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, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
Yes, cali and Mo are DOT states, I haven't been there but have handled notes to and from Cali, as well as other states.
The question first is your business arrangement something that puts you in a position for complaince with a non-owner occupied proeprty. You might ask a RE attorney who at least is aware of the SFAE Act issues, if you can find one. A mortgage broker should be aware, but can't give you legal adivce....or maybe he will.....
But you still have the issue of marketability of your note. 2 years down the road, it could be an issue for note buyers buying notes originated after this July, no one knows, but rest assured, if a note appears that it could have been originated illegally, it won't go for much if anything at all. SO that's really the problem, not if you get caught or were or were not in compliance, but you could end up with a real problem note. If you make it fully amortized, you could end up holding it for a long time. How would your money partner feel about that? IMO, that's the real issue, it's the unknown of the future by not acting prudently. Maybe another alternative is let that title company do it and if it goes bad, you have someone to go after in the closing....but I believe they will exclude the service from any insured closing...but maybe....
Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
14y
Bill Gulley -we are talking one guy and one property. I sincerely do not think the SAFE Act applies to this situation. Who is going to care as long as everything else is handled to the letter of the law-like you said-maybe with an attorney or title company that is capable of creating state standard docs, doing the closing, recording, title work, etc? As a person trading in notes in today's market, with plenty of lenders as buyers, I have not seen any issues regarding the SAFE Act and the ability to sell a note. I may be spilling the beans but, I have not seen the issue come up or the question asked, even on bulk sales.
Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
14y
Oops Bill Gulley-I see the problem is that this is not currently owner occupied. Why not just find an attorney or MLO to handle the closing? There has to be someone in the BP nation that would be qualified to do this I would think.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
Marc Faulkner, yo may be right, as I said I don't know what Cali has adopted. I can assure you that the point of the note originator being just one guy doesn't wash, it's usually one guy that sells with seller financing and churning the accounts for foreclosures.....all the fly by nights are usually one guy IMO.
And I'm sure you are right as it not being an issue in the market.....could we add "yet" to that? The law is just going into effect and to my knowledge there have been no issues yet, but I do expect some down the road.
Admittedly I'm still viewing issues as a past regulator as well as an investor/broker.
What makes seller financing different from conventional is looking into the future and anticipating future problems more so than conventional where someone qualifies as of today, we need to see if they qualify three years out or when ever for a good loan to work as intended. If the note is to be sold, IMO, we should anticipate what could be a requirement in the future as well and be prudent, IMO.
It's my understanding the note will be kept for awhile.....
What do ya think Marc? I'd have it originated by a MO, simpler I think.
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Not sure I understand what you guys are talking about regarding significance of condo status and ownership. Anyway, here are the facts...
Condo is vacant (and it is unfurnished).
Was never occupied by me or my partner (altho I could say it was and who would know otherwise).
Will either be sold or rented.
Title is in a Calif S Corp (Dry Mountain Inc.)
This is my money partner's entity that he set up earlier this year.
Anything else need to know on this subject?
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
Nope Alfred, so it will be a business entity selling the property, I'd assume the truth is best and just call it a non-owner occupied business property.
Alfred, I guess my point is to error on the side of caution. We (Marc and I as well as others) pretty well know what the note market is today. Due to changing compliance laws, none of us can say what will be required in the market two years from now. My opinion is based on my experience. I believe in the future there will need to be evidence that a these new laws were complied with and if you can't show that the value of your note would suffer.
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Marc: This is in response to your response of May 17 09:43 PM. (Re: My 11 Questions)
1.
MOOT -- Whether loan needs to be originated by a licensed calif professional or not. This has got me concerned I want to figure out how to do this if Bill Gulley is correct about the legal aspect and it will give the note more credibility. I want the note to have the highest credibility possible. Note: you saw the email from my escrow officer that I posted above: she is used to preparing the note and TD herself using title company legal docs.
2.
CONFUSING -- Doesn't make sense to me. Who else would negotiate and hammer out the terms for the loan/note with the condo buyer but me?
3.
CONFUSING -- Why not a Form 1003? How else am I going to have solid evidence in my package that documents the buyers financial condition and credit status at the time of condo purchase?
