If you are working with a buyer or seller who is considering seller financing there are many issues that you need to understand. You need to know the pitfalls and risks in seller financing as well as the three basic types of seller financing common in South Carolina. In this episode I discuss the three types of seller financing and discuss the benefits and risks of each. Also in this episode another installment of What Happened While You Were Showing and this one is a little controversial. And of course, Gary's Good News Only!
Enjoy and please like and share!
* Gary serves on the South Carolina Real Estate Commission as a Commissioner. The opinions expressed herein are his opinions and are not necessarily the opinions of the SC Real Estate Commission. This podcast is not to be considered legal advice. Please consult an attorney in your jurisdiction for applicable legal advice germane to your issue.
If you are working with a buyer or seller who is considering seller financing there are many issues that you need to understand. You need to know the pitfalls and risks in seller financing as well as the three basic types of seller financing common in South Carolina. In this episode I discuss the three types of seller financing and discuss the benefits and risks of each. Also in this episode another installment of What Happened While You Were Showing and this one is a little controversial. And of course, Gary's Good News Only!
Enjoy and please like and share!
* Gary serves on the South Carolina Real Estate Commission as a Commissioner. The opinions expressed herein are his opinions and are not necessarily the opinions of the SC Real Estate Commission. This podcast is not to be considered legal advice. Please consult an attorney in your jurisdiction for applicable legal advice germane to your issue.
Welcome back fellow health nurse to yet another episode of addition dirt with Gary Becker. So I was off last week at my super spreader event known as Thanksgiving. Just kidding, everybody. Just kidding. Humor is the only thing that's going to get us through these last few days of 2020. I'm not convinced the 2020s still doesn't have another curveball to throw at it. But something were still gonna happen before 2020 is done. I'm just convinced of it. But on this episode, I'm going to dive into what a real estate agent needs to know about owner financing options. I'm also gonna have another installment of what happened, why you are showing, and believe me realtors, you need to hear what's going on. And of course, Gary's good news only will end out our show. Now if you like this podcast, I'd ask you to please rate us six stars would probably be the appropriate number of stars to give us but because you can only give five, please go and give us five. Most importantly, please share this podcast with any of your friends, your real estate agent, heck, your doctor, your dentist, I don't care, even the guy who cleans your gutters. Basically, we're trying to grow this show. Have a great audience already. And just want to make this go statewide. If you want to follow me, you can follow me at Pickering Gary on Instagram, that's PRC KRNGAR wa. Now let's get on with seller financing. Typically, when your consumer wants an owner financing, either as a seller or a buyer is typically because somebody has an issue that's preventing them from either selling the property or an issue that is preventing them from getting there on mortgage through a traditional lender, such as a bank or a mortgage broker. Now some of the issues that you may see a buyer experiencing that would prevent them from getting their own mortgage is perhaps they have a credit issue, what you may start running across now as some people that accepted the forbearance during the COVID may have trouble getting their own loan, so they may need to do a short term seller financing until they can get their credit issues resolved and get into their own conventional type of loan. You also may run across a situation where a borrower has good credit, but they just don't have a down payment. And maybe the they do not qualify for downpayment assistance or some other type of programs. The third issue you may run into might be an employment issue. A lot of the people graduating from college and may have not started their jobs yet, or people that are moving into town, maybe are established residency with a new job. Oftentimes, sometimes they'll quit jobs in another town and then they're moving here, but they hadn't started their new job. So technically, they're unemployed for that few weeks, until they start their job to things like that could be an issue. Also, people who are self employed oftentimes have difficulties getting a loan until they've been self employed for a number of months and can prove income. The other reason you may see somebody asking for seller financing is if they are buying or selling from a family member or a close friend. Now the seller may also have some issues that would prevent the seller from selling such as they may have tax issues, they're worried about capital gains in a particular year. And so they want to push that to the next calendar year. And so they want the buyer to go ahead and do seller financing with them until they can get through to the next year. Perhaps the seller can't sell the property, they may have a rental that's being taxed at 6%. And they're worried about the 6% tax rate in South Carolina, which can be often triple what the 4% tax rate is, or they may have a judgment or a lien against them to set those expire soon. So they don't want to transfer title until that lien expires, so they don't have to pay it off. So seller financing in these situations may be a good option for the party. Let's talk a little bit as lawyer we need to give you the