by Leonard W. Stitt CNA
Are you looking for profitable notes? Then you should start showing home sellers the benefits of owner financing.
Have you ever wondered where a profitable mortgage and note comes from? That's right. Someone sells their property and carries a contract. This is the heartbeat of your note business.
Think about it. If no one sold their property with owner financing, you and I would be out of business. That's why you should promote and market the benefits of owner financing. The more it's promoted, the more you'll have a steady supply of private mortgages to buy or broker to a funding source.
ARE SEASONED MORTGAGES A BETTER DEAL?
I've had people tell me they would rather look for seasoned notes. Great. I like seasoned notes too. But remember, whether its seasoned or brand new, the bottom line is that it's still owner financing.
When you market for seasoned notes, you're going to see a lot of low-quality deals. In other words, the mortgage and note was originally set up with weak financial terms. Things like low down payments; too long of a pay back with no balloon; sloppy legal work or terrible LTV's, etc. What's needed is for somebody like you to show these people in the beginning, when they first sell their property, how to structure good, solid owner financing.
DOES IT REALLY PAY TO PROMOTE OWNER FINANCING?
So why should you go to the trouble of showing home sellers how to structure owner financing? It's simple. You want to buy or broker the new mortgage and note that's created from the sale of the property.
I'm here to tell you that home sellers will be eager to sell you their deals. They're eager because you've showed them how to put it together. Plus, they get a faster sale by offering owner financing and carrying the contract. I don't know of a quicker way to sell a house than to offer owner financing.
HOW DO YOU EXPLAIN OWNER FINANCING?
If you can understand and explain the discounted mortgage business, you can easily explain owner financing to private home sellers. All you do is put your common sense into action and listen to the needs of the home seller. Let me run you through some examples and show you what I mean.
Let's assume you have a seller who's going to sell his home for $125,000.00. All right, the first thing for you to do is find out what the seller needs from the sale. Do they need to be cashed out? If they don't need an all-cash deal, how much would it take to fulfill their need? If they're trying to pay off bills, find out how much. Maybe they're moving to a new location to buy a business. How much money do they need to take over the business? The more information you find out, the easier it is to explain what options they have for offering owner financing.
Your goal is to give the home seller the best options you can. That's why you need to get as much information as possible. When you know their financial needs, you'll have no trouble suggesting an owner financing plan that suits the home seller.
Now, let's get back to our example of the house that's going to sell for $125,000.00. Let's assume your seller needs all cash. I'd recommend the home seller find a buyer who can put down 10 to 20 percent in cash. The higher the amount, the better. Next, I would suggest the home seller spread the payments over a 10 to 15 year period. The interest on the note should be the current market rate or better. If these guidelines are followed, this would make an ideal mortgage and note. Buyers everywhere would gladly buy this one. The home seller would have no trouble selling this deal.
DO YOU SEE HOW SIMPLE THIS IS?
Our seller needs to be cashed out. In order to get the highest cash figure for the seller, you simply suggest figures that would give the mortgage high resale value. Just remember, high-value mortgages always have strong down payments, short payback terms, market interest rates, and are secured by single-family homes.
Obviously, the home seller may not end up with the same figures you suggest. Market conditions and buyer needs have to be considered. For example, perhaps the home buyer needs a monthly payment they can afford. The short term payback of 10 to 15 years produces too large a monthly payment. The thing to do is spread deal over 20 or 30 years, and place a 10 year balloon payment in the tenth year. This makes the payment affordable for the buyer, and the mortgage still has high resale value with a short term payback.
The most important thing to remember is that you're giving the home seller a good, solid financial guideline they can use to make their own choices. Based on your suggestions, they usually end up with a nice deal you can work with. Now, let's do another example.
Let's use the same house selling for $125,000.00. In talking with the home sellers, you discover they don't need all cash. They're buying a new home, and they need $50,000 for a down payment. I would suggest that you use the same figures as in the first example. 10 to 20 percent down. 10 to 15 year payback, or 20 to 30 year payback with a 10 year balloon. When the sale on the home closes, I would offer to buy part of the payments. The amount I offer for the payments, plus the figure the sellers get from the down payment, easily produces the $50,000 in cash they need. Of course, the marvelous thing is that after I've received all the payments I've bought the right to, I return the mortgage and note back to the seller, and they start to collect on it. Home sellers love this option, and are very open to this type of deal when all cash is not needed.
