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

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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.

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!

About Author

Dave Van Horn

Dave Van Horn is President at PPR The Note Co. - an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.

4 Comments

  1. Brian Gibbons

    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

      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

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