Chapter 5 CA$H NOW SELLER FINANCING
Total Page：16
File Type：pdf, Size：1020Kb
CA$H NOW SELLER FINANCINGTM INTRODUCTION This booklet is a prequel to my forth coming book, “Financing Outside the Box, an Introduction to the Subject of Creative Financing and Commercial Financing”. For almost 20 years prior to the Mortgage Meltdown that began in 2007, the United States enjoyed an unparalleled period of “easy mortgage money”. During this period of time, interest rates were generally declining and the requirements to qualify for a loan were getting easier and easier (and therefore ultimately responsible for the Mortgage Meltdown). Because of this long period of “easy money”, there now exists a whole generation of Real Estate Professionals and Investors who don’t know how to buy and sell real estate “When the Bank Says No”. But it wasn’t always like this. When I began my real estate career in Fairbanks, Alaska in 1962, there was very little bank financing available and most of our transactions were made using what is now referred to as Creative Financing. Unfortunately, what many of us Old Dogs learned as Young Pups has now become a lost art. In an effort to help those not familiar with Creative Financing, in 2008 I wrote a booklet called Financing Outside the Box and published it on my website. You can still download a free copy of this booklet at www.Cash4You.net. However, I believe there is a need for an updated and more comprehensive treatment of the subject of Creative Financing and that’s why I am currently writing the full book Financing Outside the Box. Copyright 2011 CASH NOW Financial Corp. CreativeRealEstateTalk.com Page 1 CA$H NOW SELLER FINANCINGTM Because I am a full time Real Estate Counselor and Private Mortgage Investor, and only a part time author, I don’t expect to complete this book until late 2011. For this reason, I decided to focus on one of the more important Creative Financing techniques to provide something useful that Real Estate Professionals and Investors can start using now, and therefore I have written this booklet on CA$H NOW SELLER FINANCINGTM . I hope you find the information in this booklet useful! Copyright 2011 CASH NOW Financial Corp. CreativeRealEstateTalk.com Page 2 CA$H NOW SELLER FINANCINGTM Chapter 1 TODAY’S FINANCING DILEMMA In the future, when we look back on Mortgage Financing in 2011, we will say, “It was the best of times and it was the worst of times!” We will say this because in 2010 and 2011 we have enjoyed the lowest mortgage interest rates in the memory of any living person. But in spite of these incredibly attractive rates, many Buyers cannot qualify for a loan and many properties are not financeable. Just a few years ago, anyone with a pulse could get a loan. With the Mortgage Meltdown that has occurred “A banker is a fellow over the last several years, 386 who lends his Lenders have gone out of business or umbrella when the have quit making loans1. The Lenders sun is shining and that remain have gone back to wants it back the traditional lending practices and only minute it begins to want to make loans to Borrowers who rain”. Mark Twain have good credit, who can verify their income and who can make a down payment in an amount greater than was required in recent years. For these reasons, there are many Buyers who want to buy real estate but don’t qualify for bank financing. Likewise, there are many properties that don’t qualify for financing. Let's take a look at some of the major reasons why properties will not qualify for financing. While the following list is not totally inclusive, it does outline some of the major reasons, why Lenders reject properties: The property is too old. 1 According to the website www.ml-implode.com Copyright 2011 CASH NOW Financial Corp. CreativeRealEstateTalk.com Page 3 CA$H NOW SELLER FINANCINGTM The property is in poor repair. The property is located in an older neighborhood. The property is dependent upon on site utilities (well and septic tank). The property is not of conventional construction. The construction of the property has not been completed. The improvements don't conform to the zoning. The property has too much land (many Lenders don't like to make loans on residential properties, situated on more than 5 acres of land.) The land value is too high in relationship to the value of the improvements. The property is located in a remote location (In many cases, urban underwriters interpret this as being anywhere that is not on a paved road. Obviously, in rural areas, our definitions are somewhat different) The property has been contaminated or is subject to potential contamination The property is of the wrong type (e.g. gas stations, vacant land, recreational property, hotel/motels, bars ,restaurants, junk yards): The foregoing