caveats on this before we get into giving you the three methods that I think seller financing would best work first is you need to understand as a real estate agent, what you are doing first and foremost, if you don't understand seller financing, and how to explain it, what the options are and how to properly write it in a contract, stop. Talk to your broker to assist a seasoned agent in your office and learn what you need to know before you start trying to get into this. This can be very problematic if you're not aware of what the pitfalls are and the risk are and how to properly write this up in a contract. Secondly, you need to make sure your clients understand what they are doing, and what the risks are because the three examples of seller financing I'm going to talk about today, they are tremendous, tremendous risk in all three of them. So we need to talk about those. And you need to be fully aware that your client understands what they're getting into. Number three, and maybe even most importantly, is make sure you understand how this needs to be put forth into the contract. I get tons of contracts that say for seller financing and all it says in the contract is seller will finance the transaction. Okay, what interest rate for how long was the terms? They don't put any information in there? And then when you contact the parties, they're like, Oh, I don't I just do what's normal. I don't know what's normal. Normal is different for everybody. If you're a veteran if you're a first time homebuyer if you're getting FHA if you're getting conventional all over That's completely different. Your credit dictates a lot of that. Number four, I would say is make sure your seller knows something about this buyers finances before they agree to do seller financing. Because if this person has been turned down by every bank in America, because they have a 400 credit score, there's something your seller might truly need to think about is whether they want to take the risk own of being the bank, I would say number five is also important. You need to sellers typically need to avoid doing this, if their sole purpose is trying to save on property taxes from 6% to 4%. And a lot of sellers that say, I'm reading the property of these people, they're really nice. I want to put a do a bond for title or some type of seller financing so we can get the taxes lower. And my question is, are you planning on selling the property? No, no, no, after they move out those, you know, cancel the agreement. Well, that creates a lot of problems, and that should be avoided at all costs. And then lastly, whether or not a seller financing options even good for anybody pins greatly on whether or not the seller has a lien against the property in which they can pay off at this time, or whether their properties encumbered by a lien such as a mortgage. And that's going to remain on the property that greatly affects what we can do and how we're going to do it. So now let's move into the three types of seller financing that is available, the number one way to do seller financing is through a note in the mortgage. And so what I tell people to do is to think about themselves not only as the seller, but also as the bank. So your sellers essentially wearing two hats, hat number one, they're the seller, they're selling the property to the buyer, they will be a contract sales price, whatever the contract sales price is, that's what will be on the settlement statement, we will transfer title from the seller to the buyer. Now this can only happen if the seller does not have any liens against the property, or the seller can pay off those liens at the closing. So for instance, if they're selling the house for 200 grand, and they have no liens, they could do that. Or if they're selling the house for 200 grand. And let's say they have a mortgage of $50,000 into planning on paying that off. Now they can transfer the property free and clear to the bar because that's gonna be the first requirement of the contract on this type of seller financing is that the seller is going to transfer title free and clear of any liens. The second hat seller is going to now be wearing is that as the lender of the lender, they need to think of themselves as a bank. Because what they're essentially now doing is turning around and loaning the money back to the buyer for them to purchase the house. And so what they're going to do is we'll transfer title, then we will draft a note in which the borrower promises to repay the seller. Remember, that is what I noticed a note is a promise of somebody that somebody is making to pay back a debt to another person. So they will sign a promissory note just like they would if they were going to a lender to get a loan, they're going to pay this on a note saying I promise to pay you back. Now in the note, it will set out the terms of the repayment how much money are they going to repay? How much interest? are they paying on that money? When will they make the monthly payments? When will those payments be due? Where will they be paid to? How long will those payments be made? Is there a balloon at the end of this term? Or what how long is the term are they going to be in this until they pay it completely off. One of the strategies that we often recommend when we put these together is that unless it's a family member, and they're just trying to help somebody out and don't care how long it lasts, and are willing to give them a super low interest rate. If you're you're a seller selling to a stranger, you want to put the interest rate higher than what the consumer can get from a traditional bank. Because your mo you really want them to be motivated to go out and get their own mortgage through their own lender so that you can be paid out. So if you give them a 2% interest