Let's assume the mortgage and note that the sellers create have the same terms again, just like both examples. This time, the home seller tells you he needs $60,000 in cash, and also needs some monthly income. This is easily solved by offering to buy half of each monthly payment. If the payment on the note is $800.00 a month, you divide it in two. The home seller gets $400.00 and you get $400.00 for the life of the mortgage. The amount you pay the seller for the payments, plus the down payment they receive from the home buyer, easily goes well over the $60,000 he needs. And, he still gets $400.00 a month. Again, this option can be very popular with home sellers who don't need all cash.
Let's say we have a deal that's not quite as good. The home seller is selling the house for $100,000.00. The best he can do is find a buyer who will put down $7,000.00 cash. The buyer needs to have a payback term of 30 years to make the payment affordable. In talking with the seller, you determine that he wants all cash -- but really doesn't need it. I would suggest that the seller go ahead and set the deal up for a 30 year pay back term. Place a balloon payment in the tenth year of the mortgage. This gives the deal a short payback term. Even though the down payment is not the best, you could give the seller a choice of two different offers. The first offer would be to buy the payments only, and the seller keeps the balloon payment for himself. The second offer would be one lump sum of cash for the whole mortgage.
The down payment is weak on this one, but a carefully-placed balloon payment in the mortgage will sweeten the deal up beautifully.
You could easily sell any one of these four examples to a funding source and make a quick profit.
When you're explaining owner financing, always keep in mind the vision of a quality mortgage and note. Then suggest options based on the needs of your home seller.
BE SURE YOU STAY LEGAL
One word of caution. Never have any direct contact with the buyer. You don't want to look like a real estate agent, because you're not licensed. You can talk with the home seller all you want, but leave the direct discussions between seller and buyer to themselves. If the home seller asks you legal or accounting questions, refer him to his own attorney or accountant.
What if you get some questions from a home seller about owner financing you're not sure of? It's very simple. You call an institutional funding source that buys notes all the time, and they'll have the answers. Explain the deal to them-- along with the seller's needs. They can help with your questions, and suggest other option plans for owner financing. It's that simple. Remember, the funding sources buy mortgages all the time -- so they'll have the answers.
HOW DO YOU MARKET AND SELL THE OWNER FINANCE STRATEGY?
We've been talking about the mechanics of owner financing... however, nothing is going to happen until you begin to promote and share it with home sellers. I've had great success promoting and marketing owner financing in two ways:
1. Mail Order.
2. Public Speaking.
The mail order method works extremely well. It works because you sell homeowners a teaching aid that shows them how to sell their home, on their own, using owner financing. I recommend that your teaching aid be some sort of a book or manual. If you want ideas for the information you should include in your manual, read my article entitled: "How A Home Sellers Financial Nightmare Became A Discount Mortgage Buyers Dream".
Marketing thru mail order is simple. You can run small ads offering details on your book or manual. When you get responses, you send out a sales letter that sells your book or manual to the home seller.
I like to go thru the newspaper classifieds and watch the ads of people who are trying to sell their home on their own. I follow those ads closely for a period of time. After the ads have run for over a month, I send out my sales letter offering my book. Watching the ads does take time; however, it pays off very well.
PUBLIC SPEAKING PAYS YOU BIG TIME
You may be comfortable with public speaking. This is an excellent way to promote owner financing. Offer to speak to clubs or organizations about owner financing. I've had a lot of success with attorneys and accountants. They're so impressed with the owner finance strategy, they invite me in to speak to a handful of their clients.
The information you give in your talk should be similar to your manual or book. And of course, you'll want to make your book available to people after you finish your talk.
Remember, all private mortgages are born from the sale of property with owner financing. Start sharing the benefits of this powerful selling strategy with home sellers. You'll produce yourself a never-ending source of super high-quality mortgage deals you can buy for yourself or broker for a quick profit.
Leonard W. Stitt has been in the note business since the mid 1980's. For more details on how you can make money sharing the owner financing strategy, click here.
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