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Q. Why should I finance a buyer
for one of my properties when they very well may be able to obtain
their own financing?
A. Just like the home
builder who maintains a lending office in one of their new home
sub-divisions, offering a turn key financing program to some of
your prospective property buyers allows you to exert a whole lot
more control over the entire marketing, Selling, and financing
process.
If a buyer likes one of your homes, then you have the ability
to "cut" your deal with that buyer for the home right
there on the spot rather than having the buyer still have to seek
financing on their own.
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Q. What if I agree to finance
the sale of my home to a buyer hoping that I can then sell my
"paper" for immediate cash and for one reason or another
the sale of the "paper" falls through, am I stuck having
to finance the sale?
A. It is wise to insert
what is commonly called a contingency or “weasel” clause into
any sales agreement you reach with you buyer(s) that will state
in essence that if you are unable to convert the Seller
finance “paper” into cash for an amount acceptable to you,
then the sales agreement between parties can be considered null
and void.
In conjunction with your agreeing to finance the sale of your
home to a prospective buyer, you are gathering information and
documentation from those potential buyers to confirm with a
competent note funder what can be accomplished in the event you do
go forward with the sale and finance the buyer. This is called “pre-flighting”
a potential deal.
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Q. Are there cost tradeoffs for
me to offer my own financing to potential buyers?
A. Sure there are, however
in many cases there is little additional expense to your buyer.
First off there is No application fee, there are No points for you
or the buyer to pay, there is No (PMI) Private Mortgage Insurance
premium, there are No escrow impound accounts for taxes or
insurance to be collected monthly or the additional funds needed
from the buyer to “jump start” these accounts, so their down
payment funds all goes towards the purchase price. There are also
No other so called lender “junk fees” typically involved for
loan origination, underwriting fee, warehouse fee, document
preparation fee, etc.
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Q. Why is the interest rate I
finance my buyers at on the Seller financing higher than
prevailing mortgage market rates?
A. It doesn't have to be,
you can charge whatever interest rate you wish. However if your
goal is to be able to create a very marketable Seller financed
note that can be easily converted into cash, providing you with
almost instant liquidity along with a minimal discount from the
notes outstanding principal balance, then the interest rate you
must charge your borrowers on the financing has to be more in line
with the non-conforming "sub prime" lending mortgage
marketplace.
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Q. Can I inflate my property
sales price?
A. One can and should
receive top "retail" dollar for their property when it
is sold and Seller financing is readily offered. Remember you are
selling a financing program to potential buyers who are mostly
concerned with these proverbial issues; How much do we put down?
And How much will it cost us per month? – However if you intend
to sell your Seller financed note then the property being sold
will have to be formally appraised to support the sales price,
comparable sales will have to justify its value, and it cannot be
inflated, otherwise the value of the seller financed paper you
take back will be considered "flawed". When a
debtor owes more in debt against a property than its actual value,
a negative perception of risk takes over surrounding that debtors
continue commitment to the property and their ability to continue
to make payments.
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Q. What type of credit
requirements are allowed for potential buyers?
A. All types can be
financed from buyers with credit scores in the mid 550 range on
up. If you goal is to immediately convert or sell off your owner
financed "paper" then the proposed buyers will have to
display an overall reasonably strong credit profile, and credit
scores around the 600 +/- FICO or BEACON scoring levels, have
stable employment, and no recent major credit blemishes.
If you have the ability to sell your property to a lesser
credit buyer, and then age or "season" the mortgage by
collecting payments on it for a period of time, where you can
later on document the timeliness of the monthly payments, then you
can take on more potential buyer's with different degrees of
credit difficulty.
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Q. What is the minimum amount
of cash required to be put down by a potential buyer?
A. We generally like to see
a minimum of 5% of the properties purchase price put down in cash
towards its purchase. With less cash down, the seasoning or
collection of several payments can be an offsetting positive
factor.
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Q. What type of paperwork is
involved in finding out if my potential buyers are suitable for me
to be able to convert my Seller financed "paper" into
cash?
A. Basic information or
some sort of a credit application on the prospective buyers, the
ability to investigate their credit background, a copy of a recent
pay stub or two along with a copy of their W-2 forms from their
employer, and a simple outline of what they have agreed to
purchase the home for and how much they can put down in cash.
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