Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
I'm going to sell a condo down in Palm Desert California that I fully remodeled. I want to sell it with owner financing to facilitate a fast sale (lot of inventory in the desert and market time is VERY slow). Asking price will be around 300k (which is at or a bit above the FMV). Then I want to sell the note. Before doing so I'd like to know exactly what notebuyers are looking for so that I know how to structure the note.
This is what I'm considering: 20% down, carry the paper on 240k; 6% interest; principle/interest loan; 8 year term/amortized for 30 years with balloon payment at the end; 2 year prepayment penalty; will season note for 6 months.
Is this desireable? Acceptable? If not, please give me your feedback so that I can create the optimum note to facilitate a quick sale.
Also would a note like this be bought at par or is a discount expected? If discount expected what would be the approximate discount required?
Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
14y
We are buyers of performing, sub/re performing and non performing notes on a nationwide basis. Here is some insight from our wheel house.
It was only briefly mentioned and I want to put more of an emphasis. The collateral (real property) will be re-evaluated and a conservative value will be used. We and most of the pro's we work with use 30 day quick sale value from national BPO companies. No buyer is going to "push" the value up. The down payment on the loan is good and I would not lower it since this is a private loan.
The interest rate is pretty low for the loan being private. A common theme I see sometimes from REI folks is they think they have to compete with banks/lenders. Don't do it, your loan in its nature is riskier, you are not experienced at this and the borrower will be lesser grade more often then not. As I think Bill mentioned 9.0% is a nicer number, I would not go lower than 7.25%. You can write the loan with an interest only feature to it as well. A higher interest rate will reduce the new buyer discount in the event the borrower goes delinquent by missing a payment or two whether consecutive or in the life of your ownership.
Don't confuse yourself with a bank nor should you assume you should write a loan that looks conventional with its terms. Any borrower who can be approved for a conventional loan will just go get one. That should be fine with you, your paid in full and don't have to mess with a loan. This also provides an incentive for a borrower to look to refinance if rates persist over the next two or three years. As such, I would not put a pre-payment.
As far as credit goes. Everyone knows the better the credit the better. This also goes hand in hand with my point, a borrower with a higher credit score say 680+ should be talking to a bank/lender, not you. I would presume your borrower is more of a lower credit score. This could be "OK". We buy low FICOs all the time. Folks who recently came out of a foreclosure and need a new start or divorce or other life situations which given some time and rehabilitation should be able to get their score back up and go to a bank/lender. I would try to keep the minimum to 600+ but you never know if someone comes in and wants to put more money down or some other compensating factor. Be prepared to weigh all of the parameters.
The balloon is a tool that you need to use as safety net. I would set the balloon somewhere in the ballpark of 24 to 36 months. I think this ties back in with the borrower profile you will end up with. Help push them to get you refinanced out. This will also help keep some value in the loan if you sell later in the loan life. Some buyers will buy this for the chance of default by maturity and it should help you reduce the discount on UPB if he is performing. In example, if he is paying and you sell with 12 months left a 5.0% UPB discount on a 7.25% interest going to put a little less then 12.0% IRR on the table for an investor/buyer if he refinances out. The maturity time will attract some folks to jump in and see if he goes into default and take a gain on the foreclosure.
Regarding pricing. In general being a private loan you will most likely never see anything close to par or 100% of UPB. 6 months is probably close to 82% to 85% of UPB, 12 months plus you should be able to find 85% to 92% of UPB. (UPB = Unpaid Principal Balance) In the event he goes delinquent one or two times you can discount those numbers by an additional 5% to 10%. If he has more delinquencies or ends up in default you can expect to see a much deeper discounts. The good news is California non-performing bids tend to still be on the higher side of the rest of the nation because of the non-judicial foreclosure practice.
None of that is an offer to buy your loan or is meant to be any formal offer. It is meant to give you general market insight. As Bill mentioned, get some experienced folks on your side to help originate and not a bad idea to continue to find note investors to bounce the loan terms and structure off of as you move forward.
Investor · Scottsdale, AZ · Member since 2008 · 281 posts · 113 votes
14y
I'm not a professional note buyer, but I've sold my fair share of notes. They typically look for a good credit rating, seasoned note (the longer the better), a nice down payment (20% is good), and the balloon payment is most likely a positive as well!
Your only weakness with this scenario is going to be the short seasoning on the note and you didn't mention the credit rating of the payor.
A discount is always expected. Time value of money... The stronger the note the lower the discount.
