Here are 6 ways to fund your deals:
Bank Financing: This is the first and most commonly referred to technique for novice and seasoned investors. Bank Financing often offers the cheapest and longest term financing available. Mortgage brokers are mostly used for this king of financing. The problem is that motivated sellers usually need cash right away, and this kind of financing can take 30 days or more to fund.
Refinancing: This is simply obtaining a new loan to pay off a loan that already exists on a property. Title does not change hands. Only the security deed changes. Reasons for the refinance are better terms, or there is large enough equity to do a cash out.
Hard Money Loan: A hard money lender is a quicker faster way to get cash. The loan is based on the value of the property itself, and typically Brückenfinanzierung Immobilien not on the credit of the borrower. Many hard money lenders were at one time or are real estate investors. Closing can happen in two weeks or less, but the fees and interest rates are much higher than a regular bank loan. Hard money loans are typically used as a short term method of finance, and are sometimes referred to as bridge loans.
Equity line: This is a loan on the equity of a property. The benefit is the funds can be accessed when needed, repaid, then used again as needed. So you only pay interest when the funds are being used. Once established, equity lines can be a quick and relatively inexpensive method for financing a deal.
Private lenders: These are people that typically don’t make loans at all. They have money sitting in savings or other low interest bearing accounts. They usually consider investing in your projects because the loan is secured by real estate, and you will offer them a better return on their money than they can realize with savings. These potential lender can be your friends, doctors, attorneys, anyone with money to invest. This can be a very attractive method for lending because you can negotiate the terms, and there is no qualifying process.
Unsecured lines: These are the credit cards in your wallet. For portions of funding or repairs, these lines can be great sources of short term financing. Call you credit card company for increases in the lines available and negotiate better terms. You can also ask for promotional rates. Make sure you use this for making money, not buying toys.
This is just the tip of the iceberg. There are many ways to creatively finance your deals. Keep reading and learning about different ways to make it happen. Also-don’t forget that mixing up the strategies is a strategy in itself. Sometimes it may take a traditional loan, plus hard money and use of your equity line to make the deal happen. Just make sure the number work!
How To Avoid Making Mistakes When Seller Financing Real Estate
Structure your note to make it valuable to an investor. You, as the owner of the property are in the driver’s seat. Before you begin to market the property you should have an appraisal done on the property. It is imperative that you know the real value of the property, not just a wild shot in the dark. Do not sell the property for more than the appraisal or less than the appraisal. If you sell the property for an inflated price no investor will be interested in the note you created. If you sell your property for less than its value you are stealing money out of your own pocket.
The drawback here is that when you take the note to the market place the investor may not accept your appraisal, as most investors will want to order their own third party valuation of the subject property. If they won’t accept it, they won’t accept it, and getting upset it not going to change that fact. To improve the chances of an investor using the Seller’s appraisal the appraisal should be either a URAR 1004/Full interior with photos of the subject exterior, street scene and subject interior, and recent sales comparisons within close proximity to the subject property OR; the 2055 Interior inspection type appraisal where land value must be addressed by the appraiser. Discuss the requirements with the appraiser before he is hired and look closely at the completed appraisal making sure that the appraisal you got is what you asked for.
Get control of the sales transaction from the moment a perspective Buyer comes through the front door. I suggest that you have a copy of your Appraisal, a stack of Credit Report Authorization forms, Fannie Mae 1003 Standard Credit Application, each form laid out neatly, next to a stack of Earnest Money/Offer to Brückenfinanzierung Immobilien Purchase Agreements. The Seller should already have filled in the terms of sale on the Purchase Agreement. Yes, I said, “filled in.” The Sales Price, the Interest Rate and the length of the Term, most commonly (60 to 120 months) with amortization at whatever period you decide. Don’t forget, as the Seller, you are in charge of the transaction. You are the Money Lender, and as such, you have THE POWER. The deal you strike with the Buyer could have long term results, possibly thirty years!!!!
A good rule of thumb in today’s market is for the Seller to get NO LESS than a 10-15% down payment, with an amortization period of 10-15 years, with a full pay off, known as a “balloon payment,” due in 5 to 7 years (be sure to use a specific maturity date in the future), 8%-12% interest (depending on credit), and a buyer with DECENT credit. Balloon payments are good if you are planning to carry the note yourself, but if you are planning to sell the note sometime in the future, then the balloon payment will devalue the note. You don’t want to find out later that the terms you settled for are going to cost thousands of dollars in discounts, due to the buyer having POOR credit.
It’s important for the Seller to remember that 85% to 95% of the face value of the note is possible if the contract is created properly. If the Seller sells the subject property FSBO he’s already saved big costs in realtor commissions and closing costs up front. When looking at the discount on seller financed notes it is very important to keep in mind the down payment monies received and monies saved by not using a real estate agent or big reductions in sale price frequently required to attract a cash buyer. Remember that in the market place there are many more Buyers with 5-10% down payments and good credit than there are cash buyers.
*****CREDIT OF THE BUYER: The dollar difference a Seller will receive for a promissory note written by a Buyer with Good to Excellent credit and a Buyer with Poor credit can be staggering. Also, the higher the purchase price the higher the buyers credit score. A buyer should have a credit score of 620+ with a purchase price between $50,000 to $350,000, 650+ with a purchase price of between $350,000 to $650,000 and 680+ with a purchase price of $650,000 or more.
