By: Gerald Paul - gerald(tx)
Increasing Your Owner Financed Cashoutsby: Gerald Paul
There are pointers that will further increase your cashout percentages:
- Recognize that a huge segment of the population will never qualify for a mortgage loan. They are permanent credit risks and are destined to be renters all their lives. It would be nice to "give them a chance", but stick with reality. Don't try to make homeowners out of these people.
- The present credit status of your buyers should be within striking distance of qualifying. FICO scores can usually be improved by at least 50 points over two years with conscientious effort. The buyers I like are those who have undergone a severe damaging event to their credit, such as major hospital bills, divorce, business failure, etc. In other words, their current credit status is a temporary situation, not a chronic one. They are eager to return to their former ranks of credit worthiness. Conversely, if a buyer's credit report shows chargeoffs going back for years, you are looking at a chronic situation which is unlikely to dramatically improve in your relationship.
- Having a relationship with a good mortgage lender who will work with you in exchange for your buyer's business is a valuable asset. I introduce my buyers to my loan officer who tells them face-to-face, if they will do certain necessary things, she will probably be able to get them a loan in less than two years. My loan officer sends them a monthly e-zine and periodic mailings. I also stress the importance of never being late for a payment and keeping a series of at least 12 cancelled payment checks. This continued massaging and communication pays off by instilling confidence in your buyers, and keeps you somewhat in control. It is so much more effective than simply telling your buyers to work at cleaning up their credit on their own and hoping they will comply. Hope is a poor business model.
- Newer construction is usually preferable to older rehabs. Reason is, during the first two years before your buyer refinances, a lot of surprises, known or unknown to the rehabber, can erupt. These are usually magnified in the mind of the buyer. Rehabs are typically in older areas which have no HOA to maintain standards and eyesores can surface. Throw a 'neighbor from hell' into the mix and the buyers often say, "maybe it might be better to just forfeit our down payment (or option fee) and shop somewhere else. After all, with our credit now improved, we can buy anywhere."
- Your advertising should be such that it attracts the most responsible prospects. For example: suppose you were in the market for a new TV or refrigerator. You pass a store sign "Rent To Own". Would you shop there? Probably not, because you know these stores overcharge by preying on the ignorant and desperate. If you advertise your home as "Rent To Own", you have just conveyed that same image to your best buyer prospects who are likely to bypass your property. To get the best prospects, your advertising and presentation should be geared to their intelligence and dignity.
- The ability to pay is the primary overriding consideration. If your prospects don't have sufficent income to comfortably (not just barely) make the payments, there is no point in going any further. And the income must be verifiable and sustainable for the future.
- The amount of down payment is important in that the greater the amount, the more binding the buyer is to the property. I currently insist on at least 4 to 5% down. If a person doesn't have that amount of cash up front, he shouldn't be house hunting -- for my property at least. It's tempting to want to bend on this to fill the house now before another payment is due, but I assure you it is better in the long run to wait until a stronger buyer comes along.
- Never be too eager to sell. Don't get excited just because your buyers say they want the house and have the down payment. I grill the prospects, explaining that they are using MY cash and MY credit, that I am not looking for a temporary resident. If they are not totally committed to owning the home, it would be better that we not enter into any agreement. It often sounds like I am trying to talk them out of it. I take their application and credit info release, but I am totally non-committal. I sell "pretty homes", and I want them to feel obligated if I "allow them" the privledge of buying my home.
- Don't overprice your property. Make your profit by buying bargains and selling at FMV. At the beginning your buyers are concerned with the amount down and monthly payment, but as refinance time approaches, total price looms larger. When they realize they are overpaying, they will take their newfound credit elsewhere.
- Structuring your deal as Owner Financed (using a CFD or wrap) is more effective than a Lease Option. First, you have no landlord responsibilities or liabilities. But more importantly, with Owner Financing, buyers are more committed, boast to friends and family they have "bought a home." In fact, it would be embarassing if they could not refinance and lose the home. Conversely with a L/O, the mindset is still that of a renter (who happens to have an option to buy.) It's so much easier to say, "we decided not to exercise our option." It may be largely psychological, but the degree of committal is enormous. Most of the heavy hitters using Owner Financing as their primary investment strategy never mention the words, "rent" or "lease".
Now, here's the rub. In most states, it is more difficult to foreclose on an owner than evict a renter. In my state, there's not much time difference, but if you live in a state which uses a lengthy judicial foreclosure process that takes months, it may be more logical to L/O. However, good structuring by a competent attorney can often overcome this obstacle. So let me qualify this one -- weighing all factors, if you have a practical choice, Owner Financing is preferred.
That's about it for the main items. It would be nice if it were an exact science and we could assign a weighted point value for each, but it doesn't work that way. Depending on your market, certain items can be considerably more important than others. The best we can do is state that the more items you cover, the greater your chances of a cashout becoming a reality. And when that happens, those fat, backend checks are awfully sweet to cash.
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