July 14, 2008
Looking for Loans (In All the Wrong Places)
Fannie Mae and Freddie Mac are having a rough go of it. Originally chartered as a way for all of us to pursue the American Dream of homeownership, critics accuse the GSEs (government-sponsored entities) of being too lax with their standards during the real estate bubble. Now the problems are coming back to roost.
Rather than try to get into a long-winded history lesson and the implicit or explicit guarantees the federal government makes with regard to the GSEs, I'd rather focus on the best alternative to a rigid and unforgiving lending market; seller financing.
Countless thousands currently have homes on the market. The one-two punch of declining values and negative equity has many people prone on the canvas with no chance of getting up without some serious long-term damage to their credit histories, their quality of life, and their future prospects. For others who own their homes outright or still have a sizable equity position, however, seller financing could be the goose that laid the golden egg.
If you are in the latter group described above, here are a few pointers that will allow you to create a note that will be marketable to a company like Proficient, should you decide to sell the note at some point in the future. First, get as much of a down payment as possible. The more blood, sweat, and tears you get from a prospective buyer in the form of cold, hard cash, the tougher time they'll have walking away from it. (i.e., defaulting on the note) Second, obtain a credit report and ensure they have the willingness and the ability to make the monthly payments, even if they've had difficulties in the past. If you don't know how to read a credit report, consult with someone who does. Third, charge an above-market interest rate. You are taking the risk in the transaction...make sure you get paid for it. Many buyers will try to bluff you and say the bank's rate is ____(fill in the blank): Do you think if they could really get that rate they would be asking you to finance their purchase? Hold your ground; compromising on the interest rate will eventually net you much less for your note if/when you decide to sell it in the secondary market.
As I have mentioned in prior posts, the best way to minimize the discount when selling your note is to consider selling a partial. That is, sell a set number of payments to an investor and keep the residual payments on the tail-end of the note term. You will get cash upfront, and when the note reverts back to you in (7, 10, 12) years, the principal balance will not have decreased by much, given the fact that the interest portion of the early payments is much larger than the principal portion.
The real estate market nationwide is forcing homeowners to come up with new ways of doing things. Otherwise, your home will just sit on the market along with everyone else's. Get creative. Offer financing. Your pool of prospective buyers will be much larger, and both you and your buyer will be better off than by relying on the banks for financing.
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broker, or anyone other than the actual note holder, please do not contact