Let’s discuss the mechanics of the owner financing, which is different if the seller has existing financing on the property.

Property Owned Free and Clear

Let’s begin the discussion with a simple explanation of owner financing with a property that is owned free and clear of any mortgage liens; that is, there is no debt owed on the property. Let’s say Sally Seller owns her home “free and clear” — that is, she owes nothing to the bank and there are no mortgage liens on the property. Sally agrees to sell her property to Barney Buyer for $100,000, with the terms of 5% down and owner-financing for $95,000 (95% of the purchase price). At closing, Barney tenders $5,000 in cash and signs an I.O.U. (known as a “promissory note”) for $95,000. Sally executes and delivers a deed (ownership of the property) to Barney. The promissory note is secured by a mortgage that is recorded against the property as a lien in favor of Sally. In this case, Sally is essentially acting as a lender to fund part of the purchase price of the house.

Sally can set a balloon date in the promissory note by which the loan has to be paid in full, at which time Barney must either sell the property or get a new loan from a traditional source such as a bank or mortgage lender. When the new loan is obtained, the loan to Sally is paid off and the mortgage lien is removed from the property. In some states a different form of mortgage called a “deed of trust” is used. A state-by-state list can be found in the resource directory in the appendix of this book.

Seller Has a Mortgage, But Some Equity

The preceding example is for illustrative purposes only, because if you’re reading this manual you probably owe money to a lender secured by a mortgage lien on your property. Let’s consider a more common example — a house that has some equity because it has appreciated since it was purchased, or was purchased with a sizeable down payment.

Let’s say Sammy Seller owns a property worth $100,000 that’s encumbered by a mortgage of $80,000. Sammy agrees to sell the property to Betty Buyer for $100,000. Because there’s $20,000 in equity ($100,000 value minus the $80,000 loan), Betty offers to pay $10,000 down and borrow the balance of the $90,000 from Manny Mortgage Lender. At the last minute before closing, Manny decides that Betty Buyer’s eyes are the wrong color and refuses to fund her loan. Instead, Manny offers to lend $80,000, which is $10,000 short of the amount Betty needs to close. One choice is for Sammy to drop the price of $90,000. Another choice is for Sammy and Betty to part ways and for Sammy to put the property back on the market to find another buyer.

A third choice is for Sammy to accept a promissory note for $10,000 as part of the purchase price. At closing, Betty will pay Sammy $10,000 down, borrow $80,000 from Manny and give Sammy a promissory note for $10,000. Sammy signs over to Betty a deed to the property, and Betty signs a mortgage lien for $80,000 to Manny, who will possess a first lien on the property. Betty also signs another mortgage lien to Sammy, who will have a second mortgage on the property. In a year or so, Betty gets a new loan for $90,000, paying off both the first (Manny’s) and second (Sammy’s) mortgage liens. In the meantime, Betty can make Sammy payments of interest on the $10,000 promissory note, which is a nice income stream for Sammy.

Seller Has a Mortgage, and Little or No Equity

If the seller has little or no equity but a reasonably low payment on his note (whether a fixed-rate loan or fixed for a few more years), he can sell the property by using a wraparound transaction. A “wraparound” or “wrap,” is an arrangement wherein you sell a property encumbered with existing financing by accepting payments in monthly installments, leaving the existing loan in place. The seller uses the payments he collects from the buyer to continue making payments on the underlying mortgage note.

For example, Susie Seller owns a house worth $100,000 and she owes $90,000 to First Federal Financial on a favorable 6%, 30-year, fixed-rate loan. Her principal and interest payments on the loan are roughly $600 per month. She can sell the property for $100,000 for cash, but this might take a few months and $6,000 or more in broker fees and concessions, leaving breadcrumbs on the table after Susie pays off her loan. Susie advertises the property as for sale by owner (FSBO) with owner financing and sells the property to Barry Buyer for $100,000, taking $5,000 down and carrying the balance of $95,000 at 8% for 30 years. Susie doesn’t pay off her underlying loan, but rather collects payments from Barry (roughly $700 per month) and continues to make payments on the underlying loan (roughly $600 per month). Susie collects $100 per month cash flow on the “spread” until Barney refinances.