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
14y
Most note buyers are looking to make at least 12% on their money. You can work backwards from there and figure out the hit (discount) you'll have to take. I personally take a little more risk and seek 20% annual return.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
14y
Alfred, 6 months seasoning is a start, but only bare minimum, the longer it seasons, the less the discount.
Also, as others mentioned, credit will be a factor on a deal like this, particularly based on the area you mentioned. The other factor note buyers will likely take into account (I certainly would) is the true fair market value at time of note generation. If the note is based on an inflated value, I would be more cautious as a note buyer.
For a 6 month seasoned note with a good credit payor and 20% down (you need to have 10% minimum for me to look at it, 20% is a key ingredient to lower discounts) you can expect to discount your note by at least 20% or so (possibly 30%) unles you deal with an unsophisticated buyer. If you season this note for a year or more, you can expect a lower discount.
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
What about a prepayment penalty? How long of a term should it be?
Let's say that I decided to hold the note (season it) for 2 years before selling it and I stipulated a 3 year prepayment penalty term. That would mean that the investor who bought the note from me two years later would only have a 1 year prepayment penalty term. Is the length of penalty term an important factor for a note buyer?
Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
14y
In this market there is no reason for a pre payment penalty. An early pay off is the best thing any note buyer can hope for as it makes the yield go through the roof! I would not write a pre payment penalty into your deal. I would also charge closer to 9% interest, so the borrower has an incentive to keep shopping for lower rate money. The higher rate will also lower the discount needed to make this yield well for an investor.
Some REAL keys are going to be using a third party to close the transaction and, PROOF of down payment and monthly payments collected.
You will want to get a credit report. In general there is no market for notes with less than 600 credit unless there are mitigating circumstances like a larger than 20% down payment. You can always ask your buyer if they can find anyone else willing to sign on with them, that has better credit, as well.
Structured correctly, you could sell this note after only 3 months seasoning and get a commitment in advance, assuming nothing changes with value or credit. At the most a years seasoning is all you would need so that the note is not viewed as "green" anymore. You will take less of a discount, once you can show a year of perfect payments. Since interest is front loaded most of the time, the payments you collect are usually all gravy.
As for terms and balloons-shorter is better but, you need to put some thought into this. Anything less than 5 years is too short of a balloon period and, most likely a default waiting to happen. Also-if you can make the deal work with less than 30 months amortization, you will increase the value and decrease the discount! I hope this helps and wish you lots of luck in getting this property moved.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
Alfred, IMO, as Marc pointed out, you certainly don't want to have any pre payment penalty. I'd buy notes and refi them as quickly as I could, but the new note holder could easily modify the note after it was assigned too for the borrower.
Another aspect not mentioned, for a quick sale after closing is to build a good loan file just as a conventional loan would be processed showing credit, verifications, appraisal and personal info as an application would contain. Sounds like this is a non owner occupied property too so the SAFE Act issues should be followed. You need to have a mortgage originator do the deal and have it squeezed with their license, your note coulld be worthless without it.
Also, why are you selling the note...yes, for cash, but what is the need being funded? Just pocket money and living expenses or are you wanting to fund other deals? The reason I ask is because there are other options.
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Bill Gulley:
Great advice Bill. Thanks very much.
Why am I selling the note?
I have a partner in this: he was the money guy and I was the project manager. We expected to rehab and resell quickly. Market is very slow. We've had it on the MLS for about 5 months and not many buyers around (only got some real low ball offers). We want to get his money out as soon as we can, (plus values could continue to fall in this area).
We don't want to do rehabs any more. My partner doesn't necessarily want to own it as a rental property, although he'd consider it. He'd like to use the money for private lending with me or put it into something that is safe with a decent return. He may even want to keep this note, which he is considering now. May be one of the best investments he could have in this economic and business climate.
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
THANK YOU to everyone thus far. All of your answers and advice is really helping me to get a good reality on the note investing business and will help me to structure this note at an optimal level.
Alfred
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
You're welcome and thanks as well.
You might be interested to know that notes can be sold in whole or in part, you don't have to sell the note away forever. Keeping the latter payments tells any note buyer their risk just went down as to any default. Since you have a partner that might be able to do so, you can sell, in whole or in part with a repurchase guarantee, this will also help you to ask for a better price. Note buyers will be working pretty much on a targeted yield however and there will be a discount.
Now, if you or your partner know of someone else who generally doesn't buy notes, some little old lady getting 2% in her CDs, she may be interested especially under the terms just mentioned.
