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TABLE OF CONTENTS of Owner Will Carry CHAPTER 1: An Important Marketing Strategy This is NOT a California-only book! The authors only coincidentally work and sleep in sunny California. Seller carryback financing works in EVERY state. We begin by defining seller carryback financing. We then discuss the terms used and explain their definitions and their functions. Some relatively new terms are introduced and explained throughout the book. Documents used are defined here and are shown throughout the book. We introduce our cast of characters and tell the part each plays. By using these characters, we hope to make our examples come alive. We focus on the advantages and disadvantages of seller carryback financing to both seller and buyer. Seller and buyer checklists for using carryback financing follow. References:
"If you never remember anything else from this book, remember that all elements of a real estate transaction are negotiable." That quote from the chapter sets our stage. We introduce the time value of money concepts of "MORE SOONER IS BETTER' and "LESS LATER IS BETTER." Then Sam & Sally Seller meet Bob & Betty Buyer. An example of a transaction that includes a simple seller carryback negotiation and transaction follow. References:
What items should be in a note? Better, what items must be in a note? We tell that here. Then usury (charging too much interest) and imputed interest (charging too little interest) are discussed. Late charges - when and how to use them - along with a sample late charge clause come next. Understanding the prepayment penalty and appropriate language for its use follow. Then the due-on-sale clause and a sample of same is shown. Each is related to a note and shown by example. References:
First we had to set the table. Now comes the main course. Are two or three carryback notes better than only one? The protective equity concept is illustrated by example and emphasized as an important theme. This is critical information for those people who structure, buy, sell, or invest in notes. How can sellers improve their security before agreeing to carry a note? A discussion of seller carryback notes with existing assumable financing follows, first with a balloon payment, then with wraparound (all-inclusive) financing, complete with detailed examples of each. Yields to the seller are compared for each variation. References:
The pros and cons of balloon payments are aired. Different methods of calculating a balloon payment are explained. We give sample wording for a balloon payment note. Not content with having floated a balloon, we now show how to defuse it, so it doesn't become a problem. Even better for both buyer and seller, we show how to avoid a balloon payment and its inherent problems. References:
Now that the seller has carried back a note, we explain, then evaluate each alternative. Calculations show: How to amortize a note (several ways), how to discount a note (several ways), and how to use a financial calculator for fun and profit. Handling note collections, transfer by assignment vs. endorsement, and finding a buyer for a note are explained. Loan to value ratio ranges, discounting, and restructuring are illustrated. Examples of exchanging a note at face value are discussed. Here's another BIG bonus: New material here on the Memo of Modification. We've never seen this information anywhere else! References:
Answers some questions: Who does your real estate agent represent? How can consumers tell which agents understand how to maneuver paper? Private lenders and note investors: Who is looking out for you? Loan brokers, agents and others buying and selling notes: Do you have your agency hat on straight? And, using our Agency Disclosure Document, we show how each agent should document his or her representation in a real estate transaction. References:
The reader now learns what an 80-10-10 transaction is. By understanding the risks and pitfalls involved, you will learn how to turn a potential lemon into lemonade. A novice seller can lose his shirt by not knowing how to dramatically reduce the risks involved in an 80- 10- 10 deal. Agents learn how to protect their client and themselves. We tell you how to avoid the pitfalls. What may seem like a shaky deal can be turned into a solid transaction. Tune in here to find out how. We show you two alternative methods to dispose of a 2nd that originated in an 80- 10- 10 transaction. How safe is a first mortgage when the down payment is less than 10%? Let's look at a foreclosure situation, run some numbers and see! References:
When you are looking for property with seller financing, you need to know who and what to look for. You may need the help of a Buyer's agent. We tell you what to look for in property and in a Buyer's agent, to enhance your chances for a successful transaction. References: How to reduce risk to the seller when s/he is asked to carry back a note:
What's the difference? Plenty! In a "nothing down" deal the buyer has nothing to lose and the seller may lose all. In the other the seller is well-secured and the buyer has responsibility. We go into great detail with examples showing how each one works. Learn how to use the system to give you as a seller much more protective equity! Agents should understand these concepts so they can benefit and protect their clients. Properly used, these techniques mean faster sales, more transactions and commissions. References:
