Posted by Entrust California on Tue, May 04, 2010
If you are a real estate investor, you know all too well that the mortgage industry has suffered from a major meltdown. Lending institutions are folding, foreclosures are reaching record highs, and subprime lending has caused a catastrophe for property sellers, buyers, and lenders alike. As a result, there’s a limited pool of qualified buyers and a shrinking supply of conventional lending sources. In addition, there’s an abundance of properties on the market at low prices. Seller financing is filling the void created by the mortgage crisis, offering an alternative to those hard-to-come-buy conventional loans. It moves property, more quickly and at higher prices.
Seller Financing Goes Mainstream
After the high-interest rates of the 1980s, seller financing became a specialty niche among real estate transactions. The upheaval in the housing market, however, is now creating an extraordinary demand for this alternative financing method. Two years ago, seller financing accounted for about 1 in every 400 real estate transactions. Today, it accounts for 1 in every 50 transactions. Some experts predict that it will soon become the financing vehicle for 1 out of every 10 real estate transactions.
What does this mean to you? Seller financing provides you the opportunity to sell your properties to quality buyers—at the full retail property values and more quickly—for a substantial and steady income stream.
For Quality, Qualify
Qualifying for a conventional mortgage today is much more difficult than it was just a few years ago. More restrictive underwriting criteria disqualify countless candidates who have both a willingness and the ability to meet the requirements of the loans. As a result, as many as 50% of the people who would have qualified for a conventional mortgage just two years ago no longer do. Since the shakeout in the lending industry, many good candidates are being denied the opportunity to borrow money.
Seller financing is the ideal solution for these people and investors alike. To avoid the same pitfalls that brought down many lending institutions, however, the investor must weigh the risk of each loan, and proceed only with those that present a high likelihood of success.
From This Day Forward . . .
Most people enter into seller financing contracts with the same enthusiasm with which they enter into marriage. They’re as happy at closing as newlyweds at the altar. But if the commitment is based on blind faith, the relationship may dissolve faster than ice in the punchbowl.
No investor finances his property for a buyer with the belief that the arrangement will turn sour. At most, it’s considered a remote possibility with tolerable consequences. If the buyer defaults on the loan, the investor assumes that he can simply annul the deal, repossess the property, and avoid any loss.
But the buyer has likely occupied the property for months, perhaps years. What condition is it in now? Have the taxes and insurance been paid? Have needed maintenance and repairs been done? Has the buyer trashed the place and fled? Has the equity disappeared? The seller/lender could get stuck with unpaid bills and costly repairs. The honeymoon is over.
Like fiancés, borrowers are emotionally involved with the transaction and might not view their financial situation objectively. Equally excited about closing the deal, the seller might also be blind to the risks in doing business with a particular buyer. Other investors recognize the risks but believe they can sidestep a foreclosure action by having the buyer pre-sign a deed back to them at closing. However, the buyer cannot waive his future rights. There’s no protection for the seller if the arrangement goes sour. Seller financing doesn’t come with a pre-nup. Clearly, the smart approach is to learn all you can before you’re heavily invested in the relationship.
A Safe Bet
How risky is seller financing? The risk is much lower than it used to be. That’s because it used to be easy, too easy, to obtain a conventional loan. People who failed to qualify for traditional mortgages were, by definition, the riskiest borrowers.
Lending institutions have since tightened their criteria, making it far more difficult for would-be buyers to borrow money. Many are “just missed” borrowers who now fall narrowly outside the newly tightened criteria of lending institutions. These are reliable, low-risk prospects who show every intention of meeting the terms of their loans, and have the ability to do so. They simply no longer “measure up” on paper. What the savvy investor must do is differentiate between these deserving buyers and the risky ones.
I Do Diligence
Approving your seller-finance candidate is like choosing your life partner. During that first encounter, your date presents him or herself in the best possible light. He appears honest; she seems responsible. You like what you see and you want this to work. You make plans.
Smart couples conduct due diligence before saying their “I do’s.” They learn their fiancés’ background, character, values, strengths, and weaknesses. Many singles even hire private investigators to do a background check on their potential mates.
Likewise, real estate sellers should carefully analyze their seller-finance candidates, using disciplined underwriting. The primary variable that affects the cash value of their note is the buyer’s credit. Thus, not only does good underwriting mean a more trouble-free loan, but you also create a more valuable, salable loan. As Ronald Reagan said, “Trust but verify.”
Seller Financing: It’s a Good Thing
You can be extremely successful in this business, if you use a methodical approach that calculates the risk and weighs the benefit. Plus, it’s much more profitable than sitting on an unsold property. With due diligence, good judgment, and some common sense, you can become very successful with seller financing. And the timing couldn’t be better. In addition to your own success, you can provide a much-needed service to people who deserve the opportunity to own their own homes. Are you ready to say “I do”?
By W. Eddie Speed
Eddie Speed, Founder of Note School®, has purchased more seller-financed notes than anyone else in the business. With a lifetime volume of seller-financed notes topping half a billion dollars, Eddie has seen just about every scenario. He is also an acclaimed instructor, mentor, and recipient of the industry’s most prestigious award.
Eddie will be a speaker at Entrust California’s “Creative Lending & Financing” Workshop on May 21. Click here for more information, or to register for the event.
Posted by Entrust Oakland on Mon, Nov 09, 2009
I recently presented to a group of focused real estate investors. I knew what to expect because I had presented to this group before. What I love about them is that they all want one thing: great returns on their investments! Their focus is on how they can get returns back into their IRAs and 401(k)s.
The day was scheduled to be four hours of real estate education. The topics ranged from what types of properties cash flow, to alternative funding options, to becoming a landlord. The organizer scheduled Reggie Lal as a guest speaker. Mr. Lal is the founder of Be the Smart Investor and is a well-respected real estate investor in the San Francisco Bay Area. Reggie completely understands the value of using self-directed IRAs for real estate investment. He, himself, has done so numerous times. His presentation was a very nice compliment to mine as the self-directed provider.
What was great to see was that the attendees really understood the value of having cash-flowing real estate investments working for their retirement account and generating tax-free or tax-deferred income. We also talked about using one’s retirement plan to lend money if you didn’t want to become a landlord. And we discussed purchasing tax lien certificates if your funds are restricted to smaller investments or partnering with your IRA or pooling funds with others.
That Saturday was informative, educational, and beneficial to the investors. Entrust prides itself on helping investors look outside the traditional realm of investing, and this session did just that!
By Kimberly Dressel, Entrust Administration, Inc.
kdressel@theentrustgroup.com
Posted by Entrust California on Mon, Aug 31, 2009
Entrust California was the proud and only sponsor of the largest event for investors in 2009 held recently in San Francisco. This event featuring the three amigos, John Schaub, Pete Fortunato, and Jack Miller, gurus in the real estate and paper investing arena was a unique opportunity for us at Entrust to get a beat on the marketplaces throughout the U.S. from people who actively invest in today's market.
Now is the best time to be a real estate investor with your IRA. The opportunities in both real estate and private lending are excellent and with falling prices and great market opportunities cash flow is back!
Banks are selling real estate cheap right now. They want the real estate off their books.
We at Entrust were in full force at this event. Our local offices had the unique advantage of fully understanding the mindset of the IRA Investor using their IRA or Individual (k) to invest in real estate related investments to generate cash flow today and into the future.
Visit with your local office representative to learn more about self-directing your IRA to invest in what you know best.
For more information, contact:
Business Development
800-392-9653 x 254
bizdev@TheEntrustGroup.com.
www.entrustcalifornia.com