Mechanics of a Wraparound Transaction

A wraparound is commonly done with an installment land contract. The installment land contract is an agreement by which the buyer makes payments to the seller under an agreement of sale. The transaction is also known by the expressions, “contract for deed” or “agreement for deed.” The seller holds title as collateral until the balance is paid. In many ways, the installment land contract is similar to a mortgage, in that the buyer takes possession of the property, maintains it and pays taxes and insurance. However, the deed remains in the seller’s name until the balance of the debt is paid by the buyer.

An installment land contract usually contains a forfeiture provision, under which a defaulting buyer may be evicted like a defaulting tenant. Under the contract, legal title remains in the seller’s name until the purchase price is satisfied. When the buyer satisfies the indebtedness, legal title passes to the buyer.

by William Bronchick

Interest Rate

The cost of borrowing money, i.e., the interest rate, is one of the most important factors. Interest rates affect monthly payments, which in turn affects how much you can afford to pay for a property. It may also affect cash flow, which affects your decision to hold or sell property.

Loan Amoritzation

There are many different ways a loan can be structured as far as Simple interest and Amortized. A simple interest loan is calculated by multiplying the loan balance by the interest rate. So, for example, a $100,000 loan at 12% interest would be $1,000.00 per month. The payments here, of course, represent interest–only, so the principal amount of the loan does not change.

An amortized loan is slightly more involved. The actual mathematical formula is complex, so it requires a calculator. The amortization method breaks down payments over a number of years, with the payment remaining constant each month. However, the interest is calculated on the remaining balance, so the amount of each monthly payment that accounts for principal and interest changes. For the most part, the more payments you make, the more you decrease the amount of principal (the amount of the loan still left to pay) owed.

Balloon Mortgage

A balloon is a premature end to a loan’s life. For example, a loan could call for interest–only payments for three years, then be due in full at the end of three years. Or, a loan could be amortized over 30 years, with the principal balance remaining due in five years. When the loan balloon payment becomes due, the borrower must pay the full amount or face foreclosure.

With interest rates uncertain in the future, many lenders are offering variable–rate financing. Known as an “ARM” loan (adjustable rate mortgage), there are dozens of variations to suit the lender’s profit motives and borrower’s needs. ARM loans have two limits (“caps”) on the rate increase. One cap regulates the limit on interest rate increases over the life of the loan; the other limits the amount the interest rate can be increased at a time. For example, if the initial rate is 6%, it may have a lifetime cap of 11% and a one–time cap of 2%. The adjustments are made monthly, every six months, once a year or every few years, depending upon the “index the ARM loan is based.” An index is an outside source that can be determined by formulas, such as:

• “LIBOR” (London Interbank Offered Rate) – based on the interest rate at which international banks lend and borrow funds in the London Interbank market.

• “COFI” (Cost of Funds Index) – based on the 11th District’s Federal Home Loan Bank of San Francisco. These loans often adjust on a monthly basis, which can make bookkeeping a real headache!

• T–bills Index – this is based on average rates the Federal government pays on U.S. treasury bills. Also known as the Treasury Constant Maturity or “TCM,” these are the rates banks are paying on six month CDs.

by William Bronchick

Real estate contracts are based on common law contract principles, so it is important that you understand the nuts and bolts of contract law. Offer, Counteroffer and Acceptance. In most states there are standardized contracts used by real estate agents and attorneys. The contract is generally drafted in the form of an offer. The offer is usually signed by the buyer (the offeror). The contract is not binding until the seller accepts, creating a “meeting of the minds” (called “mutual assent”).

An acceptance is made if the offeree (the seller, in this case) agrees to the exact terms of the offer. If the seller replies, “I’ll accept your offer if you agree to close fifteen days sooner,” there is no binding contract, but rather a counteroffer. The basic building block of a contract is that there is mutual agreement.

If the offer is not accepted in the time frame and manner set forth by the buyer (offeror), then there is no contract. For example, if the contract specifies that acceptance must be made by facsimile, an acceptance by telephone call or mail will not suffice.

Unilateral Contract vs. Bilateral Contract.

A real estate sales contract is a “bilateral” (two-way) agreement. The seller agrees to sell, and the buyer agrees to buy. Compare this with an option; an option is a unilateral (one-way) agreement in that the seller is obligated to sell, but the buyer is not obligated to buy – it is his option to do so. A bilateral agreement with a “liquidated damages” provision yields the same result if the buyer fails to close escrow; the seller keeps the buyer’s earnest money and the deal is over.

Basic Legal Requirements of a Real Estate Contract.