rate, the buyer is going to keep that 2% interest rate until they absolutely have to refinance, they're not going to go and refinance to a three or 4% note when they have 2% with you. Now on the other hand, as a seller, if you give them five or 6% and the going interest rates 3%, then it gives them a lot of incentive to try to go out and get their own financing and get you paid off. It depends on what the motive of the seller is some sellers I have do these things because I look at them as an investment in which they can make money on but the interest rates are so low right now I'm not sure many investors want to make two or 3% on alone where they can go out invest the money in the stock market and make eight 9% right now, that's a very big consideration for a seller in addition to the buyer signing a promissory note. The buyers also going to give the seller a mortgage on the property and what the mortgage will say is if I don't make payments under that note, I will be subject to you foreclosing me on this using this mortgage. So if they don't make the payments, the seller can go to the court and file a foreclosure action using the mortgage document cuz the mortgage is a document that secures repayment of the note with purpose property. So if the seller and this is important to understand as well, if the seller is not getting paid, the sellers options are not eviction because they don't own the property more the buyer actually owns the property, the sellers option is going to be to go foreclose the property, just like any bank or mortgage company would, so that your is your biggest drawback. So let's talk about benefits and drawbacks. Your biggest drawback is if they don't make payments, you have to foreclose. Now, what is the benefit for the seller, and the buyer? Well, ownership is the biggest benefit for the buyer. We know that when people own property versus rent them, they typically take better care of them. So less chance the house is gonna get destroyed if you're trying to rent it and do some other type of arrangement. Plus, if it gets destroyed, you don't care as long as they're making their payments because it's their house. As a seller. Your other benefit is you no longer hold title, so you have no more liability. If something happens at the property, something breaks, somebody gets hurt, not sure responsibility of the buyer has it. So I think there's a lot of benefits here. The other benefit is obviously the buyer will be able to qualify for the 4% tax rate as an owner occupant. Now the only thing that I have to finish with on the note mortgage is, as I mentioned earlier, the title has to be clear in order to do the note in the mortgage in the title and transfer title transfer. Because if the title is not clear, the seller can't transfer the property under the contract. Note mortgage is my number one best way of doing these when it's possible. Let's talk about the second option. Your second option is what's called a bond for title, a contract for deed installment contract, they're all the same thing. People have different versions of different names. I hate these absolutely hate these, these usually wind up with people suing each other. And about 50% of the time, if not more, they don't work they fall through one of the parties defaults on it, I have seen lots of lawsuits in the past few years on these things. The problem with these is a lot of people going find forms on the internet. And they try to fill in the form, we found one the other day where the seller is ready to sell the property to the buyer. But the buyer says I don't have to buy it because it says indefinite term. So for this small amount of money, these people could live in this house indefinitely, because that's how the parties filled it out that they had an indefinite amount of time to make payments on it. So they're making minimal payments, I think it was like$500 on this $140,000 house, they have many, many years, I can sit in that house and make that little $500 payment. seller's ready to sell it buyers like I don't care, I'm not doing it, they're oftentimes drafted very, very poorly, the one that we draft when we do them, and I don't want to do them very often, it's about 20 something pages. And what a bond for title says is I, my buyer wants to buy the property, I want to sell it, the buyer is going to give me a down payment, I am going to they're going to make monthly payments to me as the seller, when they finish making those payments or at a set period of time, they are going to pay me the remaining balance, and then I will transfer title. Now with a bond for title you record it. So it prevents the seller from selling it to somebody else, the buyer creates an equitable ownership in the property. And as such, they qualify for the 4% tax rate on in most cases. But the problem with this is there's billions of risk in it. And the biggest risk is if the seller quits making their mortgage payment, the buyer has put down a large chunk of money and is making monthly payments, this mortgage company is going to put the property in foreclosure now you have certain rights as a buyer to try to buy it out but you're not buying might not be in a position to take care of buying it out. So you could as a buyer, be in a big situation where you lose property, you also might have a situation where you they're putting making payments to their mortgage payment, but at the time, you're ready to close it out and buy it and take title to it. The seller has a judgment because they haven't been paying medical bills or credit cards, well, that judgment has to be paid off. And if there's not enough money to pay it off, seller can't transfer the title. So you might be stuck that way. Now, as a seller, you could be stuck in multiple situations where if the