Don't be frightened by the title. Or confused. Simply put, a seller may obtain better security for his carryback note than his own property! Why and how to do it? Fully discussed with supporting forms to illustrate. Many agents and consumers don't know about security substitution. Learn how safe and simple the process can be. Why and how it can be the superior alternative to subordination. References:
CHAPTER 12: To Prevent Surprises, Here Is A Checklist To Use Before You Agree To Carry Back A Note Or Before You Buy an Existing Note No, this chapter is not out of place. We needed to lay the groundwork by examples for the points discussed here. The examples shown throughout the book are used to refer to a seller's or note buyer's checklist of requirements. Here Bill Broadbent shows HIS PERSONAL LIST of 15 points to check before carrying back a note, funding a loan, or buying a note at discount! Important, This chapter provides sample forms and references to guide you. References:
At this point the reader understands how and when to use lst, 2nd and 3rd trust deeds and/or mortgages. Ah! but more complex situations may arise. These involve: Divorce, dissolving a partnership, settling an estate. Each may call for multiple notes. Learn how to handle each. Examples and forms we have used will give you an idea how to do it. When the transaction calls for using multiple notes, know how! Be sure to tailor each form to fit your specific situation. References:
What? More uses? How can that be? Well, this chapter alone is worth many times the price of this book! Learn how a guarantor (co-signer) on a note, who is not on title to the property, can protect himself if the primary borrower defaults. Wonderful information for those who can't turn down friends and relatives when asked to guarantee (co-sign) a note. To wind things up, we suggest a unique and creative approach, the Performance Note. CHAPTER 15: Mobile Home Notes How they differ from real estate notes. We look at the near-term risk of changes in land space rent and the long-term risk of potential changes in park ownership and or land usage. Other variables pertinent to mobile home notes are examined. We provide suggestions to minimize risk when creating or buying mobile home notes. References:
What documents do you use when selling a business? Here are some perspectives on down payments, several of which are frequently overlooked. What items should be in a business note? Other important factors to consider when creating or selling, or buying a business note. References:
click for ordering information How to take back a note or mortgage without being taken "Owner Will Carry" or "Seller Financing" are magic words that make almost anything of significant value MORE SALABLE! As this simple diagram shows, your property will become more salable. There always MORE buyers with some cash for a down payment who could make monthly payments if someone would finance the balance of the purchase price. The ONLY ALTERNATIVE to either institutional financing or the rare ALL CASH BUYER is for the seller to become the lender who finances the sale. Seller Carryback Financing Defined: When the seller helps the buyer by acting as a lender, the seller may finance part or all of the sale. The term given to such seller financing is seller carryback financing. A seller is literally carrying back part of the financing on the property being sold. Some advantages of seller carryback financing to the seller...
SELLER FINANCING or OWNER WILL CARRY are words you can add to your FOR SALE sign or classified advertisement. These words will attract a larger number of prospective buyers. "Owner will carry" sets your property apart from sellers who are waiting for that elusive all- cash buyer. Seller carryback financing applies to all types of real estate: Homes, land, mobile homes on a lot or acreage, small or large apartment buildings, condos, office buildings, farms, ranches, motels, senior care facilities, commercial, industrial, warehouse properties and special purpose properties such as theaters, hospitals and restaurants, to name just a few. This book, OWNER WILL CARRY, How To Take Back a Note or Mortgage Without Being Taken, shows how to safely structure both a down payment and/or a carryback note for maximum value now. Later if the note holder needs cash for the note, it will command a top price because of its safe and secure structure. Our major focus in this book is directed toward the sale of real estate using seller financing. The principles explained in this book would also apply to carrying a note secured by almost any asset, including but not limited to: a car, boat, airplane, mobile home (w/o land), a business (w/o real estate), stamp collection, tractor, machine, or other equipment, to name just a few examples. A seller of one of these assets who is reluctant to accept the personal property being sold as security for the carryback note should carefully read pages 120 through 127. Some buyers may be able to secure the note with an interest in real property they own, making the security much safer than just the asset being sold. If the seller needs assistance with the process, a real estate consultant should be employed on an hourly fee basis to help structure the transaction properly and maximize the safety, security and possible future salability of the note being created. Adding the words "Owner Will Carry" or "Seller Financing" can be the quickest way to change a "For Sale" sign to "SOLD"! From a property seller's viewpoint:
Q. Would the cash still be there a year from now?
THINK ABOUT IT! When a seller carries back financing to facilitate the sale of real estate, the note can provide him/her with a steady income for many years. Suppose you carry back a well secured, properly structured note and need cash at some time in the future. You can generate cash by selling all or a portion of your note at that time. Using the techniques in this book will help you get MORE for your note. Many real estate agents THINK they need an all cash sale. Agents:
A majority of listings expire, UNSOLD. Were the sellers and agents waiting for that elusive 11 cash to new loan" buyer? Seller carryback financing can make the difference between a SOLD or an EXPIRED listing. Those agents who understand and utilize seller carryback financing make more sales. Carrying back seller financing, buying and owning a note for income, or making a loan secured by real estate involves, RISKS, REWARDS AND RESPONSIBILITIES. WHAT YOU BELIEVE DETERMINES YOUR SUCCESS If you believe the information in this book will work for you, you are right. It will. If you think the information is fun to read but will not work, you are right. 95% of your success depends on what you believe. The other 5% of your success Is knowing how. This book tells you how. Think for a moment about how most agents market property. When you as a seller ask an agent how he or she will attempt to sell your house, the agent almost always responds in terms of advertising the listing, putting up signs, and holding an "open house." Indeed, if signs, advertising and open houses were the primary tools needed to effectively market property, wouldn't all properties soon be sold? Advertising, signs and open houses are part of marketing. Obviously, more is involved. click for ordering information CHAPTER I of Owner Will Carry AN IMPORTANT MARKETING STRATEGY In a newspaper article on how to improve a home's marketability, the author suggested that sellers consider the following in addition to a competitive price:
While the above suggestions have varying degrees of merit, both these articles overlooked the most important marketing strategy of all: SELLER CARRYBACK FINANCING The availability of mortgage money varies. As we write, loans are currently inexpensive and available for owner-occupied single family homes. Some people believe that mortgage money will be less available in the future. No matter. Even though mortgage money is cheap and plentiful, some borrowers who would be excellent buyers still cannot qualify under institutional lender standards. And, there are always some properties that don't meet institutional lender standards. For that reason now is the time to understand seller carryback financing. This book contains principles -and ideas for all seasons. Interest rates may fluctuate over the years but the principles in this book will never go out of style. These principles apply to all types of real property: Homes, land, mobile homes, apartments, condos, office buildings, farms, commercial and industrial property. Many of these principles can be applied to notes secured by personal property, such as the assets of a business that is being sold. THESE PRINCIPLES APPLY AND WILL WORK IN ANY STATE! Be sure to conform the paperwork and forms to the laws of your state and get professional legal and tax advice to accomplish your objective. Seller Carryback Financing Defined: When a seller assists the buyer by acting as the lender, the seller may finance part or all of the sale. The term given to such seller financing is carryback financing. A seller instead of a financial institution, is literally carrying back part or all of the financing on the property. Seller carryback financing is vital to a successful sales program. It is so important that if more sellers and agents understood the principles of seller canyback financing, more real estate sales activity would be generated across the country than with any other marketing tool! The primary reason we wrote this book is to show you how to properly structure and use seller carryback financing. Many listing (seller's) agents are not aware that seller carryback financing can make their listings more salable. Seller carryback paper (any note secured by real property or personal property) can provide a seller with an interest return (yield) on their note that exceeds savings accounts, certificates of deposit (CDs) and money market funds. Following the suggestions in this book will make seller carryback notes safer for sellers who want to keep their notes. These same suggestions will also make carryback notes more salable for sellers who later need to sell all or part of their note to raise cash. Many sellers are not aware that owner financing, if properly structured, can be converted to cash. Several possibilities are outlined later in this book. Holding a note secured by real property Involves three R's: RISK, RESPONSIBILITY and REWARD: RISK can best be minimized by proper structuring of the transaction in which