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   ARTICLE   |   From Scotsman Guide Residential Edition   |   April 2008

Do the Two-Step

Understanding seller-financing can help brokers help clients

The Texas two-step is a two-person dance in which the leader determines the dance movements and guides a partner around the floor. Mortgage brokers can learn something from this, especially when it comes to seller-financing.

With more-stringent loan-qualifying guidelines now in place, even homebuyers with clean credit find it difficult to get financing to purchase property. A sluggish real estate market, coupled with an uncertain economy and buyers’ limited ability to get traditional mortgage financing, has severely leveled the playing field for property-sellers.

Most property-sellers simply would like to get cashed out. But just like with the Texas two-step, motivated property-sellers who wish to be proactive can elect to become leaders. Said another way, they can take matters into their own hands by implementing their own two-step sales process.

To thrive, property-sellers may have to fill the lending void that exists in the marketplace. They can do this by offering to self-finance the sale of their property.

Seller-financing allows homeowners to sell their property and start receiving income from the sale. The paper created from the sale often can be sold to investors and converted to a lump cash sum.

As a mortgage broker, you can be the intermediary between sellers and buyers. When buyers are turned down by lenders and a seller is willing to finance the deal, you can help construct a transaction in which seller-financing is part of the sale.

Of course, for your clients to understand the process, you must know the steps first.

Step No. 1

Sellers can expand the marketplace for potential buyers for their property by offering seller-financing. Here are some tips you can offer interested clients.

First, sellers should screen potential buyers based upon their having cash funds to put down, as well as their employment, stability, overall credit profile and credit scores. Advise sellers to ask interested buyers to complete some sort of credit application for their files and for later use.

Buyers should also provide evidence of fire-hazard-insurance coverage or reimburse the sellers monthly for tax and insurance expenses they may be paying.

Even if the seller has existing debt against a property, it is still possible, with some special considerations, to create a “wraparound” financing instrument. In this scenario, the debt that buyers owe the sellers will encircle -- or wrap around -- the existing debt.

The property-sale transaction should be closed through a third-party escrow agent or attorney who will guide the seller and buyer through the paperwork -- settlement statements, deeds, mortgages, wraparound mortgage, promissory notes, etc. -- and procedures. Help your clients ensure that all documents are properly prepared and recorded.

Step No. 2

Once the property-sale transaction closes, the seller should keep payments collected on the seller-finance note separate from other monies. Advise sellers to keep a copy of the checks paid or separate deposit tickets representing payments collected.

It also is possible to convert the seller-financed paper to a discounted lump-cash sum, if the sellers don’t want to service the loan themselves. They can do this via an assignment or transfer of their interest to investors who purchase such seller-held paper for that future income. These investors pay the seller a discounted cash sum, on which the mortgage broker involved with the deal can often make a commission.

The two-step process at work

Often, the financing or availability of financing is more important than the purchase price when it comes to whether a property sells. It’s possible for sellers to continue to thrive and survive in this tough credit market by offering their own financing to buyers. If they desire, sellers can then move through the seller-financed paper to get to a cash position by converting it.

As a mortgage broker, you can put the parties together to make a successful transaction. You can earn a commission from such sales while also helping clients achieve financing that they otherwise could not.

Learning to properly lead your clients is crucial to this two-step dance.  


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