buyer doesn't make the payments, you can't evict them, you're going to have to foreclose on them. And it's going to take a long period of time to foreclose on them. In the meantime, they could be remaining in the house and not making payments and tearing up the house. So you have lots of risk here. And I don't really I'm not a big fan of these. As I said earlier, I see multiple times where these things don't work out. Now the biggest benefit and about the only benefit that I have seen in these is that it lowers the tax rate from 4% to 6%. So if you're talking to $400,000 house, then Okay, that saves you a tremendous amount of money in taxes. But if we're talking 150 $200,000 house, you may save yourself $1,000 a year in taxes. Is this risk really worth it for that $1,000 benefit per year? My answer is absolutely not. It's not worth it. It's too much risk for doing these things about the only time I can see a bond for title being safe and minimal risk is when it's going to be a very short period of time, one month to Three months, and it's going to be a lot of money being put down as a down payment. So for instance, on a $400,000 house, if somebody put down$20,000. And the bond for title was for three months, because they had a tax issue they're working out, and their lenders already told them, they can pretty much get this thing done in about three months, that might be a reason to go ahead and get it taken care of. But if we're talking a $400,000 house, and the buyer is willing to put down 1000, or $2,000, and it's going to be for a year or two, a seller or a buyer will always walk from $1,000 to get to have a deal, they'll just move and you've got a problem. The other problem with it that I didn't mention earlier is let's suppose that your buyer simply moves out and quits making payments. As a seller, you've still got to foreclose on them, but now you got to go find them to foreclose on them. And so the only other option you have is you can ask them if you don't want to foreclose is asked him to move out and sign a quitclaim deed. And oftentimes, you can't find them and if you can find them, they often want you to give them money to sign a quitclaim deed to cancel the transaction. And I've had that happen on a client before where husband and wife are actually boyfriend girlfriend, we're living in a property girlfriend got a coke coke cocaine problem, she moves out and disappears, nobody can find her boyfriend comes in and signs the quitclaim deed releasing it, we could never find the girlfriend Finally, the boyfriend found the girlfriend about two months later, after no payments are being made in this house. On they tore the house up by the way, and the only way they could get the girlfriend to sign the deed was to give her$1,000 so they had to pay her even though she was not making monthly payment, so it became a mess. I just don't think these bond for titles are really worth it. I think there's a lot of drawbacks. And I would go into these things very hesitantly The last thing and the last option you can do for seller financing is an option to purchase with the lease. I like these off this idea here. This is where the consumer, the buyer is going to sign a lease with the light with the seller so that you have a landlord tenant relationship just like you would do, they're gonna do any rental. Now if you are a realtor, then most of those forms can be found on the realtors website, you just pull up a standard residential lease and use that or your company probably has several in your forms. Now the second part of that is there's an option and what the option is the seller and buyer has agreed to sell the house for a certain price. And the buyer has the option of exercising that right during a set period of time. And the reason I like this is you can set that option period for whatever length you want, the buyer will pay you a downpayment or consideration, they'll basically pay you for that option. And they have the right to buy the house a set upon great agreed price, they will pay that price before that day, or the Option expires. Once the option expires, it is no longer a lien against the property. And you can sell the property to somebody else without having to foreclose or evict anybody, you have to evict them. But for non payment under the landlord tenant agreement, but on the option, then you all you have to do is wait for it expire and you can sell it to somebody else. And so it's a nice way to work out the deal, get everything in writing, put everybody in place, and close these and I find that most of these close, most of these do in fact close. The downside is they only are going to they're not going to be able to get the tax benefit at 4% because it's a landlord tenant. So they'll be they'll still be paying 6%. But remember, if the property has already been taxed at 4%, in a given calendar year, the tax assessor does not raise it to 6% for non owner occupant until the following year. So if we are in June signing this option, and the tax rates already 4%, it will stay 4% for the rest of this year, it won't move to 6% until the following year. So that's 18 months later. And if the transaction closes before the end of the following year, then the buyer can apply for and gain the 4%. So the tax rate never even comes into factor. And so most options are going to be for six months or 12 months anyway. So if the property is already being taxed at 4%, it's unlikely that the deal won't get closed before enough time so that the buyer can go qualify for their own 4%. Now it's already being taxed at 4% at 6%. You know it's not going to change, it's gonna stay at 6% maturity paying 6% interest factor that in the pricing of the house when you do the option. So to recap, the best way in my opinion to do is a note