This is the Best Real Estate Market in a Decade!
Many investors and homeowners will be shocked by that statement, but if you are an owner-financing type investor, the next three to five years are going to provide you with tremendous opportunities.
Sellers used to hire a real estate agent, the agent would put the house in the MLS, and then homeowner would start packing and the agent would start spending their commission check. Agents merely had to sort through the offers, and choose one that offered the best terms and the most money over the asking price. Like the spaghetti western, those days are gone, along with many of the real estate agents and mortgage brokers that flooded the market during the real estate boom.[googmonify]4494413162:right:250:250[/googmonify]
Now sellers are desperate for an offer - any offer. Buyers that could have easily qualified last year are now completely out of the market. The Fed could cut rates by two full points and it still would not save the current market. It is not the interest rate that is affecting the buyers. It is the new, tighter standards requiring full documentation, down payments, two and even three appraisals or reviews of the property's value and the prospective buyer's qualifications. As a result, many buyers come up short. Even buyers that get to the finish line have to worry about whether the mortgage broker they are using will be in business until the escrow closes, and if the lender they are using will be able to fund the deal.
This offers an incredible opportunity to investors who understand owner financing to pick up great deals. Also, homeowners who understand owner financing will sell their properties much quicker, and will not have to discount them as much - if at all.
Owner financing essentially refers to any technique where the property owner assists the buyer to finance the purchase. This can be in the form of a "seller second" where the buyer generally gets a loan on the majority of the purchase, and the seller accepts a portion of the purchase price in a note that is paid by the buyer. Essentially the seller becomes a lender.
An example would be a seller that had a house worth $500,000 and is very motivated to sell or they are in a financial position where they do not need to receive all of the proceeds in cash. They may offer to finance 5-20% of the purchase price, thus helping the incoming buyer qualify for a loan. If the seller really does need the cash, they can also take the second that they create in this transaction and sell it to a note buyer at a discount. The amount of the discount will depend on a number of variables including the buyers, FICO scores, the amount of seasoning on the loan, and the loan to value among other issues.
While taking back the second, and then selling it into the secondary market place might bring the seller more money overall, in this marketplace it would almost certainly allow the property to be sold quicker. Other common owner financing techniques include Lease-Options, sandwich leases, Contract for Deed, "Subject To", and wraps or All Inclusive Trust Deeds (AITD's) and these will be future article topics including examples of when you should and shouldn't use them.
If these techniques are so good, why aren't they well-known? Since mortgage brokers and real estate agents don't make a commission on these deals, they don't have an incentive to promote these techniques. Also, since so many agents are new - they just don't know about them. Examples of a couple of deals that could be done with Owner Financing:
The property is at 100% LTV and the owner is $10,000 behind with no hope of making up the payments. Conventional wisdom says that this would need a short sale. However, there are other methods that could work and allow the homeowner to get out without a foreclosure on their FICO
The Buyer has a down payment, but can't qualify for a loan under the new guidelines
The Seller lost their job, needs out fast, has a prepayment penalty, and owes 90% of the value of the house and can't afford $5,000 to move to their new job that is three hours away
Owner financing could help in all of these situations and with a little creativity every one can win in these types of transactions. Owner financing is not a panacea, but is a very real option for many people who are currently unaware of their options. Considering that there are more than 150,000 homes that are more than 30 days late in Los Angeles County alone, helping even 10% of these owners would benefit over 15,000 families. Considering the millions of families across the United States that are facing foreclosure, or are having trouble selling their home, there will be great opportunities for owner financing investors for some years to come.
John is developing a series of articles related to owner financing. Use the RSS feed for notification or register for our newsletter to get them e-mailed to you.