Mortgage Modification – Bankruptcy – Creative Financing

March 27, 2011

Today I got this email from Teresa, a real estate broker:

James,

I have a buyer with a good down payment. They make good money, but they are self-employed, have less than perfect credit, and are having problems getting financing.

They have been looking to buy a home around the $300-400k range.  I would like to get you connected up with my buyer to see if they can use your creative financing techniques to make a purchase.

Let me know when you are available.

Sincerely, Teresa, Real Estate Broker

***

Dear Teresa,

I can probably help this buyer. I look forward to talking with you. It sounds like you have found the kind of buyer who can benefit from creative financing.

What is the advantage to a buyer to do seller-financing? The buyer can avoid the cost and trouble of getting bank financing.

What is the advantage to a seller to do seller-financing? The seller will have more potential buyers and can probably get a better price than if the seller insisted on the buyer getting a new loan.

As an agent, what you are looking for is a buyer who can pay at least 8.0% to 10.0% percent down. You need that much to cover closing costs and commissions and other costs. Commissions get paid at closing.

You are looking for a seller who has a property with equity in it. It should be obvious that seller financing is not going to work in a short sale situation. The seller should have at least 10.0% equity in the property.

If the seller has only 10.0% equity in the property, the seller’s equity will generally be cashed out. Then the buyer’s monthly payment will equal the seller’s mortgage payment.

If the seller has more than 10.0% equity in the property, either the buyer will make a larger down payment or the buyer will owe the seller his equity on a second note.

These seller-financed deals are all unique. They are structured in different ways. I believe I can put them together so that buyer and seller are secure and so the lender will not object to the transaction. I would describe exactly how I handle these deals, but the information is “proprietary”.

When I put these deals together I represent buyer or seller – not both. But I make sure that the party I am not representing gets legal counsel. As broker you need for this to happen for your protection. I generally represent the buyer, but I have also represented the seller. Bear in mind that seller-financing is not for everybody.

I just closed a deal like this in Pierce County. The buyer is a contractor who is going to live in the house and run his business out of it. He has bought and sold a lot of properties. Property values are down, and now is the time for those wanting a bargain price to be buying.

I believe that in many cases seller-financed transactions can be closed even when there is a due-on-sale clause in the seller’s mortgage. However, the buyer or seller needs to come see me for a consultation so I can disclose the pros and cons.

If you are a broker, don’t be shy about calling. I do not charge brokers for time on the phone.

I also handle mortgage modifications and bankruptcies, but it is structuring seller-financed deals that I find most interesting.

Forward this to a friend. Subscribe by clicking on this link:

http://mortgage-modification-attorney.com/subscribe/

Sincerely,

I would like to say a few words about creative financing, also referred to  as seller-financing, or a wrap-around deed of trust deal, or a lease-option deal. I have been putting together such real estate deals for thirty years now.

Seller-financing is advantageous because it avoids the hassle of having the buyer get a new loan. There are only two parties to a seller-financed deal, buyer and seller, instead of the usual three parties.

The lender is not there to rain on our parade. Two is company and three is a crowd – in love and in real estate transactions.

Are you are a seller having trouble selling your property? I can guarantee you that a big part of the problem is that buyers in general are having a hard time getting financing. So why not eliminate the obstacle? Why not sell on lease-option or wrap-around deed of trust or assumption? Why make the buyer go get a new loan? Let the buyer use your loan.

In the old days almost all residential bank loans could be assumed or “wrapped around.” Then in 1986 Congress passed the Garn St. Germain Act. The due-on-sale clause in paragraph 18 of your deed of trust became enforceable under federal law.

I think one way out of our real estate depression is for the enforceability of due-on-sale clauses to be suspended. Seventy percent of mortgages are owned by Fannie and Freddie, and they could suspend enforcement of Paragraph 18 of the standard deed of trust with the stroke of a pen. I have written to the president about this, to the vice-president, the president of Fannie, the president of Freddie, the secretary of the treasury, the head of the FED. I keep trying.

In a seller-financed deal the buyer makes monthly payments to a collection service. The collection service pays the lender in the seller’s name and keep a record of everything. The buyer will pay a reasonable down payment – enough to pay for closing costs and commissions and maybe enough to cash out the seller’s equity in the property.

If you are a frustrated buyer, especially one having trouble getting financing, look for a seller who will carry the balance. You might find one on your own, and if you do, contact me and I will write up the deal.

You are more likely to find a willing seller if you work through an agent. Tell your agent to look for a seller who will carry the balance. When your agent finds a willing seller, tell your agent to call me.

If you are an agent working on a deal, don’t be shy about calling.I spend a lot of time for free discussing these deals with agents. I love to work with agents. They butter my bread.

By the way, if you would like me to put on a a seller-financing seminar at your office, let me know.

I ask buyer or seller to come in for a consultation. If my client wants to go forward, I ask for for a retainer. I sometimes take part of my fee at closing.

Creative financing, seller-financing, wrap-around mortgages, lease-option deals – they work for residential property, second homes, rental houses, commercial property, building lots – you name it.

When a buyer and a seller find each other and want to buy and sell using creative financing, buyer or seller or agent needs to bring in a real estate lawyer to write up the deal and see that it gets closed properly and safely and to make sure that everyone gets full disclosure. These creative financing deals are complicated and it takes technical expertise to write them up.

That’s where I come in. I write up creative financing deals. I have lost count of how many deals I have written or reviewed since I started practicing in 1978.

Agents normally write up the deal for no extra charge. Agents are authorized to write purchase agreement if standard forms will cover all the issues. But with seller-financing, these agreements are not standard. Each deal is different. A lot of issues have to be addressed.

Agents have earned their commission when they bring buyer and seller to the point where they have reached a basic oral agreement. It is not the agent’s duty to write up a complex deal.

I have closed thousands of escrows over the years, including seller-financed escrows. The title companies won’t touch seller-financed deals. Escrow companies won’t touch them either. They tell the parties to go find an attorney to close them. Sometimes I close them myself. Sometimes I bring in an escrow attorney I know to close them.

I am only licensed to practice in Washington. If your property is in another state, and if you still want to hire me, you would also need to hire co-counsel in your state who will “sponsor” me.

P.S. I am switching email services. Click here to sign up for my new email list.

P.P.S. I hope you like the Spring theme of this letter. I am really into gardening, especially growing things I can eat. Read more about gardening here.

Sincerely,

FSBO – For Sale By Owner – Legal Counsel

If you are thinking of buying For Sale By Owner or selling For Sale By Owner, you should consult a lawyer with real estate experience.

I have lost count of how many purchase agreements I have written and reviewed over 33 years of law practice.

Many involved seller-financing, wrap-around mortgages, and lease-options.