Traditionally, a buyer gets a loan from a third party lender i.e. a bank, credit union etc… in order to finance the purchase of a property. Owner financing (A.K.A. seller financing, owner carry-back, seller take-back) however, is an agreement in which the seller of a property agrees to provide (all or part of) the financing to the buyer for the purchase of that property.
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The seemingly endless run of bad housing news is discouraging some potential home buyers from considering a purchase. But the truth is that the advantages of homeownership have very little to do with investment gains. The best things about owning a home have a lot more to do with personal comfort and satisfaction.
Here are five of them:
Be your own landlord. The bank can only kick you out if you don’t pay; a landlord can be much less dependable – deciding to sell the property or choosing to live there themselves.
Paying the principal is forced savings. Yes, it’s possible that home prices will fall further. It is also possible that your 401(k) will lose value. But over the long haul, both are likely to enjoy modest gains in value.
Fixed-rate mortgages never rise – and eventually you pay them off. With mortgage rates at record lows, people who buy now are locking in real bargains
Good schools. Family-sized rentals are harder to come by in areas with excellent public schools
Spacious properties in pleasant neighborhoods. Sizable homes in attractive communities are almost always owned – not rented
Source: The New York Times, Ron Lieber (08/27/2010)
Ask a seller to give you owner financing to purchase the home he has for sale and most likely you will get a “No.” Sellers for the most part automatically reject the suggestion of owner financing because no one has explained that option to them as a way to sell their home. As a seller, should you consider financing or partly financing your buyer? Owner financing can be a valuable and lucrative tool in a seller’s toolbox, providing he understands exactly what he’s getting into.
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Nearly 11 million, or 23 percent, of all residential properties with mortgages were in negative equity at the end of the second quarter of 2010, down from 11.2 million and 24 percent from the first quarter of 2010, according to housing analyst CoreLogic.
• Negative equity remains concentrated in five states: Nevada, which had the highest percentage negative equity with 68 percent of all of its mortgaged properties underwater, followed by Arizona (50 percent), Florida (46 percent), Michigan (38 percent), and California (33 percent).
• The biggest declines in negative equity were concentrated in the hardest-hit states. Nevada experienced an 11.8 percentage point decline in negative equity share, followed by California (-1.3), Florida (-1.3), and Arizona (-1.3). About two-thirds of all states experienced a decline in negative equity share. Since peaking in the fourth quarter of 2009, the number of borrowers in a negative equity position has declined by about 350,000.
• The declines were entirely due to foreclosures, not the stabilization or small increases in prices in some markets. The largest decrease in negative equity occurred among those with loan-to-value (LTV) ratios in excess of 125 percent, where the number of negative equity borrowers fell to 4.8 million, down from 5 million last quarter.
• Homes with more equity are appreciating faster than underwater homes. The average values of properties with 50 percent or more equity increased over 1 percent between the fourth quarter of 2009 and the second quarter of 2010. Properties with 25 to 50 percent in equity increased an average of 0.2 percent in that period. However, values fell for every segment in negative equity, with the biggest value decline occurring for properties that are 50 percent or more in negative equity.
“Negative equity continues to both drive foreclosures and impede the housing market recovery. With nearly 5 million borrowers currently in severe negative equity, defaults will remain at a high level for an extended period of time,” says Mark Fleming, chief economist with CoreLogic.
Source: CoreLogic (08/26/2010)
There are many different trustees and the process of calling all of them and scrubbing their list is very tedious and time consuming. On top of that, you have to call a title company to check lien positions and back taxes. There are professionals offering to do all of this for you, as well as physically attending the auction and bidding on your behalf. The fee for this service is between $3,000.00 and $5,000.00, to be paid only when you have a successful bid. I highly recommend hiring a professional to assist you with this process.
Needless to say, it takes a particular stomach or nervous system to buy at a trustee sale. Making a mistake can be devastating. Be sure that you are up for the challenge, and that you can live with the consequences. On the upside, if you are educated and disciplined, there is tremendous opportunity!
