I bet that a lot of you think that I have lost my mind by asking such a stupid question! But the truth is that this is what most Sellers want to do! Before you call the looney bin to have me admitted, take a minute and look closely this photo of a a $50 bill.
Notice the writing at the top which describes this bill as a “Federal Reserve Note”. That’s right, cash is nothing more than an Unsecured, Non-Interest Bearing Promissory Note!
The question then is, “Why do Sellers want Cash?” The answer is because cash can be exchanged for things they do want, and I will explore this basic motivation, which is the basis of every transaction, in future Blog posts.
We are now enjoying some of the lowest mortgage interest rates in our life time, so it should be easy for all Buyers to get loans and pay cash for the property they want. But the truth is that, in the spirit of “lock the barn because the horses have been stolen”, Lenders now have very strict lending standards and as a result many Buyers cannot get a loan!
Fortunately there is an easy solution to this dilemma! The solution is to do what folks did before banks were invented and sell property using Seller Financing.
Buyers love Seller Financing! The fact that they deal directly with Sellers rather than a bank reduces closing costs, protects privacy of the transaction, and allows for flexible underwriting as well as creative structuring meeting the needs of both Buyers and Sellers. Also because no third party approval is required, closings are faster.
If you have any doubt about Buyers loving Seller Financing, try this test: Prepare two ads on the same property with identical wording in the text of the ad, and then on one ad use whatever headline you like and on the other one use the headline “Seller Financing” or “Owner Will Finance” and see which ad gets the most phone calls.
For Sellers who are looking to convert their real estate equity into an investment in a known asset with an interest rate higher than CD’s or bonds, Seller Financing is an attractive alternative. However, in most cases, the Sellers need all or a substantial portion of the equity in the property they are selling to purchase another property. Assuming a typical down payment of 10%, a 6% selling commission, and a 1% closing cost, leaves only 3% of the selling price as net cash to the Sellers and many times that amount is insufficient to meet their needs. Fortunately, there is an answer to this dilemma.
Use “CA$H NOW SELLER FINANCING”. With this technique, a property can be made more marketable by the Sellers providing Seller Financing, which Buyers love, while at the same time getting the Sellers the cash they need. The solution involves a simultaneous sale of the Seller Financed Deed of Trust to a Note Investor at the closing table; thus, the Sellers are only financing the sale for the minute or two that it takes to close the second escrow in which all or a portion of their Note is purchased by the Note Investor for cash. To learn how to use CA$H NOW SELLER FINANCING, go to CreativeRealEstateTalk and download my FREE eBooklet on this topic.
HOW SELLER FINANCING WORKS
The Down Payment: An important element of a Seller Financed transaction is the down payment. Due to the fact that the Buyers in many such transactions have less than perfect credit, the down payment is far more important than it is in conventional financing. With larger down payments, the Seller Financed Note is more secure and as result can be sold for a higher price. The goal in every Seller Financed transaction should be to try for a down payment of at least 10%. But remember, the advantage of Seller Financing is that it can be very flexible and creative. Therefore, the down payment can be in any form, can consist of anything of use or value to the Sellers, or can be anything of use or value to the licensee (as all or part of the commission).
Financing Documents: The difference between the selling price and the down payment consists of the Seller Financing. The Sellers are entitled to the same legal protection as any Lender and therefore the unpaid portion of the purchase price will be represented by a Promissory Note outlining the amount owed, the terms of repayment, and the interest on the unpaid balance. This Promissory Note is then secured by a Deed of Trust pledging the property being purchased as security for the Note. However, security does not have to be limited to only the property being purchased. If the down payment is low or if the Buyers have weak credit, it is possible to secure the Seller Financed Note by other property owned by the Buyers or perhaps their relatives.
Collection Escrow Instructions: The final financing document is the Escrow Collection Instructions to the bank or escrow company that will act as neutral agent for both Buyers and Sellers. This enables them to collect the payments from the Buyers, remit them to the Sellers, calculate the interest and unpaid principal balance, and provide the required annual reporting to the Internal Revenue Service. Also, the escrow company holds the reconveyance documents to remove the Deed of Trust from title after the Note is paid.
Seller Financing is an incredibly flexible, financing tool and is one of the most important Pillars of Creative Real Estate. It can be used to finance the sale of all types of real estate and can be used to finance the sale of real estate that is subject to an existing loan. To learn to master this important technique, I strongly recommend the book “Owner Will Carry”.
Because of the importance of Seller Financing in Creative Real Estate, my next several Blogs will be on this topic.