If Your Duplex Buyer Can’t Find A Bank, Be One

said on March 18th, 2010 categorized under: Financing

Comments Off on If Your Duplex Buyer Can’t Find A Bank, Be One

moneyLet’s face it. Due to foreclosures, short sales, job losses and tightened lending standards, fewer prospective duplex buyers can qualify for loans.

Ultimately, this translates to fewer potential buyers for properties, which contributes to declines in value.

Months and months ago I predicted we’d see the re-emergence of the contract for deed as a financing option. In recent days and weeks, I’ve begun to see just exactly that.

A contract for deed, which is sometimes called a land contract, is a means of financing a property in which the seller becomes the bank.

Of course, acting as the bank for a buyer carries inherent risks and rewards for a seller.

Benefits include:

  • A much faster sale, as there’s no waiting for mortgage underwriting or loans to be funded.
  • A way for a seller to simply get out of a property
  • A way to ultimately be paid more for the duplex than a traditional sale would offer, in that the seller would be earning interest as part of the payments.
  • Less stringent foreclosure laws which allow the seller to regain all rights to the property within 60 days of default, while keeping any of the monies from the payments or sale.
  • A way for an investor to spread capital gains tax over a period of years, thereby allowing for more comprehensive tax planning and savings.
  • The monthly payments may ultimately result in greater cash flow than was available to the seller as a landlord, without the headaches of maintenance and vacancies.
  • A balloon payment two, three or five years in the future, which allows the seller to retain the balance of their equity in a lump sum.

The risks of carrying a contract for deed can be:

  • Having to foreclose on the property, thereby being forced to manage and/or sell it all over again.
  • Having to make repairs after the foreclosure
  • Buyers may not have enough of a down payment to cover seller’s closing costs, resulting in the seller having to go into their pockets to pay the difference
  • Triggering a due-on-sale clause with your mortgage company.

Having weighed both the benefits and liabilities, many traditional sellers are finding a contract for deed to be a way to solve the problem of being stuck in a property they no longer care to own.

Comments Off on How Much Should You Put Down On A Minneapolis Duplex Contract for Deed?

House and Money with Pad of Paper and PenWith today’s tightened lending standards, many investors are having a difficult time finding financing. As a result, the contract for deed has once again emerged as a viable option.

I have had two buyers ask me this week alone to find them property where the seller is willing to do the financing.

Believe it or not,  there are properties on the MLS right now where this is an option. Many sellers, for whatever reason, simply need to no longer have the managerial responsibilities of a property.

Of course, the seller also wants to make money on his duplex.

While most forms of seller financing carry a higher than market interest rate, they often also require less of a down payment. At the moment, most banks are requiring a down payment of 25 percent on a non owner-occupied investment property. Private sellers willing to carry financing will often ask for less.

How much less?

Let’s look at it from the seller’s perspective.

If his duplex is actively on the MLS, he has signed a contract with a real estate broker. In the event the property sells as a result of his Realtor’s efforts, he is legally bound to pay a commission based on a percentage of the sales price.

So, if he’s bound to pay six or seven percent in commission on say a $200,000 property, that’s $12,000-$14,000.

In that case, is he going to be ok with a buyer putting $5000 down?

Probably not. If he did, he would have to go into his own pocket to pay not only the rest of the commission, but closing fees as well.

What’s the likelihood of finding a seller willing to do this?

You tell me.

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Mortgage ContractWith the tightening credit standards and increased down payment requirements in today’s mortgage industry, many sellers have become willing to provide financing for prospective buyers via a contract for deed.

In a contract for deed, which is also known as a “land contract”, the seller acts as the bank for the buyer.

All the terms of the “loan”, including interest rate, monthly payments, amortization schedule, length and down payment requirements are negotiable, just as all of the terms of the purchase of the duplex itself are.

While a contract for deed certainly avails a seller of more prospective buyers, it’s crucial that prior to offering it, he know whether or not his mortgage has what’s known as a “due-on-sale clause”, which may also be called an acceleration clause.

When contained in a promissory note, this clause stipulates that the original lender, or bank, may require the entire balance of a loan be paid in full upon the sale or transfer of any interest in the property used to secure the note. (Please know there are some exceptions between spouses, with estates, etc.)

These clauses came into existance in the 1970’s when double-digit interest rates made new loans unattractive. Buyers found if  they assumed a seller’s existing loan, they could usually obtain financing at a greatly reduced interest rate.  To stop this practice (and offer loans at higher interest rates), banks began using the due-on-sale clause.

The truth is, most of today’s mortgages have this language. In fact, in a Fannie Mae or Freddie Mac single family mortgage, for example, it’s usually found in paragraph 17, where it’s called the “Transfer of the Property or a Beneficial Interest in Borrower”.

Uh-oh, right?

Not necessarily.

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Comments Off on Five Benefits of Buying A Twin Cities Duplex on a Contract for Deed

HandshakeA contract for deed is a type of owner financing. It usually requires the buyer to make payments over time, with interest on the unpaid balance; just like a bank. After the loan iis paid in full, the owner gives the buyer a deed to the property.

There are several advantages to buying property this way:

1. There are no loan origination fees, therefore closing costs are lower.

2. The purchase can close quickly.

3. The seller may accept a smaller down payment.

4. There is no limit to the number of properties that can be purchased this way.

5. The seller may be willing to accept a note from a buyer with a less than perfect credit score.

Of course, there are caveats too. The disadvantages of buying a property on a note include:

1. Typically a higher interest rate than a bank held mortgage

2. Shorter foreclosure period. The seller may begin foreclosure if you are 60 days behind in payments.

3. Sellers aren’t always familiar with a contract for deed, and may be reluctant to carry a note.

4. The buyer may face a balloon payment down the line.

Of course, it is crucial to do the numbers before you buy so you are certain you can cover the note in the event of any loss of revenue.

And it is always wise to seek the counsel of either a real estate attorney or Realtor who is familiar with the process before you buy.

 

 

 

 

Comments Off on Seven Reasons to Sell Your Minneapolis/St Paul Duplex on a Contract for Deed

mortgage deedWith each day’s basket full of negative, I’m increasingly convinced the banking industry doesn’t want any of us to buy property ever again. OK, so maybe it’s not quite that dramatic, but…

First it was the end of stated income programs. 

Then it was word that as of August 8, Freddie Mac will restrict lending for investors who own more than four properties.

And there’s the looming threat of the end of gift programs for seller down payments like Ameridream, Nehemiah and Genesis.

Regardless of market conditions, people will always need to buy and sell property. There are countless circumstances other than short sales or foreclosures that necessitate a sale. Perhaps a seller faces a job transfer, an addition to the family, a divorce, or has simply happened upon a better investment opportunity.

So how are those with less than perfect credit, who own five or more properties or work for themselves going to finance real estate?

My guess is we’ll see the re-emergence of the contract for deed, which is also known as a land contract.

With the impossibly low interest rates and readily available loans of recent years, this way of financing fell out of style. (Except in the case of farm land which is often difficult to obtain conventional financing for.) However, it was not an uncommon way to finance property in the late 1970’s, when interest rates hovered in the high teens and low 20s.

Quite simply, when a property is purchased on a contract for deed, the seller becomes the bank.

How does this benefit the seller?

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