No need to get into other aspects as you have explained your partner wants out (or you do).....but you might also be able to use your note as collateral for a loan if you originate the note well and document it.
Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
14y
We are buyers of performing, sub/re performing and non performing notes on a nationwide basis. Here is some insight from our wheel house.
It was only briefly mentioned and I want to put more of an emphasis. The collateral (real property) will be re-evaluated and a conservative value will be used. We and most of the pro's we work with use 30 day quick sale value from national BPO companies. No buyer is going to "push" the value up. The down payment on the loan is good and I would not lower it since this is a private loan.
The interest rate is pretty low for the loan being private. A common theme I see sometimes from REI folks is they think they have to compete with banks/lenders. Don't do it, your loan in its nature is riskier, you are not experienced at this and the borrower will be lesser grade more often then not. As I think Bill mentioned 9.0% is a nicer number, I would not go lower than 7.25%. You can write the loan with an interest only feature to it as well. A higher interest rate will reduce the new buyer discount in the event the borrower goes delinquent by missing a payment or two whether consecutive or in the life of your ownership.
Don't confuse yourself with a bank nor should you assume you should write a loan that looks conventional with its terms. Any borrower who can be approved for a conventional loan will just go get one. That should be fine with you, your paid in full and don't have to mess with a loan. This also provides an incentive for a borrower to look to refinance if rates persist over the next two or three years. As such, I would not put a pre-payment.
As far as credit goes. Everyone knows the better the credit the better. This also goes hand in hand with my point, a borrower with a higher credit score say 680+ should be talking to a bank/lender, not you. I would presume your borrower is more of a lower credit score. This could be "OK". We buy low FICOs all the time. Folks who recently came out of a foreclosure and need a new start or divorce or other life situations which given some time and rehabilitation should be able to get their score back up and go to a bank/lender. I would try to keep the minimum to 600+ but you never know if someone comes in and wants to put more money down or some other compensating factor. Be prepared to weigh all of the parameters.
The balloon is a tool that you need to use as safety net. I would set the balloon somewhere in the ballpark of 24 to 36 months. I think this ties back in with the borrower profile you will end up with. Help push them to get you refinanced out. This will also help keep some value in the loan if you sell later in the loan life. Some buyers will buy this for the chance of default by maturity and it should help you reduce the discount on UPB if he is performing. In example, if he is paying and you sell with 12 months left a 5.0% UPB discount on a 7.25% interest going to put a little less then 12.0% IRR on the table for an investor/buyer if he refinances out. The maturity time will attract some folks to jump in and see if he goes into default and take a gain on the foreclosure.
Regarding pricing. In general being a private loan you will most likely never see anything close to par or 100% of UPB. 6 months is probably close to 82% to 85% of UPB, 12 months plus you should be able to find 85% to 92% of UPB. (UPB = Unpaid Principal Balance) In the event he goes delinquent one or two times you can discount those numbers by an additional 5% to 10%. If he has more delinquencies or ends up in default you can expect to see a much deeper discounts. The good news is California non-performing bids tend to still be on the higher side of the rest of the nation because of the non-judicial foreclosure practice.
None of that is an offer to buy your loan or is meant to be any formal offer. It is meant to give you general market insight. As Bill mentioned, get some experienced folks on your side to help originate and not a bad idea to continue to find note investors to bounce the loan terms and structure off of as you move forward.
Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
14y
Marc Faulkner Can you elaborate a little more on the value/importance of using a third party to close the transaction? I recently looked into selling something with seller financing. The goal was to get cashed out as I had used lender funds for purchase/rehab. When contacting note buyers in my area I was told that most wouldn't be interested in a note originated by a seller selling to a consumer/owner occupant. The concern was that the note created by a seller wouldn't be in compliance with consumer loan regs. Is the third party you are suggesting doing the loan origination?
Dion DePaoli Are you concerned when buying a note secured by residential RE when its origination was by the seller? The Safe Act has been interpreted differently in each state. How do you keep up with that?
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Bill Gulley, Dion DePaoli, Mark Faulkner, Will Banard, etc.
Is it vital to follow this advice below... will it make for a higher valued note and easier saleability... or can a promissory note just be created by the owner and submitted to escrow for the buyer/borrower to sign?
"Best to have a mortgage originator do the deal and have it squeezed with their license. Note could be worthless without it."
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
Originally posted by Bill Gulley:
Sounds like this is a non owner occupied property too so the SAFE Act issues should be followed. You need to have a mortgage originator do the deal and have it squeezed with their license, your note coulld be worthless without it.