There are some basic requirements that must be present to make a real estate contract valid:

1. Mutual Assent. As stated earlier, there must mutual agreement or “meeting of the minds.”

2. In Writing. With few exceptions, a contract for purchase and sale of real estate must be in writing to be enforceable. Thus, if a buyer makes an offer in writing and the seller accepts orally, then backs out, the buyer is out of luck.

3. Identify the Parties. The contract must identify the parties. Although not legally required, a contract commonly sets forth full names and middle initials (it helps the title company in preparation of the title commitment). If one of the parties is a corporation, it should so state (e.g., “North American Land Acquisitions, Inc., a Nevada Corporation”).

4. Identify the Property. The contract must identify the property. Although not required, the legal description should be set forth. A vague description such as “my lakefront home” may not be specific enough to create a binding contract.

5. Purchase Price. The contract must state the purchase price of the property or a reasonably ascertainable figure (e.g., “appraised value as determined by ABC Appraisal Group”).

6. Consideration. A contract must have consideration to be enforceable. Consideration is the benefit, interest or value that induces a promise; it is the glue that binds a contract. The amount of the consideration is not important, but rather whether there is consideration at all. It is common for a contract to state that “ten dollars and other good and valuable consideration has been paid and received.”

7. Signatures. A contract must signed to be enforceable. The party signing must be of legal age and sound mind. A notary’s signature or witness is not required. A facsimile signature is usually acceptable, so long as the contract states that facsimile signatures are valid.

by William Bronchick

Basically, there are three things that happen between contract and closing, which can be remembered by the acronym, “ATM”.  This should be easy to remember because it is like going to the ATM machine when you close to get your money.

• All contract contingencies must be met

• Title searches and title commitment prepared

• Mortgage must be paid off, and a new one must be approved for your buyer

All Contract Contingencies Met

If the contract calls for an inspection by the buyer, this should happen immediately, especially if there is an inspection deadline.  The buyer will probably employ a professional house inspector.  For about $350 in most areas, a house inspection service will prepare a detailed report and a list of things wrong with the property.  A home inspector will check the complete exterior of the house – the chimney, roof, flashings, gutters, and downspouts. He will also check the foundation and the grading of the lot to be sure it is pitched away from the house. A buyer may also require an engineer’s inspection of the property, particularly if the initial inspection reveals problems with the foundation or any other major issues with the property.

The inspector will then write a complete report with photos and a narrative of all of these items, as well as a punch list of things that need work. The buyer will likely use this list to her advantage to negotiate a lower price or cash back at closing (called a “concession”). The buyer can also use the inspection clause to kill a deal that turned out to be buyer’s remorse on her part. If the seller will not agree to make the necessary repairs or adjustments to the price, the buyer can cancel the contract and receive her earnest money back.

You must anticipate these issues, but don’t be in a rush to fix everything that is wrong the property.  For example, if you know the furnace is 20 years old and has an average life span of 20 years, your buyer will likely insist on some credit for a new furnace.  In my part of the Country, a forced-air furnace costs about $2,500.  If it is replaced before closing, the total cost is $2,500.  But, if the furnace is in working order and otherwise safe, the buyer may accept a $1,500 concession at closing.  The point is, don’t rush to fix EVERYTHING before you put the house on the market, but rather consider the cost of doing so versus the cost of a concession.  Fix the items that relate to safety that won’t scare off a potential buyer.  In addition, fix the things that are the cheapest ways to create visual appeal and will sell the house.

In some parts of the country, a separate inspection will be done for termites and other pests.  If you suspect that there is termite damage in your property, take the step of having it inspected before you place the property on the market.  Take a screwdriver in the basement and poke around to see if there are any problems. Use a sharp pick or screwdriver to test for damaged beams, joists, and sills.  If you see what you think are termites, make sure they are not just ants. Ants have elbowed antennae and narrow waists while termites have straight antennae and thick waists.

Title Search & Commitment

The contract will usually provide that it is contingent upon proof of a marketable title by a certain date. The seller is usually required to provide the buyer a copy of a title report or a title commitment showing that the title is insurable. Even if the title report shows problems with the title, the contract is still in force if the seller can cure the problems before the closing and deliver a marketable title.  For example, the existence of an existing mortgage lien or judgment is not fatal, because it can be satisfied by the seller from the proceeds at the closing.