*****PROPERTY VALUE: Please do not inflate the true value of the property and expect that an investor will not discover the over valuation and “pass” on the note. It is not necessary to inflate valuation if the terms of the Deed of Trust or Mortgage are well crafted.
*****DOCUMENTATION: A title company or attorney should be involved in the closing process to ensure the transaction is within full compliance of all Federal and State lending laws. A note that is not within compliance of all Federal and State lending laws are less desirable by a third party note investor. The buyer should sign all required Federal Disclosures to remain within compliance. Also, title insurance should be used within the transaction.
*****DOWN PAYMENT: What generally happens is the seller takes a small down payment to get a quick sale. Remember, the bigger the down payment the more committed the Buyer is to the property. Theoretically, the investor’s financial risk is decreased by a favorable LTV/ITV. Investors feel very uncomfortable when the Buyer has ZERO financial commitment to the property. Stand your ground. It’s your property. Take absolutely NO LESS than a 10-15% down payment.
The buyer’s credit score should determine the down payment you request from the buyer. Generally, a buyer with a FICO score of 640 + can provide the lowest down payment of 10% while a buyer with a FICO score of 550+ should provide a down payment of 25% or more.
*****INTEREST RATE: Interest rates are currently low. Do not. I say, do not, allow the Buyer to convince you to take a low interest on the purchase note. If the Buyer wants bank rates let him go to the bank, immediately to obtain a loan to purchase your property. In most cases, this will not happen. Many people fear the scrutiny of a bank’s lending policies. Some Buyers are very savvy, and invest in property, which can be quickly flipped for an inflated profit. These Buyers are usually very sharp, and very sociable and also, to the detriment of the Seller these type Buyers frequently direct the purchase terms, knowing that most Sellers are desperate to sell, or, are uneducated in the Seller finance market. Whatever the reason, the Buyer is looking for Seller financing, and as such, should be charged Seller financing rates. Remember, the interest rate of the cash flow can be worth thousands of dollars on the purchase price when being evaluated by an investor.
PLEASE, PLEASE do not even consider a variable, floating rate, or prime plus interest rate. Most investors will use the floor rate or the lowest possible rate the note will pay when considering these types of transactions for purchase. Don’t handicap the note. Stick with the basics. Stick with what investors want. The last thing an investor wants to see is potential changes in the value of a receivable.
*****AMORTIZATION: The incremental reduction of the principal balance on a mortgage or other indebtedness. The longer the amortization period, the smaller the monthly payment will be. The shorter the amortization period, the larger the monthly payment will be. Typically, Sellers use a 10 year, 15 or 30 year amortization framework, with the 30-year schedule, by far the most typical.
*****TERM: Most seller financed notes are fully amortized for thirty years with a pay off clause; creating a “balloon payment” in five, seven or ten years. Most investors don’t want to see a balloon payment in a short period of time especially if the buyer has fair to poor credit, so do not create a note with a 12, 24 or even a 36 month balloon payment, these short term balloon payments often add greater risk from the investors point of view and will usually discounted accordingly. Investors usually prefer to collect a stream of payments, while, allowing the buyer to build equity and be in a strong position to cash out the note by obtaining bank financing prior to the maturity date.
*****SEASONING: Investors like to see a history of payment. However, this does not apply to simultaneous purchases, as the note will be purchased at the closing table but a higher down payment is required to satisfy the LTV/ITV ratios the note investors will desire. A note with a buyer that has an excellent credit score is desirable at 6 to 12 months and a note with a buyer that has a credit score of 625 and below will become desirable after 12 months or more.
*****STRUCTURING THE DEAL: I am often asked by potential sellers, “How can I structure this transaction to get the best possible payout for my note and lower the discount rate?” More often than not, with note purchases an investor will want to limit their exposure or risk on a particular transaction (usually at about 70-80% of the value of the collateral) with that being said, there are ways to decrease the exposure a potential investor may have. Many savvy sellers will create a first lien note at 65-70% of the total sales price, collect 5-10% down payment and carry the remaining balance (20- 30%) in the form of a second lien position. By structuring the deal in such a way, you as the seller ensure you will receive a maximum payout for the sale of the first lien note without needlessly losing dollars to an investment to value cap. In addition, you have also created for yourself a continuing payment stream in the form of a second lien note. This scenario is often a win-win for all parties involved. The buyer gets into the home with a smaller down payment than a bank would typically require, the seller gets the cash they need at closing, and also create a income steam in the form of the second lien, and the investor buys the note at an investment to value ratio they feel comfortable with.
*****THE NEXT STEP: (REQUIRED DOCUMENTATION)
Seaquis Capital, Inc. will be glad to provide you with advice about how to structure your note and provide you with a firm quote once the note has been formed, provided you supply us with the following documentation.
- 1003 FNMA Standard Loan Application Form (to be completed by Buyer)
- Authorization to Release Information Form (to be completed by Buyer)
- Completed Request for Quote Form (to be completed by Seller)
- Purchase Agreement (between Buyer and Seller)
- Final HUD Settlement Statement (provided by Title Company or Attorney)