the note is created. RESPONSIBILITY means YOUR responsibility to understand the rules that relate to trust deed and mortgage notes. REWARDS are available to those who understand the rules. Those who don't know the rules should employ someone who does to represent them. Understanding each of the three R's will benefit property sellers, property buyers, real estate and business opportunity agents, note holders, note sellers, note brokers, and individuals who invest in notes for income. When a seller agrees to carry back a note to finance the sale of his property, there is some RISK involved. This book shows how to reduce the RIS if the seller follows certain guidelines. This book shows you "How To Take Back A Note or Mortgage Without Being Taken!" Terms used in the book: We use the terms deed of trust or trust deed interchangeably throughout the book to identify the security for a seller carryback note. Both mean the same. If you are from a state that uses mortgages instead of trust deeds, think and use the term mortgage. In states where Land Contracts or Contracts For Deed are routinely used, then think Land Contract or Contract For Deed. All of these instruments are sometimes referred to by real estate agents and investors as "paper." Introducing the cast of characters in this book: Our cast of characters is fictional. Any similarity to persons living or dead is purely coincidental. Arthur Agent (represents either the buyer or seller of real estate)
The formula for our examples: The KISSS formula (Keep It Simple, Sensible and Safe!) To keep our examples simple, let's use a $100,000 house. If you are from a lower-priced area of the country, then divide by two. If you are from a high-priced area on the East Coast or California, multiply by three or four. If you're from Texas where everything is supposed to be bigger, then add three or four zeros. Monthly payments shown in many examples have been rounded to the nearest dollar. How does a seller benefit by carrying back financing? Sam Seller wants to sell his property. Suppose when he sells he could get a:
There are more buyers today for well structured, privately held real estate notes than at any other time in our history. Also a growing market of buyers for other types of cash flows has evolved during the last decade. A recent report indicates there are 58 different types of cash flows available. Sam Seller's motivation would be strong. Why would he not help a buyer finance part of the sale? There is some risk, and Sam still needs to do some checking on a specific buyer by following our checklist in Chapter 12. Seller carryback financing helps most properties sell faster! Just as the benefits listed above work for Sam Seller, the flip side of each benefits Bob Buyer. How does a buyer benefit when a seller carries the financing?
Lenders have tightened their credit requirements. They are being picky. And, in some cases, rightly so. "WE CAN'T MAKE YOU A LOAN ......" Institutional lenders may not be willing to make a loan based on policies which relate either to the people concerned and/or the property involved. Examples would include but are not limited to: PEOPLE PROBLEMS Lenders tend to categorize people. People who fall into the categories fisted below ge frequently avoided by some lenders. Do any of these categories apply to you? Q) Are you self employed?
And that's only a partial list of reasons why institutions may say, "We can't make you a loan ...... PROPERTY PROBLEMS that institutional lenders can get picky about include but are not limited to the following:
DOCUMENTS USED: What documents are used in a sale involving seller carryback financing? 1. Offer To Purchase The document may be called an Agreement to Purchase, Purchase Contract, Deposit Receipt, or a Real Estate Purchase Contract and Receipt for Deposit. This document contains the offer and shows details of the sales or purchase price, down payment, institutional loan, if any, and/or the seller's carryback loan. It also contains other terms and conditions of purchase. 2. Mortgage or trust deed to secure the promissory note In states where mortgages are used: The note may be built into the mortgage document or it may be a separate document. A note is a promise to pay a certain amount of money during a certain time period. A mortgage encumbers (places a lien) on the owner's interest in the real property as security for the note. There are two parties to a mortgage. a. The mortgagor is the buyer/payor.
In trust deed states: The note is a separate document. It also shows who owes what, to whom and when it is payable. The note or promise to pay money is a negotiable instrument (can be assigned to others). A trust deed provides security for the note by encumbering (using) the property as security. There are three parties to a trust deed: a. The Trustor is the person (buyer/payor) who conveys the real property
to the trustee as security. Terminology differs in some states. For example,
in Oregon the buyer/payor is called a Grantor in the deed of trust.
