Sunday, April 28, 2013

Seven Reasons Why I Love Owner Financing

     Owner financing is so easy.  You don't have to fill out any papers.  You don't have to give the lender your social security number and past address and job history.  You just agree with the seller to pay him $500 per month until paid off.  How easy is that?  You don't need a calculator to figure out the payments.  If the seller is holding a mortgage for $60,000 at 5%, let's make the payments  $500 per month.  That is OK with the seller.  That is OK with the buyer.  How many months is that?  Who cares?  Owner financing is cool.  Read this, http://www.biggerpockets.com/blogs/3840/blog_posts/27179-seven-reasons-a-seller-should-hold-a-mortgage

     Another thing I like about owner financing is you can always change the terms later.  Let's say the seller has agreed to a $500 per month payment on the above described mortgage.  Thirty six months later Mr. Buyer is having cash flow problems.  Mr. Buyer calls his morgagee, Mr. Seller and asks if it will be OK if we lower the payments to $425 per month and extend the terms.  He says OK.  Mr. Buyer's cash flow just got $75 a month better.  OR thirty six months later Mr. Buyer calls Mr. Seller and suggests that if Mr. Seller will lower the interest rate from 5% to 4% , Mr Buyer will agree to raise the payments to $600 per month.  Why would Mr. Buyer want to do this?  He just saved 1% on his mortgage balance.  Why would Mr. Seller (mortgagee) want to do this?  He is getting an extra $100 per month. 

     Another reason I love owner financing is that you are never finished negotiating.  One of these days, Mr. Buyer is going to decide to sell the house.  When you have a loan from a bank, what do you do ?  You contact the bank and ask them how much is the payoff.  The bank says the payoff is $49872 plus daily interest until you pay the loan off.  When you owe the mortgage to the previous seller, you contact the seller and ask him, "If I paid you off this week, would you accept $40,000?".
He says," No but I will accept $44,000.".  I like that system better.  Another way to keep negotiating is to include a little note in with every payment asking the seller (mortgagee) if he ever wants to be paid off at a discount, call me ( buyer,mortgagor).   One day Mr. Seller might have a financial crisis and call and offer to accept $50,000 for the $60,000 that you owe him. 

     Another thing I like about owner financing is that you can move the mortgage to your new house.  In 1998, Kathy and I bought a house in Daytona Beach, Florida We put a few thousand dollars down and the owner held a mortgage for about $110,000.  We lived in that house.  In 2001, we wanted to move to Deland, a town about twenty miles away.  I called Marvin, the mortgagee ( a savey investor) and ask him if I could substitute the collateral of the house in Daytona Beach for the house in Deland.  He checked out the Deland house and said OK.  The house in Daytona Beach was worth  about $145,000.  We paid $175,000 for the house in Deland. We paid cash for the house in Deland.  We had no mortgage to pay off on the Daytona Beach house.   Marvin still had a first mortgage on the Deland house.  How could he go wrong?  I didn't have to beg the bank to loan me the money.  I didn't have to give anyone my social security number or job history.  I didn't have to pay $4000 in crapola fees.   This is a wonderful advantage of owner financing.  It helped that Marvin was a sophisticated investor and understood such things.  Even if he were not, I believe I could have explained this to him and his attorney and made this happen unless he was dying to be paid off.  If he were dying to be paid off, he would probably be open to a discount offer. 

     Did I mention that I had never been late with a payment to Marvin.  If you are making payments on an owner held mortgage, pay those payments on time even if your kids are hungry and crying.  Once you owe about five owner held mortgages, be certain that you make those payments on time.  When you are asking a stranger to hold a mortgage for you and he asks you,"How do I know you will pay me?".  Ask him to call any of these five people that you have been paying for several years. 