Paying off Your Existing Mortgage

Before closing, you have to pay off your existing mortgage, unless you are doing an owner financed transaction or a lease/option.  You can use the buyer’s funds from the sale of the property to pay off the existing mortgage and release the mortgage lien (or deed of trust) from the property before you deed it to the buyer.  Contact your lender (or lenders if you have a second mortgage or home equity line) and ask them to fax a payoff statement for the loan.  You’ll want to make sure the payoff statement is good through at least the closing date, with per diem (daily) interest listed on the statement in case your closing date gets postponed.

Buyer Getting a New Mortgage

The one contingency that usually makes or breaks a deal is the loan approval.  The way a typical contract is written, a buyer may cancel the agreement and receive his earnest money back if his lender does not approve his loan.  A buyer must make all reasonable attempts to obtain financing, but his lender can find 100 reasons not to fund his loan.

While getting a loan is primarily the responsibility of the buyer, it is also your problem, too.  What if they can’t qualify for the loan and don’t have another lender lined up as a backup plan?  In other words, you have to take charge of the situation to make sure the loan gets closed.  Have a provision in your contract that gives you the right to communicate with the buyer’s mortgage lender during the process so you can keep tabs on what is going on and what documents or lender requirements have to be taken care of.  The appraisal is one of the things that always seems to get held up, so get that scheduled as soon as possible.

The Closing

At the closing, the buyer tenders the balance of the purchase price for the property (less a credit for his earnest money).  If the seller is taking back any owner financing, the buyer will sign a note and mortgage or deed of trust as collateral.  The buyer will also sign his loan documents for his new lender.  The seller and buyer will sign a variety of other disclosures and closing forms, as well as a settlement statement called a “HUD-1” form (HUD stands for U.S. Department of Housing and Urban Development, a federal housing agency).  The HUD-1 form spells out all of the math for both the seller and buyer.  A sample form is shown in the back of this manual.

Once the paperwork is complete, you walk out of closing with your check (hopefully a big one), and the buyer walks out with the keys.  It is customary for the buyer to do a final walkthrough of the property the day of closing or the day before closing to make sure the condition of the property has not changed and that the seller has vacated the property and left it clean.  If you are planning on moving out, make sure the property is in “broom clean” condition and that everything is still in good and working order.

Summary

Understand the complete process from contract to closing and stay in control of the transaction so it goes as smoothly as possible.  Consider owner financing or lease/option as a backup plan if the buyer is not able to get his loan financed.

by William Bronchick

I am sure you’ve heard the expression, “Attitude is everything.”  This is very true. Right now, it’s simply your attitude and mentality that will give you the edge over others who are trying to invest in this highly violatile market.   You’ve undoubtedly heard the importance of thinking positive and having the right attitude.  Most people are intelligent enough to know that this statement is true.  Some people reading this will argue that a positive attitude doesn’t always work.  Well, maybe not, but I know one thing for sure – negative thinking and a negative attitude NEVER works!  So your only choice and your only chance for success in this market are to pick the positive things in life and maintain a positive attitude at all times.

I once read a fortune cookie that said, “An optimist is someone who tells you to cheer up when things are going his way”.  I know that if you are reading this article, times may be difficult and you need serious answers to your burning questions such as “How can I profit in a slow market”? There are many answers to this question, but first I need to impart to you some relative perspective.

A History Lesson on Real Estate Cycles

About every ten to twelve years, as an average, real estate values tend to double in most major metropolitan areas.  For example, in the 1920’s, the original colonial homes sold for just under $2,500 in Long Island, New York.  Since then, real estate prices have doubled almost eight times over the last 80 years.  That averages out to a 100% increase approximately every ten years.  An interesting note to this is that about every ten to twelve years, real estate values must correct before they enter their next “doubling cycle”. 

It’s Not a Matter of If, It’s a Matter of When

The evolutionary process is three steps forward and one step backwards.  For example, imagine a 100% increase occurring in three steps of one-third parts each.  The last market cycle of the 1980’s was one in which real estate values doubled, followed by a correction of the early 1990’s, which equated to a 20-30% decrease over a three to five year period.  This cycle was then followed by the post-millennium cycle boom of 100% from the last high point of the previous cycle.  We are now in the naturally-occurring phase of a correction in the cycle.  This essential and beneficial adjustment gives the market pause to reflect and re-gather momentum and strength for the next doubling cycle.  This has occurred time and time again because the long-term demand for housing is growing an exponential rate based on population growth to almost double in the United States by 2050.  This will continue to drive prices higher as it has for the last 100 years.