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Owner financing can help sell a property even in this challenging market. Banks generally are willing to accept rent credits for an option to buy as an acceptable down payment, but both buyers and sellers must follow these guidelines for Fannie Mae and Freddie Mac to sanction the transaction.
The rental amount must be determined by a property appraisal with the credit for the down payment clearly calculated as the difference between market rent and actual rent paid for 12 months. For instance, if market rent is $1,000 and rent paid is $1,200, $200 could be credited monthly toward the down payment.
The rent/purchase agreement must be for a minimum of 12 months. The contract must clearly specify a rental amount as well as the portion to be credited toward the purchase. The buyer will need copies of canceled checks or money order receipts for 12 months, proving rental payments to persuade the bank to credit the funds toward the down payment.
Source: Creative Investor, Rodney Williams (08/23 2010)
You show up at the auction with your cashier’s check for $10,000.00. Different auctioneers will be representing different trustees selling property all at once. You have to find out which auctioneer represents the trustee that is selling the property you want to bid on and register with them. Once you have registered just wait until your property is up for bid.
Once your property is on the auction block (or on the lap of your auctioneer sitting in a lawn chair), you start bidding. Bid in small increments and STICK TO YOUR MAXIMUM BID. If your maximum bid is surpassed, you get to start all over again the next day J
If your bid is successful, the auctioneer will give you a receipt for your “non-refundable” $10,000.00 deposit, and all the paperwork. You will need to take a certified check for the balance to the trustee’s office to finalize the purchase. Make sure you show up within the timeframe provided – usually before 5pm of the next business day. Congratulations, you are now the proud owner of a foreclosure property (or you just lost ten grand if you did not show up on time to pay the balance!).
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Private equity firms and other groups of wealthy people are purchasing foreclosures at distressed prices, rehabbing them, and selling them for a quick profit. This used to be a game for amateurs, but because of the lack of other investment opportunities, the money-management pros have stepped in.
The influx of new players is pushing up auction prices and making it harder to make a profit. The average discount at auctions — the difference between a home’s sale price and its actual value — is 21.6 percent, down from 28 percent in January 2009, according to ForeclosureRadar.
“In crisis there’s opportunity,” says Rick Hudson, president of investment firm Prosperity Group Real Estate in Irvine, Calif. “Right now there’s huge opportunity with flipping houses.”
Source: Los Angeles Times, Walter Hamilton and Alejandro Lazo (08/20/2010)
Stocks are up 50 percent from the March 2009 bottom. Some commodities have risen dramatically. The only asset class left in the cellar is real estate, says Michael Murphy, editor of the New World Investor stock newsletter. As a result, Murphy is advising investors to buy now for these three reasons:
• Desperate sellers: Both home owners and lenders are eager to unload a flood of foreclosed and underwater properties. Buyers with the patience to push through these complex deals can save a bundle.
• Little competition. Because most people don’t have what it takes to negotiate their way through short sales and REOs, patient investors are winners.
• Low rates. Mortgage rates are at their lowest level in 40 years. If you believe inflation is inevitable, lock in now.
Source: MarketWatch, Michael Murphy (08/19/2010)
Typically, here is how it goes: you call the trustee the morning of the day prior to the auction and ask them for a list of what is going up for sale the next day (some counties have a morning and an afternoon sale; some just have a morning sale).
You peruse the list and identify possible prospects. You do your “paper” homework on those properties, meaning you make sure the properties you are interested in look good on paper. Be sure you find out what lien position is being auctioned (if you want to end up owning the property you want to bid on the 1st lean), and how much back taxes are owed.
At the end of the business day, call the trustee back and ask them to give you an updated list. The list will be significantly smaller because many properties will have been postponed.
Once you have your final list, go drive the properties and conduct a physical inspection. Lastly, put it all together and determine your maximum bid amount.
The Challenge
The challenges of buying a property through auction are: you generally have less then 24hours to do your due diligence; you are not granted access to the inside of the property, often the property is still occupied by the previous owners or tenants, and you have to pay the full purchase price in cash the next business day.
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