examples are some of the reasons that the property may not qualify for financing. However, even if the property is Copyright 2011 CASH NOW Financial Corp. CreativeRealEstateTalk.com Page 4 CA$H NOW SELLER FINANCINGTM acceptable collateral, it is possible that the Borrowers may not qualify for financing. Some of the more common reasons that Lenders reject Borrowers are as follows: Lenders like Borrowers who fit into their “cookie cutter” concept of a perfect borrower and therefore will often reject Borrowers who: The Borrowers’ income is not high enough to meet Lenders required payment ratios (i.e. certain programs require that the home payments, including taxes and insurance, cannot exceed 28% of Borrowers’ income). The Borrowers’ total payments, including house payments and other bills, exceed some ratio (a common figure for this ratio is 33% of total income). The Borrowers’ down payment may not be in the proper form. Unacceptable down payments include: o The down payment may have been borrowed. o The down payment may consist of an exchange of other real property or personal property. o The down payment may consist of Borrower’s services such as sweat equity. The Borrowers may be self-employed. The Borrowers may have had a recent change of job or profession. The Borrowers may obtain too much income from rentals. The Borrowers may own too much real estate. The Borrowers may have had past credit problems. The Borrowers may have recently moved and haven't yet sold their old home. Copyright 2011 CASH NOW Financial Corp. CreativeRealEstateTalk.com Page 5 CA$H NOW SELLER FINANCINGTM The Borrowers may have had a recent divorce. The Borrowers may be employed in seasonal occupation. As you can see from the above, there are many reasons why banks reject properties and reject Borrowers! Now, I would like you to take a minute to think about the following questions: 1. Have you ever listed a property that did not sell? 2. Have you ever had a transaction “DFT” because the Lender didn’t like the property? 3. Have you ever had a transaction “DFT” because the Buyer didn’t meet the Lender’s credit standards? 4. Have you ever had a Seller of an “un-financeable property” say they would only sell for cash? 5. Have you ever had a Seller reject an offer using “Seller Financing” because the down payment didn’t provide enough cash? 6. Is it now more difficult to earn a comfortable living depending only on sales that can be financed by Banks under today’s conservative loan underwriting? 7. Would you have better served your clients and made more money if all your answers had been NO? 8. Would you like to know how to sell a property when “The Bank says No”? Copyright 2011 CASH NOW Financial Corp. CreativeRealEstateTalk.com Page 6 CA$H NOW SELLER FINANCINGTM Chapter 2 IN THE BEGINNING—FINANCING BEFORE BANKS In the beginning there was land, and eventually man evolved (or was created, depending upon your philosophy). In any event, in the early prehistoric days, humans roamed the land searching for food and shelter without any elements of ownership. Eventually groups settled into certain productive areas and began defending them against outsiders, thus creating the first elements of ownership and private property rights. I don’t think anyone knows (or at least, I don’t) where the concept of private property ownership began, but the best evidence suggests it may have been somewhere in ancient Mesopotamia (part of modern day Iraq) or perhaps China. In any event, eventually private property rights were recognized, and along with them came the rights to use, lease, sell or bequeath. In the early days, most transactions were undoubtedly transfers upon death to heirs (bequests). But eventually someone decided to sell their property (perhaps childless land owners), but since it had value, they obviously wanted something in return. Since these early transactions occurred before the invention of money, they were undoubtedly barter transactions. When you pause to think about it, you will realize that barter is really the basis of every transaction. This is true because every transaction is based upon the human desire to dispose of something in order to acquire something else. (Money just makes the process easier, but doesn’t change the basic motivation). Perhaps the first barter transaction involved an exchange of a farm for a hut in the village or an exchange of a hut in the village for a herd Copyright 2011 CASH NOW Financial Corp. CreativeRealEstateTalk.com Page 7 CA$H NOW SELLER FINANCINGTM of goats. Unfortunately, history does not record the first transaction, but I think you get the picture. Eventually there was a situation in which a property owner had property of value, but was unable to find a willing Buyer with something of equal value.