     Another thing I like about owner financing is that you can put subordination clause in purchase money mortgages if everyone agrees.  You can also put exculpatory clauses in purchase money mortgages if everyone agrees.  I went to a seminar many years ago.  The guru at the front of the room told us that, if we ask the seller to allow us to put a subordination clause in the mortgage, most would agree.  This is a clause where the seller (mortgagee) agrees that, at some later time, the mortgagor can place another mortgage ahead of this mortgage in priority.  This would turn a second mortgage into a third mortgage.  Developers do this all the time when they are buying vacant land to turn into a subdivision.  The same guru told us that we could put a exculpatory clause in our purchase money mortgages.  Many sellers would not object to that.  This is a clause that makes the buyer (mortgagor) NOT personally liable for the loan.  If he defaults, the mortgagee can not sue the mortgagor  personally for a deficiency judgement.  Both of those seemed like nifty ideas. 

     I used to go to seminars and read books and take my new found ideas and go out on the street to see if I could make them work.  A couple of weeks later, I bought a house.  I assumed the seller's first mortgage and he held a second purchase money mortgage for $12,000 with no payments and a seven year balloon.  We had a subordination clause that said we could put as much as 20% of the appraised value in front of the seller's mortgage at a later date.  We also had an exculpatory clause.

     When we got to closing two weeks later, I showed up.  Harry,the seller showed up.  I said,"Well I guess we can start the closing.".  Harry said," No,we have to wait for my attorney to show up.".  I started to feel a little queezy.  The attorney showed up.  He asked the title clerk for the paperwork.  He looked at the HUD 1.  He looked at the mortgage.  He looked astonished.  He said,"Harry, this mortgage has no payments."  Harry said," I know that".  The attorney said, "Harry, Ron can place another mortgage in front of you at a later time.".  Harry said, I know that,".  The attorney said, "Harry, if Ron defaults on this mortgage, you can't sue him for a deficiency judgement."  Harry said," Ron is not going to default.".  We closed.

     Six years later, Harry was paid off with interest.  Twelve years later, harry called me and listed his mother's house with me.  Harry told me that I was the only honest Realtor he knew.  I tell you this story to make this point.  People hold mortgages for buyers because they like the buyers and they perceive the buyers to be trustworthy.  Learn to build rapport and trust in all business relationships.  In getting people to hold a mortgage for you, this is critical. 

     Another reason I like owner held financing is that I can make deals that other people can't make.  When I was selling houses every day as a Realtor, I used to call expired listings.  If you sell real estate, you should call expired listings.  That is another article. http://www.ronclimer.blogspot.com/2013/04/if-you-are-not-making-enough-money.html 

     I went out one day to see this expired listing on Edland street in Orlando.  This house had been for sale for twelve months.  It had been listed with a small Realtor for six months and it had been listed with a big Realtor for six months.  The big Realtor's listing had expired yesterday at $85,000.  This house was in a neighborhood of 1100 square foot houses.  The comps in the neighborhood was low $60's .  This house seemed to be overpriced. This house was 2400 square feet.  The owner had lived in it for 27 years.  He had expanded it in every direction.  The family room was larger than most of the houses on the street.  The reason the seller was selling was that he bought a 100 foot yacht.  It was parked at the Sanford marina and he was going to live on the yacht.  Do you know what a 100 foot yacht costs?  The house on Edland street was free and clear.  I was there to list the house and earn a commission.  I asked the owner if he would hold a mortgage for the buyer?  He asked me what that meant.  I explained that the buyer puts down a few thousand dollars as a down payment and makes payments directly to him, the seller.  He asked me could he get interest.  I assured him he could.  Twelve days later we are sitting at the closing table.  In twelve months, no Realtor had made an offer on that house with the owner holding the mortgage .  Why?  It is a mystery to me.  It is a safe bet that the Realtor that had it listed doesn't understand owner financing.  The seller doesn't understand.  Your Realtor probably doesn't understand.  You Mr. Buyer have to be the one to understand. 

     When you are looking at houses, your first question should be,"What is the price?".  Your second question should be, "Will you hold a mortgage?".  Read my article,"Seven Reasons The Seller Should Hold A Mortgage".  The link is above.  Owner financing is the best way to finance.  If the owner won't finance it, find another property to buy.

     If we can help, www.climerrealestateschool.com
http://ronclimer.blogspot.com/2014/03/where-do-you-find-sellers-that-will.html

    

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