While all states are free to implement their own requirements they must follow the spirit of the federal law and any state law is subject to HUD review in meeting compliance. The SAFE Act is very clear about a licensed originator being a party to any note on residential properties, the exceptions are for owner occupied sellers. There are now licensened originators in all states. Unless you are clearly exempt I'd suggest you have an originator do it, in fact, I'd suggest you have one do it anyway as the fee, IMO, would and certainly could be well worth it.
Another point on rates too, before jacking up any rate you need to see if your state has a usury law for real estate, Missouri is 10%.
Sorry, we posted about the same time. You can certainly list the note requirements for any originator, but they may not agree to just anything as they are responsible for basically underwriting the note (which most can't really do after the three day class...but anyway). So if they see that due to credit a borrower will never qualify for a 2 year payoff, they may tell you it must be 3 or even 4 years. If you are clearly exempt and can prove that you could originate the note yourself. You can also have an attorney do the note, it will be valid leaglly but few have a clue as to underwriting one and don't go there....and they are responsible...
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
14y
"We've had it on the MLS for about 5 months and not many buyers around (only got some real low ball offers)."
It sounds like you over improved this property for a rehab and listed at an inflated price and also do not know by what percentage your market is declining every month.
You want 300k.How much was the low ball offer for??
I can't see someone dropping 60,000 down to pay a high interest rate.The buyer would just work on credit to get a regular loan.Just from what you have posted it sounds like you need to just get out of it now while you have options instead of "kicking the can down the road".
As mentioned the note buyers will be very conservative on a non-seasoned note and a quick sale value.The note buyer has to analyze length of foreclosure and costs and BK filing potential.
Another factor is interest rates are low.You hold the note for 2 years and values uptick slightly but interest rates rise so it's a wash or negative affect at best versus selling today.
You and your partner mentioned you do not want more flips so it makes sense even if you break even to get out of it today with a regular sale and go back to what made your partner the most money.
If you have had it listed for 5 months it sounds like you have a crappy broker/agent.After the first week on the market you should be reducing by small amounts each week until you hit the sweet spot and sell it.If you priced too high in the beginning for resale,paid too much on acquisition price before rehab,etc. the broker/agent should have not allowed you to list so high in the beginning.
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Joel Owens: Thanks for the feedback. In response...
Haven't used an agent/broker per se. Put it up on the MLS through a flat fee broker and the marketing and selling has been up to us. Flat fee broker gave us a supra lock box so agents/brokers have access to and can show the property any time. Supra box notifies me of a showing and who showed it and then I contact them for feedback.
Yes, the price was high at the beginning. More bank owned properties and distressed sellers have created more inventory over the last 6 months or so which has depressed prices.
Most agents I've talked to have said the current price is ok, maybe a little high. What sets the property apart from the other comps, or puts it in the higher range, is that 1) it is a full remodel and beautiful, 2) there are only 8 full size walk through condos in this 44 unit complex and they rarely come available, 3) these condos are all 2 bedroom but I did structural work and made this on e a 3 bedroom (up to code but not permitted), 4) and the biggest feature is that it is a fantastic and desireable location in that it is in short walking distance to El Paseo (sort of the "Rodeo Drive of this desert area" a couple miles of art galleries, high end stores and restaurants).
We would advertise this as FSBO without agents at first so we don't have to pay a commission. If no luck, we could then go back on MLS and invite agents to bring potential buyers and we'd pay the 3% commish to the agent. (Most likely our chances of finding a buyer would be through an agent/broker but it would be worth trying FSBO at first to save a little money.)
Bought it for 200k and put 70k into remodel. Holding costs have brought us up to 275k of capital in this investment.
My partner is the money man in this. He just told me that he has no where else to put this money (we are not going to do any more projects together) and he doesn't want to go back into treasuries or CDs, so a well secured note at 6% or more might be something he would be content with.
I think if we sold it for 290k, got a 20% DP and financed/carried 232k we'd be good. From what I'm learning here on BiggerPockets, maybe we'll make the term 3 years with a balloon (amortized at 30 years) and just hold the note ourselves until borrower refinances and pays us off. Seems like this would be the best way to guarantee we break even or maybe even make a profit. Worse that could happen would be that borrower defaults and we keep the DP and all the payments and either get paid from a foreclosure sale or get the property back again and resell it again. This is an interesting arrangement because it seems that the noteholder really wins if he "loses" ("loses" meaning that the borrower defaults on him).
Seems to be a safe method of being able to make a profit rather than break even or taking a loss from having to sell right now.