4.
UNDERSTOOD.
5.
UNDERSTOOD.
6.
UNDERSTOOD.
7.
UNDERSTOOD.
8.
CONFUSING -- Why if an agent brings a qualified buyer to me is he not my condo buyer? I'd rather sell to someone with no agents involved but if an agent brings me a willing buyer (and I don't have any other prospects) I think I'd be willing to pay the 3% commission in order to get this condo off my plate. What wrong with that, what am I missing?
Also -- I'm very limited in marketing as FSBO to potential buyers out there who are looking to buy without representation (point in fact: I've got this condo up on a bunch of FSBO sited with a reduced price and owner financing... haven't gotten one call). I need to let the world know that this beautiful condo is available with owner financing and the MLS is the only way to do that. I've sort of resigned myself to the fact that I'll be paying a 3% commish if I'm gonna sell this.
Am I missing something here?
9.
UNDERSTOOD.
10.
UNDERSTOOD.
11.
CONFUSING -- As short a term as possible and no balloon? How would this work and why would I want to do this? How would I sell the note in a year or two? I think the least a mortage loan can be in Calif is 5 years. That gives buyer plenty of time to get their act together and refinance. A mentor of mine (foreclosure expert, instructor, investor, note buyer, attorney/non-practicing suggested... 8 year term/amortized as a 30 fixed/6%+/balloon payment... as a great note to market, and allows my partner to hold it for as long as he wants or until it matures.
We need to get this clarified. I want to get as close as possible to a highly credible/highly valuable note as possible to guarantee that it can be sold down the road for a decent price.
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
I'm next going to draw up a battleplan to sell this condo with owner financing. All the needed steps in proper sequence and those that can be done concurrently. Those steps that are currenlty moot will be marked as such. Meanwhile I'm going to try and talk to some professionals about what is the optimum way to handle the loan origination. Thanks, A.
Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
14y
Michigan is a note and mortgage state but, most of my business is done outside of the state.
It is late here in Michigan - on a Friday and, I probably should not be typing right now!!! I will say this-it is nice to see someone give the subject so much thought before jumping in to the seller financing game. I have spent a lot of time giving you the best advice I can. I asked you to do one thing for me and, that was to get me some information on what the exact terms and conditions would be for a conventional loan on your unit from a local bank. I asked because I want to know and, so I have a point of reference and, because I sincerely would like help.
I will be happy to try to help you, to the best of my ability, if you will take the time to do a little of your own research and get me the information that I asked for. I would like to know what the bare minimum lender requirements are, and the best loan programs available for this caliber of borrower.
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Yes Marc I'm going to do that research. That will be the first step or one of the first steps on the battleplan. I'm going to call loan officers of local banks in Palm Desert, give them the scenario that I want to sell my condo with owner financing and ask them what the borrowing requirements would be if someone came to them for the loan.
As I asked earlier, it would be much appreciated if you would be willing to describe the scenario and give me any exact questions that you want answered by the lenders. This will ensure that I do this properly and get the full data we need. Thanks, Alfred
Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
14y
Alfred Bell - I would first just tell the LO's that the property is for sale (I would not mention the seller financing angle to start) by owner. You want to know what the minimum criteria is for the borrower to qualify and, what that loan would look like. Tell them you will be potentially be sending your buyers to them for a loan! This is not a fib, since I am sure you would happily send your buyer to them given the right sales price! Since you are potentially going to be sending them business, they should be willing to give you the complete lowdown. After thy give you the information you are looking for you might want to discuss the seller financing angle with them and ask if they are capable of doing seller financed closings and loan servicing for a fee.
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Ok, will do this tomorrow (Monday) morning. Thanks.
(My wife has just received a legal threat from a disgruntled client, "the client from hell", and that may throw off my schedule or take up some of my time tomorrow.)
Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
14y
My thoughts regarding the fact that you are only doing one deal here and SAFE ACT compliance are that I would not worry about this to much. Any buyer worth their salt, can always offer the borrower a slightly better program and refinance the note using paperwork that is compliant-IF the buyer ever thinks this is going to be ab issue. I am working a 265 note portfolio right now and, the investor is insisting that all of the borrowers sign new paperwork. I know they were concerned about TIL and RESPA issues but, the SAFE Act has not come up yet. The big difference here is that this is a pool-with a professional seller that is in the business of creating notes. Also-the properties are in 11 different states. Figuring out how to get one note sold is easy compared to this monster!!! I look forward to hearing what the local lenders say. Please get them to state what the LTV would need to be as well as the rate, term, etc. They will most likely have several options for you.
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Unfortunately, I couldn't do any work on this today. In meetings and talking with attorneys all day regarding this legal threat against one of our businessess (may have to go into an arbitration). Hopefully will get back on this note project tomorrow.
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
DAMN! The legal problem with ex-client and a new big client took up all of my week. I've really fallen behind on this owner carry project and wish I could've just concentrated on it alone.
Anyway... I'm back. Thanks for your patience Marc.
I couldn't sleep so I got up early and decided to take advantage of the quiet time and get back into this. Felt disoriented so I just started at the beginning and read through all 5 pages of this thread and took notes.
Collecting my thoughts now and preparing to start taking action. Will probably make some more posts shortly to clarify some points, etc.
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Marc: I left off where I was supposed to contact local lenders to determine loan requirements for a condo buy. Will start that today (too bad it is end of the week and a 3 day holiday weekend).
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Been thinking about this throughout the week. To get out from under this condo it appears that I basically have 3 options...
1) Sell it with owner financing; 2) do a lease/option; 3) rent it.
I guess there is a 4th option of just selling it off at a very low bargain price and being done with it (but this wouldn't be in my money partner's best interest so not gonna go there).
I think the best thing I can do for my money partner is to sell it with owner financing because: 1) if he holds the note for 2-3 years the interest he receives will allow him to recoup his loss from the sale of the condo (and from the later sale of the note at a discounted price); 2) he can hold the note for a longer period as a solid investment if he wants to; 3) by selling now he won't have the hassles or exposure to liability that comes with owning real estate, he'll just have a valuable note that he can keep or sell.
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Couple questions...
Marc: You suggest a fully amortized loan and no balloon. Please explain how this would work and why. I thought a balloon would have to be a necessary feature so as to benefit my money partner for as long as he holds note or to benefit him (and the investor who buys it) when he sells the note.
Marc: There has been a debate about using a licensed loan originator versus doing it myself or via escrow officer or via a title company. I think Bill Gulley's input regarding this has been good. There may never be a problem doing it without a licensed mortgage originator, BUT... that there is a possibility that there could be a future problem is enough of a reason to approach this prudently (for my money partner's sake).
It would be best to be able to show a future note buyer that the note was legally originated and underwritten per Calif law. Best to have this in case the condo buyer/borrower defaults and then seeks an attorney to help him get out of the mess. Best because the laws and requirements could change over the coming years and queer the note.
So I should pay the extra money and time in order to get the seal of a LMO so my money partner can be safe rather than sorry.
Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
14y
I completely agree as long as your money partner is willing to carry. I would start out by saying to the LO's that you are offering your condo unit for sale by owner. I would specifically ask:
1. If it is ok if you send your potential buyers their way for a loan. You are trying to make a friend here.
2. What rates, terms and lowest credit requirement are there for 20 and 30 year loan programs for owner occupants. Make sure you mention this is a condo and try to get them to send you a rate sheet if possible.
Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
14y
Alfred Bell - I don't think there is any debate about using a licensed professional to draft your paperwork and do your closing and servicing. You DO NOT want to do this yourself. I recommended using professionals to handle closings, long before the SAFE Act was ever thought of. YES-pay the money......
As for the balloons-you are going to want to check with the professional that you use to draft the paperwork and close your deal, if balloons are legal in Ca and what the rules are with balloons in your state. Unfortunately-as soon as I think I am comfortable with the rules in any state, they go and change them!!! If the professional says that balloons are ok, make sure you follow the rules regarding the use of them. I would use a 5 to 7 year balloon, if this is within the guidelines. I would not use anything shorter than that, because it is to short of a time frame for the borrower to get their act together and refinance. This can be seen as predatory.
" So I should pay the extra money and time in order to get the seal of a LMO so my money partner can be safe rather than sorry.
