33 years ago today…

It is rare to have an entire day pass, for the awake and fully engaged sales professional, without hearing about how tight mortgage lending standards are these days. In most casual polls, lenders today appear to be “overreacting” to their lax lending standards (can you say… “liar loans”?) of the previous decade. Then the competition to originate new loans was fierce and also very profitable. So should we sit back and wait for lenders to loosen up, or is there something we can do now that might get more buyers into homes they want to purchase; and get more sellers out the door to their next home?

Decades ago there were unbelievable interest rates in play. I recall, as a Banker in Denver, making some home improvement loans in the late 1970’s at interest rates above 15%! I cannot imagine what I was thinking or what those homeowners were doing borrowing at such steep rates. It might prove the adage that borrowers will sign a note for money at almost any interest rate, not taking the time to understand the true cost of an amortized payment schedule. Once we started to see the APR highlighted on Truth in Lending statements, borrowers started paying more attention. But something else was going on back in those days, some 33 years ago. I am talking about selling homes and buying homes when interest rates made the proposition feel like you were truly pledging your first-born in order to make the deal.

There have been other periods of time when SELLER FINANCING was popular and in demand, but in the late 1970s, with those prohibitive interest rates, the seller financing avenue was one of the ways transactions were able to close. Then it was interest rates while today it is lending standards, but whatever the reason institutional lenders are holding back, it becomes a perfect time to put seller financing on the agenda for sellers and buyers. And as we say in my real estate office (KW) … “seek first to understand”. Now if I was going to insult your intelligence here, I would take it to the basic level of YOU understanding all of it first before you educate your customer. But then you knew that already. That is likely why many professionals do not even mention the concept to their sellers or buyers. They simply do not know enough about it to be comfortable discussing it. But why? For one easy reason, it was unnecessary the last 10 years or so. Conventional, sub-prime, jumbo, any sort of loan you could name were easily and readily available. But all that has changed now, so what better time to become conversant and comfortable with seller financing?

First, let’s review the paperwork. In my enchanted state of New Mexico, we have a long-established format for completing a seller financed deal known as a Real Estate Contract (REC). It is time-tested and has stood up in many a courtroom. Some states, I am told, have a Land Contract form that is similar, and other states may use a REC as is common here in New Mexico. Another popular and legitimate way to set up the lender/borrower relationship with a seller and buyer is through a note and mortgage (or deed of trust). A common perception is that a note and mortgage is better for the buyer in that they have more legal rights should they go into default. I am not an attorney, so I will not presume to speak to that. Next, I strongly urge the real estate professional to involve an attorney for the preparation of said documents. Your managing broker doesn’t want you to practice law, of course, so hire someone else to prepare legal documents. Your area of expertise includes obtaining a set of terms and conditions that both parties agree to and understand. Then turn the information over to that attorney and ask for the preparation of documents.

When talking about seller financing, the concept of a lease/option to buy should also be understood. This is just what it sounds like, but has maybe double the details and documents.  Knowing how that works in real life is very important to anyone that should suggest it. One of the most interesting features of a lease/option transaction is the possibility that the sales price, paid down the road at the end of the lease term, could be an amount that adjusts based on market conditions years later. Some potential buyers are hesitant to buy because they fear the home they want will be worth less in a couple of years. A lease/option structured for a new property valuation (appraisal) after the lease term allows this objection to be overcome. A seller might not want to see the price lower in 3 or 5 years, but they still have a buyer in the home that is fully invested by then. After all, when the deal was fresh, the seller was happy to move on. Unless there is a total default, the seller has started a new life in a different home. The lease term, ending in the final closing, sale and transfer of title, is the completion of something they agreed to back when they had the right to negotiate. Once the deal is struck and the terms are being executed over a period of time, nobody wants it to fail. Many other issues need to be determined at time of offer/acceptance, such as insurance, taxes, major repairs and more. It is a fantastic exercise in projecting into the future.

If you know a seller might consider seller financing, please help them understand the buyer should still be qualified and prove income and stability to the seller’s satisfaction. And what sort of return should the seller get on the money? Probably quite a bit higher than traditional investments are paying out these days. Some believe that a seller offering to finance a buyer should command a higher sales price due to the benefits accruing to the buyer. That may be, but since every deal is unique, I don’t think a blanket assumption should be made about that idea. The primary task for us, the real estate professional, is to have a full array of knowledge and tools to work with our customers most effectively and successfully. One could argue that you are not doing your job if you don’t discuss seller financing with either a buyer or seller you are working with. None of us need to leave ourselves exposed to future blame or allow for the lack of complete confidence.

Study up, look at the forms and do a couple of sample transactions to get the flavor of it. Talk with someone that has done a few. Some of the most interesting stuff will come out when you analyze the flow of money over the term. That is where the selling points are hiding.


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