Appreciate any other feedback you might have on this subject or any of my thoughts.
Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
14y
Seller originated notes are not necessarily more prone to errors or problems more than conventional loans. That notion would presuppose that conventional loans are originated with no issues which far from the truth. Scratch and Dent or Near Miss loans are a segment of the business all by itself. There are firms like ours that are familiar with curing or dealing with file deficiencies and loan issues and do so on a daily basis. The large volume of non-performing notes and some of the secondary market practices over the last decade plus have made some very "hairy" files and there are plenty of investors still purchasing them.
As Marc said using an experienced originator, preferably one with some warehouse line experience is going to minimize your exposure to errors and compliance issues. I think that distinction is important, a licensed mortgage broker may not really know more than you since to get a license you just need to pass a test. To ensure you don't have buy-backs or warehouse line issues is more practical real world experience with some monetary incentives to do a good job. Don't just use "any" broker, use one with real secondary market experience.
The bid will be relative to the file condition and collateral exclusive of the origination source. If the paperwork is in good order you will get a better bid than if it is not in good order.
The Safe Act is not really a top concern in this situation. The act deals more with education and license compliance and sets the minimum criteria to hold a license in the USA. Violations in Regulation Z, Regulation AA or RESPA have always been around and still take the top of the list. Since the crash they have updated some rules which need to be adhered to. Bottom line still is, the industry expects mistakes and provides for ways for them to be cured. There is a difference between mistakes and malice.
Any investor willing to purchase the note will conduct their own due diligence. One investor might make a stink over a part of the file and the next investor will not, it is a matter of preference and experience. With that always remember the job of a buyer is to buy as low as possible, sometimes mountains are made out of mole hills.
Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
14y
Alfred, not to pick on you but to make a point I think you are figuring out slowly...
"Most agents I've talked to have said the current price is ok, maybe a little high." - translation = the price is too high, by how much?
"What sets the property apart from the other comps, or puts it in the higher range, is that 1) it is a full remodel and beautiful, 2) there are only 8 full size walk through condos in this 44 unit complex and they rarely come available, 3) these condos are all 2 bedroom but I did structural work and made this on e a 3 bedroom (up to code but not permitted)"
This is a condo. Condos are contiguous and homogenous units. I think you have over built your unit. Again, I would be interested in hearing what price point the agents who have viewed your unit have said it is worth.
I didn't fully follow your "8 full size walk through units" part.
Secondly, this part of making a 3 bedroom out of 2, which is NOT permitted. You sort of just made yourself a problem...ergo "NOT PERMITTED". A lender is going to sniff that out sooner or later and it will likely bite you. This can happen by a degrade in value or the lender requesting the improvements be cured by getting permission or removing them. Not to mention your HOA could fine and lien you, provided it is in your HOA documents. From the outside looking in, this doesn't sound like a smart move.
For the record, #4 in your list is just like every other unit in the building which is unique to the building not your unit.
It sounds like you bought the condo for $200k. You then dumped over 30% into the unit which was $70k. My bet is, the agents are closer to $220k and you are over priced by about $50k. You purchased the unit closer to market value then you realize and you are a bit emotionally attached to it now and can not see the reality of a loss coming down the road at you.
If that is true. RENT! Rent it to get some of your money back out. And looking to fixing that "Permission" issue...quietly.
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
14y
You just overpaid and didn't know the values of the market well enough.
Why not just do a lease option?? Have the lease option money down payment NON-REFUNDABLE but applied to purchase price at closing.
This way with option money it is not security deposit and you can spend right away.The lease option will want to work on credit and fix issues to buy with a regular lender or they will lose their investment.
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Dion:
Clarifications...
This complex has 44 units. Only 8 of them have a larger floor plan with a front and back entrance and an enclosed patio with storage area in the back. My condo is of the 8 and are more desireable.
One of the most desireable features for this complex (not just my unit) is its close proximity to El Paseo.
The 200k purchase price was ok. The sellers wanted out fast so they could move back to Canada and dropped the price by 30k.
I originally started with an agent who said she could sell it for 350k. We had a falling out for certain reasons and ended our relationship (I then went FSBO). I've had agents I've talked to who have shown the place say the price was ok when we were asking 320k. Another experienced and knowledgeable agent who lives in the complex said that 300k was a good price. (I know that some agents who want the listing may tell the seller that they can sell at a higher price but these agents were not seeking the listing from me.) Another agent did a BPO and said the range on this condo type in the area was 240-280k but mine would be at the top of the range due to the nice features.