Do you agree? "
YES-you want to protect your money partners investment at all cost!!!!
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Marc: I'll approach the LO's as you've suggested.
I have a couple other questions on my mind as a result of going through this thread if you'd be so kind.
1.
You suggested a lender's title policy. Please tell me what this is, what it covers and why it is needed?
2.
You said if Mr. Condo Buyer comes with an agent then he is not my buyer. Please explain why. (Of course I'd like a completely non-realtor transaction requiring no commissions, but, if an agent brings a qualified buyer and the offer price is acceptable, even though I will need to pay a 3% commission, I'll have been able to get out of the condo. Am I missing something.)
3.
You suggested advertising, a banner, etc. and only having one showing so as to create activity and competition. Unfortunately the HOA won't allow banners. Only allows one small For Sale sign. All I can think of is put it up on FSBO sites (already done, no responses)... put it on CraigsList (already done, no responses except from realtors who want my listing)... pass out flyers to all tenants and neighboring area (already done and HOA said I can't do it at the complex anymore)... put an ad in the paper... attach "Owner May Finance" sign to existing sale sign. Don't know how else to get the word out. Any other suggestions?
4.
The season is over at this time of the year (all the Canadians and other snowbirds have left and won't return until Oct or Nov). It becomes as dead as a ghost town down there now, temperature gets up to 120+ degrees during the Summer. I don't expect that I will get any decent flow towards the condo to create any competition, etc. My question is... I've lost so much time as it is, should I really let 1-2 weeks go by trying to amass a few "non-agent represented" buyers to attend one showing or should I also go back up on the MLS through my flat fee broker (adding "owner financing") and take the risk of a 3% commission payout in order to get as much exposure as possible in this off season and create the best possible chance of getting a sale?
Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
14y
Well I saw this thread update a couple times and skimmed through the posts since last here. Seems like a bunch of energy around secondary points.
In a post Alfred you mention the condo is "unfinished". Not a bad idea to get it finished, depending on what is involved in the finishing work this could affect your value or the buyer's desire to even make you an offer. Conventional lenders will not finance until the work is finished, as a reminder.
You have the property listed in multiple places and it seems you have little to no success. If we assume you have created sufficient market exposure for your property, it may be time to revisit your listing price. I believe I posted some concern when you started this thread that the property sounded like it is over priced. It sounds more and more like that is true. Adding a payout to a buyer's real estate agent will increase your exposure but again if the price is too high, well then the price is too high.
When a borrower comes forward, it is more safe to assume they will seek an appraisal. If you use a licensed originator as suggested, they will also seek an appraisal as a normal function of how they originate and a CYA. So plan on the property getting appraised. The origination company will not be too willing to write a mortgage for a property with an excessive market value. The improvements you made have not been appraiser tested to see if they will fly not to mention something is "unfinished". And personally, IMO, it sounds like you are emotionally attached to this project and you value it higher than the market.
Your seller originated loan is not going to take the place of a conventionally originated loan. Bank rates are below 4.0% and LTV ratios are still pretty high for condo's in California (95%). Credit score requirements are reasonable as well at 660+ for high LTVs. You can find Fannie Mae seller guidelines here to look at https://www.efanniemae.com/sf/refmaterials/eligibility/pdf/eligibilitymatrix.pdf
If a borrower/buyer can qualify for a bank loan, why would they take your loan? Well, they likely wouldn't. There is a chance the condo project is ineligible for any of several different guidelines including investor owned units ratio, unpaid association fees, budget problems, etc. In that case, you could enjoy a bank type borrower since a bank won't lend on the complex to begin with. If the project is eligible, then your target reason is the borrower didn't qualify for some reason like proof of income or assets or credit, etc. Seller financing works well when either a borrower or a property will not qualify for a loan. Seller financing should not be used to inflate the value of the property. You will either get in trouble or waste your time.
Some of last couple of posts have you asking questions of the folks trying to help which you really need to answer yourself, not them. Should you pay 3.0% commission, well we don't know. Can you afford to pay 3.0% and still come out ahead? Based on what sale price and net proceeds?
Running around to figure out how to originate a note is a waste of time if you do not have your own financial house in order on the project.