Sounds like a rotten situation for sellers and buyers. But not necessarily. Despite these difficulties, it’s possible to get creative with financing – seller financing, that is.

Seller financing is simply the seller offering to finance the buyer’s loan. It’s kind of like a lease option, but it’s basically a takeover of the existing loan. And it’s attractive because it doesn’t require the credit restrictions the banks require. The seller also has the right to charge whatever interest he or she wants within the confines of the law.

Yes, the Fed has locked down on the use of this type of financing with the SAFE Act, but it’s just like any other regulation. As long as you follow the rules, you can use this creative investment strategy to your advantage.

So, is it a worthy investment route? Let’s look at a few options for investors:

• You can find the buyer and match the seller and collect a “finder’s fee.”
• It’s possible to owner finance investment properties, but you have to get creative and follow the rules enacted by the state and the SAFE Act.
• You can act as a buyer and lease out the properties and add a purchase option to the lease.

Sellers with Houses to Move

Seller financing may be the only way a seller can get out of the house. This article gives a great look at how sellers can screen buyers.

• How you can take advantage of this situation – Play matchmaker. If a property has been on the market for a while, you can take advantage of the situation by matching buyers with sellers.
• How to find deals – Screen Craigslist and other online listings for seller financing opps. Work with a realtor or develop your own buyer’s list of buyers looking for non-traditional mortgages.
• How to make money – Charge a finder’s fee. You’re there to play matchmaker; so get the contract and collect your percentage at “closing.”
• How to avoid risk – Play by the rules. Check with your state on their requirements for registration and guidelines for working within the guidelines of the SAFE Act. And, enlist a real estate attorney and accountant to ensure you are following the letter of the law.

In addition to risk, there are costs involved to protect yourself. It’s important to secure a real-estate lawyer and accountant. He or she will ensure you make the right decisions and complete paperwork correctly.

Seller finance your own properties/or purchase properties to rent out with seller financing – The SAFE Act does have some restrictions on how many properties you can personally seller finance. If you have a property that needs to move or are looking into a seller financed rental property, here are a few tips for seller financing. You can also provide this info to your potential matches.

• Find out everything you can about the buyer. Start by asking him to complete a Uniform Residential Loan document. This 5-page form details buyer information including income, type of employment, assets and liabilities.
• Check the buyer’s credit history and criminal background, but obtain his or her permission first. You can do this for a fee through the American Apartment Owners Association.
• Research bankruptcies. And if the buyer cannot get a traditional mortgage due to bankruptcy, you can use PACER (Public Access to Court Electronic Records) to find details about the case.
• Consider a land contract, or “contract for deed,” rather than a traditional mortgage. A land contract ensures the legal title does not transfer to the buyer until the entire loan is paid.

Protect Yourself!

Lending laws and regulations vary from state to state, and having an expert sort out the details is very important when considering and executing a seller financing agreement.

Just like anything, you can work within the guidelines and profit if you get creative enough. Want more creative investment strategies and funding sources? Check out my free video training series at GettingtheMoney.com.

Consider seller financing for the terms, not the price. Ken Corsini, a real estate investor in Georgia made a good point recently on the Bigger Pockets blog on how you can find better investment deals by working with seller financing. He says, “While these [private] sellers may be less willing to negotiate their selling price, they may be open to negotiating terms.”

Pay attention to the local economy.  A good way to find deals is to be knowledgeable about the local economics. You may even want to network with a few city council people and find out about planned developments in the next 18 to 24 months. These neighborhoods could become desirable. Getting in early on deals can help you foresee a good sale price or increase in rent.

Business networking groups. You’ve heard of these, but you’ve probably never attended them. Bankers, roofers, insurance agents, real estate agents, plumbers, contractors and others who are involved with commercial and residential real estate often join these groups to build referral networks. Why shouldn’t you join them? These people often know everyone in town and in a tough economy; people are fixing what they have, not selling. It’s worth your time to go to a meeting. See what ideas and deals may turn up.

Stay tuned to The Investor Insights this month for more on finding deals.

It’s true; we’re living in a scary time. And as Las Vegas tycoon Steve Wynn says, businesses are scared to invest. Especially with moves like the one that’s been overshadowed by this debt ceiling debate. As I posted earlier this week, the Fed is attempting to eliminate “seller-based financing.”

See the original report from The Paper Journal.

How We Can Squelch the Fear

We have a tiny window to be heard and you need to make sure your voice is heard before the Federal Reserve knocks out a key way we investors can keep on making money – and helping people remain homeowners.

Some of the key points:

• The Fed wants to enact a rule that “prohibits property sellers from taking back a mortgage unless the buyer can qualify for conventional financing.”
• The proposed act empowers buyers to “cancel the sale” within three years if they aren’t “properly qualified” for a mortgage by the seller.
• The proposal means that you’ll be required to collect all sorts of financial information on your prospective buyers. That means you’ll have to keep up with more regulations and will likely drive investors out of the business.

