As much as I hate leaving New Jersey in February, someone had to go on the National REIA cruise last week in the Caribbean to learn advanced techniques in real estate investing, so I volunteered. Bob Zachmeier, Kevin Stroup and Walter Wofford gave impressive presentations on how to CREATE seller-financed notes with 100% OPM. To somewhat oversimplify the concept, the investor serves as the “connector” between a home seller, a home buyer, a retiree with funds and professionals for loan origination, loan servicing and other services (title, legal, insurance, etc.)
To be sure, this technique requires advanced “connector” skills and the investor-connector is compensated for mastering the deal mechanics, the relationships and the compliance requirements.
Following are characteristics of the deal that were taught (as I understood them). This list of deal characteristics is NOT comprehensive nor is intended to layout all the steps you must take to execute this strategy. You must consult with licensed professionals in your state before making any decisions or taking any action. This list of deal characteristics is intended to stimulate your thought about whether you want to learn more about creating seller-financed notes without lending your own money.
The home seller receives a bit more money (net) than he/she would receive from the sale of a home through an agent, after commissions and other selling costs.
The buyer does not have to qualify for a mortgage loan with a big bank since there are two loans with which the buyer pays for the home.
One loan is a seller-financed 1st position mortgage loan and the second is an investor-financed 2nd position mortgage loan.
The seller is paid in full at closing by a combination of a down payment from the buyer and the immediate sale of the seller-financed 1st position mortgage loan to someone with funds, such as a retiree, who will get a much higher interest rate on his/her money than the pitiful money market rates where the retiree’s funds are now parked (e.g., 7% interest rate when buying the seller-financed 1st versus 0.2%-0.5% that is typical of money market accounts or savings accounts in 2019).
In order to protect the retiree, the LTV of the 1st position note is no more than about 75% and of course is secured by a 1st position mortgage.
The sale price of the home is slightly above normal retail price since the buyer does not have to qualify for a bank loan. This is important for a significant segment of buyers who have a hard time getting loans from traditional banks due to factors such as fluctuating income, experienced by independent small business owners (such as contractors) who have enough down payment and enough income to buy the house with reliable payments, just not the type of consistent income the banks like to see when they make loans.
Another reason that the buyer is willing to buy at a slightly higher price than retail market price is that, when structured properly, the PITI payments are lower than rent that the buyer is currently paying. In fact, this may work well with renters who have a long history of on-time rent payments who want to buy a home. In some cases, this might work buying the home from their landlord who wants to sell the house and get out of having tenants.
The investor-connector carries a 2nd position mortgage loan that is the difference between the sale price less the 1st mortgage loan and less the down payment. The investor-connector has no money in the deal and the value of the 2nd position note is created by connecting the buyer, the seller, the retiree and he professionals involved.
The investor-connector can choose to make money in the form of passive income from the 2nd position note or the investor-connector can cash out by selling the 2nd position note at a discount to another investor.
In order to be compliant with Dodd-Frank, the loans should be originated by a licensed loan originator. It is also best that the loans are serviced by a loan servicing company.
All other standard buy-sell items should be handled by professionals such as title work, insurances, etc.
The concepts described seem to have many moving parts and indeed there are, just like everything in real estate investing. You have to learn how to do this right and take action. I intend to learn how to do this right and get compliant paperwork from a knowledgeable attorney in my state.
Is it worth learning the details of this technique? It depends on your situation, your skills, your network and many other factors. That is always the case with any type of investing, especially investing in real estate. You must always customize your mix of investment strategies to your individual situation.