The trustee also releases (reconveys) the trust deed as security when the beneficiary advises the trustee that the note has been paid in full. In the event the trustor/payor defaults, the beneficiary may notify the Trustee of the default and ask the trustee to begin a no1ijudicial foreclosure on the trust deed by filing a NOTICE OF DEFAULT. Nonjudicial means you do not go to court to foreclose. The beneficiary also has the option of going to court to obtain a judicial foreclosure. The trustor/payor will either bring the note current or pay it off within the statutory time limit or the property will be sold at a trustee's sale (a privately held public sale/ auction) to the highest bidder. Frequently the only bidder is the note's beneficiary. PROPERTY DISCLOSURES Seller Checklists 1. Preliminary Title Report or Commitment To Insure
2. Termite Inspection Report
3. Real Estate Transfer Disclosure Statement
Even if your state laws may not require you (a seller) to prepare a Real Estate Transfer Disclosure Statement showing Condition of the Property (EX# IL, pgs 24-25), prepare one for the buyer! You do not need a form for this if your state does not have one. A simple letter telling the buyer what you would want to know about the property's defects if you were buying will do the job. We have included a two page form, which may be used in any state, on pages 24 and 25. The more you can tell a buyer up front, the fewer contingencies the buyer will have. If you own an older property, providing an inspection by a qualified professional inspection service may reassure the buyer that the property is in good condition. 4. Other Ideas
Buyer Checklists: 1. Abstract of title
2. Preliminary Title Report or Commitment To Insure
3. Environmental concerns:
Asbestos, radon, toxic chemicals, lead paint etc. Contamination on adjacent or nearby properties could impact your property. Inspectors who can determine the presence or history of such materials on the property are available. A qualified inspector can conduct tests which tell you what materials are there and who to contact in the event removal is necessary. Be sure to check the credentials and references of any inspection firm or consultant you hire. The report you get is only as good as the person who prepares it. Don't ignore this issue. If you do, the liability may stay with you even though you later sell the property. A Hazardous Materials Addendum could be an appropriate addition to a Sales Contract or Deposit Receipt (EX #4, pg 29). In California a new law requires disclosure if the property is within one or more Natural Hazard zones. The hazard zones are:
click for ordering information SUMMARY 183
About the authors:
Bill received his BS degree from Cal Poly in 1956 and MBA from Cornell University in 1958. He has been an active real estate broker and consultant in San Luis Obispo for over 38 years. Bill is president of Arnett & Broadbent Inc., a real estate firm specializing in real estate investment brokerage and consulting. In 1976 he became a charter inductee to the Exchangor's Hall Of Fame and has won state and national recognition for his exchange transactions. Bill was the first broker in America to achieve both the prestigious SEC and CCIM designations. He has served the California Association of Realtors as local board president, state director, teacher and district representative to various committees. From 1970 to 1988 he taught an average of 4 seminars a year in a total of 18 different states. An active broker, consultant, investor, author and educator, he is best known for his specialties of Exchanging, Consulting, and Buyer Representation, all practiced under Single Agency, a term he coined in the late 1970s. Bill is a DOER of what he teaches. Insiders who have seen his work consider him "one of the best" when it comes to transaction structuring. He has used the techniques in this book for many years to benefit and protect his clients. In addition to his real estate investment brokerage and consulting practice, Bill has been buying trust deed and mortgage notes for his own account in over 36 states during the past 24 years. For additional background consult http://www.arnettbroadbent.com/resume_broadbent.html. George Rosenberg (Thousand Oaks, CA) A personal note to the reader: Until I retired from brokerage in 1996, I made my living as a real estate broker. I have been licensed in California since '57 and have been a broker since '69. My practice was centered around Single Agency representation and involved Exchanges, Consulting, and Home Resales. Concerning home resales, I have tried for years to explain to agents and to consumers concepts which would either save money, make money or limit liability. My motivation to jointly author this book is that I have a vision. Someday, my vision goes, agents will act like agents; they will put their clients' interests before their own; they will learn all they can about their work; they will convey confidence so that consumers will not be afraid of an agent's always trying to sell them something. Agents who understand the simple principles in this book will benefit their seller clients, their buyer clients, and, so, themselves. Consumers who choose to be customers (one who does not employ an agent) will begin to seek client status (one who employs an agent) when they see how a real pro works. For example, how many agents do you know who will use multiple carryback notes secured by one trust deed or mortgage when settling an estate or when parceling out equities in a divorce? Not many. But, a whole lot more will after they read this material. My vision is about proper client representation. Creative structuring of seller carryback financing for the client's benefit is part of that representation. More, of course, is involved. But, reading this short book is a great way to begin. |
Creative Solutions, Inc.
SINGLE AGENCY REAL ESTATE REPRESENTATION
1380 Broad St., San Luis Obispo, CA 93401-3910
To Order, Call: (800) 366-6037
e-mail to bill@arnettbroadbent.com