Since we now know based on history that nearly all real estate prices will double again, it’s not a matter of if, it’s a matter of when your existing houses will sell.  Sharing these facts with your prospective buyers will put them in the right frame of mind to buy now versus next year if they plan on staying in the home more than five years.  If a buyer is apprehensive about being the right time to invest, ask him if he’d like to buy his parent’s home for the price they paid for it – the answer will be obviously “yes”.

Maintain a Positive Attitude Assuming a Negative Result

In “Winning Through Intimidation” author Robert Ringer talks of the importance of maintaining a positive attitude through the assumption of a negative result.  In other words, Ringer suggests that you should be prepared for the worst case scenario while at the same time putting your best foot forward to get the best possible result.  This will take the mental pressure off of you and allow you to focus on getting the job done.  This approach, I believe, allows you to be positive and realistic in your mental assessment buying and selling houses.

If it Bleeds, it Leads

There’s an old expression in the media business, “If it bleeds, it leads.”  In other words, the media loves to cover negative news more than positive because it sells better.  When the real estate market is in turmoil, the media loves to run these negative headlines to keep reminding people how bad things are.  When buyers hear the bad news, it affects demand because the negative news drives fear, which makes buyers worry about whether the time is right to buy a home.

Is the media simply reporting the news or does the media actually affect the news in this regard?  The answer is obviously both.  The media reporting negative news alone can’t shape a real estate market.  However, since perception is often reality, when buyers are spooked, they may shy away from buying.  This affects lenders, builders, real estate agents and other professionals who rely on the real estate business for their income.  It becomes almost a self-fulfilling prophecy because things get worse and the media again reminds us how bad things are.

But, are things really as bad as the media reports?  At the time of this article (October 2008) the numbers certainly do reflect falling home prices and rising foreclosures.  When you hear that foreclosures have doubled or even tripled in a particular area, this may sound catastrophic at first until you realize that the vast majority of homes (97-99%, depending on the local market) are NOT in foreclosure.  Despite the doom and gloom, there’s always a buyer for a well-kept home offered at the right price and terms.  In short, don’t read the paper if you want to keep a positive attitude and sell your homes fast!

Ready Fire, Aim, Fire

Well done is better than well said – you have to take a whole lot of action to get your houses sold in s slow market.  In a good real estate market, people can sell a house fast, so when things slow down, they figure, “Oh well, there’s nothing I can do.”  Nothing could be further from the truth.  Not only is there something you can do, but there’s a lot you MUST do to get your house sold.  However, it’s not just about working hard, it’s about working SMART.  You need to do things in the right order and in the right way to get the proper results.  

However, don’t focus too much on perfection before you take action.  You’re probably familiar with the phenomenon of the “C” student who outperforms the “A” student in real life.  This is because the “C” student is often satisfied with doing a mediocre job at something, but just getting it done.  The “A” student mentality often leads to paralysis of analysis and inaction.  In other words, the bottom line is getting your house exposed to as many buyers as possible, not necessarily getting it done perfectly.  For example, many sellers want to show their house only when it’s convenient for them and the house is in perfect shape to be shown, instead of when a buyer is ready.  While showing a house in its best condition is a priority, it doesn’t make sense to put off a ready, willing and able buyer for too long.

Fear

Many people reading this are prone to inaction because of fear of doing it incorrectly.  Remember, it’s not a matter of doing it perfectly, but putting forth your best effort.  As I discussed earlier, a lot of effort at a “C” level beats doing less things at an “A” level.

Lack of knowledge certainly makes it difficult to sell a house fast in a slow market, and in fact is probably the single biggest drawback for the average person.  Most people only have the opportunity to sell a few houses in their lifetime and often rely on professionals to do the work.  Thus, the average home seller does not have enough practice to get really good at the job.  In fact, most real estate agents who sell houses for a living are hardly good at it.  The top 5% of agents in any market do the vast majority of the business.

Taking the time to learn what to do is a very important part of the success in selling a house.  In the classic book “Think & Grow Rich”, Napoleon Hill writes about the importance of learning the right things.  He distinguishes between general knowledge and specialized knowledge.  Certainly, there’s a lot of general real estate knowledge in bookstores and floating around the Internet, but this book is unique because it offers the very specialized knowledge of how to sell a house … QUICKLY!  Our experience in selling thousands of homes will reveal the very specialized knowledge you’ll need to get your house sold fast and at the highest price you can get for your market.

Article by William Bronchick