mortgage, it gets the seller out of it, the seller is done they no longer on the property. The buyer now is the owner, they're going to take better care of the property because they're the owner and the seller is going to act as a bank. They get their money with some interest. I like that idea. But remember, it requires the seller being able to either have no lien against the property or to transfer the property free and clear by paying off any lien. Second option is to do the option to purchase with a lease. Yes, the seller acts as a landlord with the landlord tenant relationship. The buyer has an option for a short period of time, but it's a good benefit because it sets everybody in motion toward closing and if they don't close, then the option expires and then you can sell it to somebody else. And then the last one is the bond for title. I strongly recommend not doing those except in extreme extreme situations. But before you do any of it. Talk to All right. Now on to our next segment, what happened, why you were showing, and I'm going to caveat this with the state. I think everybody is well aware of my affinity for the realtors Association. I think the work that the state association does with Nick comidas. Byron King and others is phenomenal. They're one of the main reasons that we were declared essential by Governor McMaster. And we all kept our jobs. And we made good money this year when a lot of our citizens were unemployed. So we're very, very blessed by the great work of the association at the local level. As you also know, I'm a big fan of what Kim and Taylor do over at CCRI Central Carolina realtor Association. I think Kim fuller and Taylor. Oxendine are phenomenal people and just great at what they do. So why I say that is because this is an article that I found because a friend of mine who's a real estate realtor sent me who is very concerned about something is going on at the realtors Association. regardless what Association you're part of there's good and bad things that happen. And this is one of the things that I don't really agree with the National Association of Realtors. And I think it's something that y'all should talk to your state association and your local associations to try to get started. Now this was an article from Daniel Greenfield who reports from front page mag.com front page mag calm, and there's a quote a lot of what he says at the center of the storm is the addition to Article 10 of the real estate realtor code of ethics, which covers various forms of discrimination. Now we all poor discrimination in any form. Make no mistake of that. But unlike all the previous sections, which address how real estate professionals interact with customers, Article 10 dash five is a catch all that controls what real estate agents say on social media, on their private accounts and in their free time. So now they're not only going after agents were discriminating as they should in housing, but if they determine what you post on your social media is not to their liking, yes, they can discipline you under Article 10.5. Remember, this is your private Facebook, Instagram accounts. Now as NARS claims a realtor speech and conduct reflect on the realtor organization whether said publicly on a business social media profile or privately on one's personal one. When you're a real estate agent, you no longer have the rights to a personal opinion. According to Mr. Greenfield. He says that Lars is wrong and characterizing personal views that are privately expressed as discriminating, treating it as a violation of ethics and commercial enterprise. And then reporting it to the state licensing authority is a violation of public trust on the face of it. If you make a discriminatory discriminatory comment about a race, someone's race, religion, national origin, personal sexual choice and things of that nature. Yeah, that's problem. But the problem with this is there's no limitation on this, and your religious, political, cultural beliefs. If it's not to national association, realtors liking, they can decide to bring an action. But what is even worse is if a fellow our fellow realtor or a customer doesn't like what you say, politically, religiously, sexually, or whatever, on social media, they can bring an action against you at your local Association. And now you're before your local peers, try and defend yourself on what your religious beliefs are, or personal beliefs or political beliefs are this is very chilling, very chilling to think that somebody could not like your beliefs, and take an action that could result in you losing your ability to make your money particularly, it's something as taken completely out of context of what you're saying. I have personally advocated for many years, that real estate agents need to be more careful about what they put on social media on it from a business aspect. They're worried about you being cancelled out because of this rule. Because if you go post something online politically, whether it's right left or in the center, you are going to offend 50% of the people in any given community. 