present terms? Thanks, Don