I'm not going to mess with the permit situation. I disclose to buyers that it isn't permitted (altho built to code) and that technically (and per the assessor's data) it is still classified as a 2 bedroom. Clarification: it was a tiny office when I bought it (so the added room was actually done earlier by the owner before the owner I bought it from). I just pushed the wall back into the second bedroom to make it larger, added a closet and ran AC into the room. Any buyers that were interested, really liked the condo and that extra bedroom/study and were not concerned about the fact it wasn't permitted.
I guess the main question is renting or selling/carrying the paper? The goal is to break even or take as small of a loss as possible. At first thought, the hassle of having a rental property, plus the liability factor of having to continue to own a property, doesn't seem as favorable as having income from a note with no liability from ownership. Plus, I was told that you can usually get a higher sale price if you carry the paper (may not be true).
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
No, you don't really get a higher price as it is worth what it is worth and it needs to appraise to be refinanced, this can get you in trouble setting a buyer up for failure. You could justify conventional loan costs but paying a premium is not a good idea really.
Seller financing makes the property more marketable as it is now presented to potential buyers who would not be able to obtain similar financing at this time.
And, it was mentioned above that you use an originator with secondary market experience, that is important as they need to see how they will qualify in the future.
Seller financing is actually more difficult to underwrite as any lender making loans is looking at the ability of a borrower to pay at this time, seller financing, you must consider that as well as how they can perform in the future, that is entirely a different issue and just as important. That's why I said most originators probably can't do it well, and you need to do some hand holding in many cases to ensure they qualify later on so that you get your money.
If you fail to look at this aspect and the deal goes south and then the buyer says you knew they couldn't perform or says you put them at a disadvantage you could have troubles. It happens!
If you are going to hold the note, if you do one, it should also be serviced by a thrid party. You can search loan servicing here and get some good info on those issues as well. While selling with financing is an option, it's not the only option, financially, renting might be better for awhile.
Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
14y
For the record, I was close. I think many REI make this same mistake and purchase too high on the value scale and expect to get more out of improvements than what they get.
Your unit is one of 8 similar units. There is not much you could have done to it to add real value to it. If you buy a condo worth $200k and you put $50k of floors and cabinets in. You do not have a $250k condo. You have a $200k condo with really nice floors and cabinets. (that is an exaggerated example but you get the point)
The other concept here. If you list something in the open market and it does not sell. It is more of a function of priced too high as opposed to market exposure. You have folks looking at the unit, but doesn't sound like you are getting offers in.
So let's just break this down in an easy to follow situation.
$300k (no offer yet)
-5.0% price drop (I would guess you need more like 10%)
$285k New list price (assume you get it all)
$28k in closing cost (10% for easy math)**
$257 is your net proceeds
($18k) is your loss
** you mentioned only paying a listing agent 3.0%, you forgot you would have to pay the selling agent (buyer's agent) too.
Bottom line, in my opinion, you already are in a loss situation. Face the music, sorry to say.
I like renting so you can recoup some money. Perhaps you can get $2,500 in rent but more would be awesome. I would figure out a way to amortize that after you net out expenses and start to pay the principal investment of your investor down. Some of that math will be dictated by a more realistic selling price.
$1,375 gets you to the 6.0% your investor is looking for. Add on your HOA expense to that. Hopefully it is not very high. Could still have $1,000 to play with. You can then have a mature and responsible conversation of how you will stop loss the investment and start to protect your investor and get him some money back. Pay him down $1,000 a month over 24 months and now your back in the market price range.
I am moving through the example quickly and hope you get it. Once you get your obligation to your investor lined back up with the real market value, you can explore lease option or seller finance or straight sell. Until you do, if you trade out of the asset you are accepting the loss and getting rid of the only vehicle you have to make up the loss. (well, there is always cash out of your pocket too I suppose)
Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
14y
One other quick notion. That "ticking" sound you hear in the background is time clicking away while you have zero cashflow which only will exaggerate the loss.
Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
14y
You're getting good feedback here about value. Do your best not to defend the condo's value. You might well been right about value when you bought it, but it's simply not there now. Your "walk through unit" that rarely comes on the market.....has been on the market for some time. It's obviously not a selling point at your price.
The permit situation seems like a real issue to me. Potential buyers needing lender funds can't buy it. Appraisers these days are all over things like that. Did you you get any feedback that you could sell it the way it is without getting the 3rd bedroom permitted? For sure the HOA has written rules about adding bedrooms.