50% of the community leads one way 50% leads the other way. Look at our election this past this past election, it pretty much was split right down the middle. So why would you take a political position on the internet or on social media that might offend half the people who send you business. I personally have some strong political and religious views as well as all of you do. But I don't post them on social media. I don't put them on stickers on my car. I very rarely, if ever talk about them with other real estate agents, unless they're very close friends. But that's today's segment of what happened while you were showing. And now to my final and favorite segment. Gary's good news only, you know, I'm constantly getting thanked either by email or in person. When people listen to these podcasts for this particular part of our podcasts, they really like getting good news. And I think the reason that people liked getting this Gary's good news only is because a recent study showed that when the US media reports on campus COVID it was negative doom and gloom 91% of the time. And when all other worldwide media's report on COVID, it's only negative 56% of the time. So the remaining 44% of the time, they're giving you good news on things that are happening, that we should be all listening and you're looking for. The report even noted that in the United States when there's good news on school reopenings business reopening when Fauci admits that schools should be open, because it's a negligible risk to children, or when there's a study that shows that school aged children are more likely to die in car accidents on the way to school than from getting COVID or that the United States has developed three vaccines under operation warp speed and what less than six months, it is basically ignored in the US media. And we know this is true. An example of that is I had to dig for good news all the time. And every time I have to dig for good news. I even most of the time go to trusted European news sources, a lot of what I get isn't from the United States, I'm getting it from England or France or other places Germany, because it's not being reported here in the United States. If you look back and think about when USC and Clemson went back into session, all the media reported on was the 1000s of students who are getting COVID, which was true, but what they never reported to you that there were no reported deaths from the University of South Carolina or Clemson. nor was there even a reported hospitalization of a single student with COVID. That's good news. But it was never reported. Look, all I do is I report what I find is good news. And I do it based on the data that's out there only use trusted sources. And when I do that, find a source. I tell you who it is oftentimes it's the World Health Organization or the CDC. I'm not putting a spin or a political nature on this. It's basically straight from what we're finding out there. But I want to give you good news because we all need good news. I don't understand why getting good news is a bad thing for people these days. But let's talk about the good news. My good friend, Danny hood, who works over Coldwell Banker has been so awesome. He gives me every week I get updates from him that he gets from a pharmacist friend who receives them from the CDC. So a lot of what I get comes from CDC directly to doctors and pharmacists. And what we've learned this week is that the vaccine is being delivered as we speak as I speak right now they are producing and getting the vaccine out to the American people. Now it's gonna go to the frontline workers first, which is where it needs to go. But the CDC has asked all the states to provide where they want their first allocations of their vaccines to be delivered. And we could have this vaccine delivered way before Christmas. So that is credible. Now from nature journal, nature journals that are well respected magazine, Wuhan, China, yes, that Wu Han conducted a study on the transmission of virus via a sample of 10 million people basically a sample everybody in the entire area. of the 10 million, only 300 people were asymmetric, asymptomatic positive, none of the 1174 contact tracing they did, tested positive. So what this tells us is twofold. That's what the article concluded is number one is that asymptomatic people are not driving transmission. It's symptomatic people that are transmitted that are transmitting it. Secondly, this confirms a New York Times article that was written earlier this summer that says the sensitivity of our trade of our testing is jacked up so high, that is picking up people who have what's called a virtual artifact, which is a dead culture, which could have been from one of the other four coronaviruses that could be in your system for many years. This kind of confirms that our testing here is too sensitive and when like pet people test positive asymptomatically is possible they're really don't have the virus is picking up a dead culture from a previous Coronavirus flu that you like that you may have had years ago. Number two, if you don't believe China, and I can understand why you don't believe we want Chinese this is where it originated. How about the World Health Organization? They admitted in June, that asymptomatic spread was very rare. Alright, so now we don't want to talk about the World Health Organization. How about the University of Florida? Would you like them? They said they found that symptoms work, people with symptoms were 28 times more likely to transmit it than people who were asymptomatic. All right. We don't want to go with the University of Florida. How about Dr. falchi. He said January 28. And all of the history of all respiratory virus transmissions. asymptomatic people have never been the driver of outbreaks. So this is good news. If you're asymptomatic, or you're around someone who's asymptomatic, it doesn't look like you're going to catch it from them. It looks like the drivers of the transmission are people who are symptomatic, which goes to the biggest point that anyone can make today. If you have a fever, stay home. Stay away from people. If you have a sore throat or cough, stay home. Stay away from people. That's what we need alarm for this. So fantastic news. That's our show for today. I hope you enjoyed this episode on owner financing. If you like us, please share us. Please give us five stars. Please subscribe and come back next week for another exciting episode. hope everybody has a great week.