Challenging lending climate – more creative-financing options
What does ‘Holding Paper’ Mean?
In a buyers’ market (like this one) sellers have an opportunity to widen
their pool of potential buyers when they consider owner-financing. Buyers
that dont qualify in the current more stringent conventional lending
channels may have an opportunity for property ownership, if they are
willing to follow a roadmap to cleaning up their credit. But sellers need
to be diligent in their qualifying the buyer, get a substantial down
payment, and ensure that they have some protections in place on the loan.
Employing a good real estate attorney in this case is a very good idea.
When conservative banks seem to be appraising property values at low
levels or if you are trying to sell/purchase a very unique property that
will have trouble appraising due to lack of ‘comps’ (recent comparable
property sales), consider holding paper for potential/qualified buyers.
It’s a good marketing angle to make your property more accessible and
opens the door to more offers.
As long as the buyer can put down a significant enough deposit, you might
consider offering something like a 5% loan. The important thing is that
you have a Deed of Trust that is recorded at the local courthouse, giving
you the ability to foreclose and get the title to the property back in
case your buyer defaults and cannot meet their payment obligations on your
loan to them. Make sure the promissory note that the buyer signs is fully
negotiable, that is, transferable to another party. Once the note is
seasoned, with the buyer having made regular payments for six to 12
months, you may be able to sell it to ‘cash-out‘, but you may need to
discount the amount.
Lease Options
Another option for sellers to consider in this continued tough climate for
borrowers is a lease-purchase option. Buyers that don’t have enough saved
for a down payment or with less-than-stellar credit/finances (and may have
qualified for financing three years ago) now cannot qualify for a
mortgage. If you cannot get your property sold outright, offering this
option to buyers that are stuggling to qualify, gives them up to a year or
so to work on getting that credit repaired to then ‘finish’ at the
purchase-line.
The key is in structuring the deal thoroughly. Make sure there is a
significant down- payment (portion could be used as a ‘security deposit’
on the property-rental); if possible, try for a non-refundable portion, to
ensure the purchase (unless the leasee still cannot obtain their financing
by the end of the period). You can agree on a portion of each month’s rent
that would then be applied to the buyers’ down payment/closing costs once
they are prepared to make the purchase.