Fight Back by Friday

Let’s take hold of the fear and fight back. Be sure to submit your comments (scroll to the bottom of the page) by Friday, July 22nd. And here’s a link to some prepared responses for you to use in crafting your comments.

How do you feel about this issue? Fearful? Angered? Share your sentiments in the comments below.

The Federal Reserve, which received sweeping new authority under the Obama regulatory reauthorization, wants to effectively eliminate seller-held mortgages. It will do this by enacting a rule for the Dodd-Frank Act prohibiting property sellers from taking back a mortgage unless the buyer essentially can qualify for conventional financing!

If this is enacted it also will remove access to housing for millions of Americans, because seller “financing” is the only way people who can’t qualify for conventional loans can buy a house.

Moreover, it would allow a buyer a three year right of rescission (they can cancel the sale) if the seller did not properly qualify them. The right of rescission also applies to anyone who buys the note.

The Fed is Soliciting Comments on the Proposal

The deadline to comment is FRIDAY, July 22.

Click here and scroll to the bottom of the page to submit your comments!

With your help, the Fed may at least decide that this does not apply to private transactions. Urge them to exempt seller installment sales from the rule.

Points to Make In Your Comments

• Seller “financing” provides housing for millions who otherwise could not qualify for conventional loans.
• Homeowners are not bank officers or mortgage lenders. By requiring them (many if not most of whom who take back a mortgage are elderly) to qualify buyers using bank standards means they will simply refuse to sell with owner financing. Thus millions of people will be deprived of home ownership.
• Why should the buyer be required to divulge their income and assets to the very person with whom they are negotiating the terms of a sale? This is not required when there is a 3rd party lender.
• Requiring the buyer to turn over all their financial information to a stranger opens the door for identification theft and fraud.
• This also creates the opportunity for predatory borrowing. This is where an unscrupulous buyer knowledgeable about the Dodd-Frank Act leads an uninformed seller (and this will be the majority of sellers) into negotiations not in compliance with the ability-to-repay requirements. (An example of that could be a balloon, an interest rate greater than 1.49% above a standard mortgage, or the seller did not know how to calculate the income-to-debt ratio correctly, or know what residual income means). That buyer lives in the property trying to resell it for a profit and if they are not successful within three years they rescind the sale and get all their money back.
• By not allowing them to negotiate a balloon payment, there is a good chance that a seller 55 years or older will die before receiving all their equity. A lot of seniors have invested in real property with the intent of selling it using seller financing (an installment sale) in order to supplement their income in retirement, but also with the hope that they would not be stuck with a 30 year investment. The Dodd-Frank Act does the same thing insurance companies do who sell 30 year annuities to seniors. Our government has criticized this deplorable practice because seniors will die before they receive all their investment.
• The restriction of no balloon doesn’t affect just seniors, it has financial consequences for anyone using seller financing. Under the Dodd-Frank Act community banks are allowed to originate fully amortizing loans with a five year balloon. The rationale is that they hold these loans in their own portfolios and the government recognizes their need to hedge against inflation and rising interest rates. Yet, the Act does not recognize that private property owners who have 100% skin in the game need the same protection. A five year balloon is predatory lending. If there has to be a restriction it should at the very least be the same allowance given to community banks of a balloon in 5 years.
• There are a lot of small builders that have a spec house or two that they can’t sell unless they offer great terms using seller financing. Otherwise they have to let these properties go back to the bank, which does not help housing or the economy.
• It has been said that a seller financing the sale of his or her own property would completely avoid the issue of licensing by retaining the services of a licensed loan originator. If a mortgage loan originator (MLO) fails to properly follow the ability-to-repay guidelines the buyer still has three years in which to rescind the sale which leaves the seller at risk and will most likely bankrupt them.

The House initially proposed that only licensed mortgage originators should be allowed to do seller financing transactions OR be limited to one transaction every 3 years.

On June 23rd, the sponsors of that bill have agreed to increase it to 3 seller financed transactions per year without a license. Not a huge win but a win nonetheless.

From the Wall Street Journal…

The House-passed version of the bill would have required people to register as mortgage originators if, more than once over a three-year period, they finance a sale of property they own. The provision was written into the bill out of concern that unscrupulous businesses would try to get around new tough lending rules by financing real estate transactions themselves.

But this week, Sen. Christopher Dodd (D., Conn.) and Rep. Barney Frank (D., Mass.), who are the lead House and Senate negotiators working to finish the financial-overhaul legislation, agreed to relax the limitation on seller financing to three properties in one year.

Now let’s just hope the Senate doesn’t screw it up!