Seller Real Estate Financing is Ideal For Retiring Baby Boomers

The last few years have been tough for the real estate market. The Great Recession and its ongoing aftermath have seen millions lose their jobs and homes. Because of short-sighted and often punitive policies by lenders and government-backed agencies, the buyer pool for the real estate market keeps shrinking. But these “outcasts” denied access to traditional financing represent viable buyers for sellers willing to consider creative financing. This will lead to a surge in seller carry-back financing, especially as Baby Boomers begin to retire and want to downsize in a slow real estate market.

Whether due to a job loss or a strategic default, when someone’s home goes into foreclosure the homeowner’s credit file is branded with a crimson “F” and they are barred from received a standard home loan for three or more years. The period for short sales is 2-3 years, assuming the required decimation of credit can be rebuilt within that time. Chapter 7 bankruptcy leads to 2+ years suspension of home-buying privileges for low-down loans backed by Fannie Mae, Freddie Mac or FHA.

Now, these unfortunate souls are not deadbeats. Most are just unlucky in that they worked in a private enterprise, an arena unshielded from Depression-level unemployment and dramatic drops in incomes. So lender attitudes and industry policies preventing them from buying a home for a number of years are really akin to “kicking them while they are down.”

But most will eventually recover and find employment or salvage their small business. Then they will be in the market for buying a home again. However, they will quickly discover that they are shunned by the institutional lenders.

Fortunately, their predicament coincides with another phenomena – the growing number of Baby Boomers that are either voluntarily or involuntarily (because of job loss) going into retirement. A good percentage of this generation wishes to downsize to reduce their expenses in retirement, but have difficulty selling their home. They are competing with a glut of foreclosures, investment properties and short sales for a small pool of qualified buyers. Despite historically low interest rates, worries about the economy and a growing number of excluded buyers makes selling a home today difficult today in many parts of the country. Many Boomers wind up just renting their home out because they can’t find a buyer.

The stars are aligning, however. Boomers and others can tap into the growing population of potential buyers who are ineligible for normal home loans by offering carry-back financing that circumvents standard lender approval criteria. Moreover, retiring Baby Boomers reap significant tax benefits from receiving payments over time instead of lump-sum profits. They can also receive a higher price or enhanced interest rate compared to current market figures. For many sellers, carry-back financing is the perfect way to supplement their retirement income with secure monthly payments at a much higher rate than that received from bonds, CDs or annuities. In the process, they will also get renters or installment buyers who are more likely to take good care of their property.

Buyers benefit too. First, they can buy a home despite being black-listed by institutional lenders. Second, they avoid many of the fees (e.g., points) that tradition lenders charge. Overall, it a much better deal than pursuing a high-rate short-term or subprime loan to buy a home.

Homeowner seller financing is nothing new. There are several universally accepted forms of carry-back financing. The two most popular are:

Lease-Purchase Option: An installment sale where the tenant has a purchase option that can be executed at under specified conditions. Typically, part of the monthly rent is applied towards the down payment. The buyer gains title to the property upon satisfying certain mutually-agreed contractual conditions.

All-Inclusive Trust Deed (AITD): Here the homeowner “wraps” existing liens within a new loan. The seller continues to be responsible for existing loans on the property, but makes a profit override on the entire total of all loans, thereby amplifying his return. The buyer gains title to the property and makes payments to the seller who in turn pays existing lenders.

In all cases of seller financing, it is the seller who decides the credit-worthiness of prospective buyers. The seller assumes the risk normally taken by an institutional lender. Sellers can be assisted in this process by credit reports, standard disclosure forms and experienced real estate professionals. In today’s economy, a recent period of income disruption and bad credit is often bookmarked by a past history of stable income and high credit scores on one end and new employment on the other. This reflects the profile of hardworking families recovering from job losses and perhaps a foreclosure or short sale. It is up to the seller to decide if he wishes to extend credit to them. To sweeten the pot, additional security such as a co-signer on the carry-back note or a lien on personal property or other real estate can also be considered.

Carry-back financing is typically secured by a trust deed or mortgage instrument on the property that allows an expedited foreclosure process to recover the seller’s asset should the buyer default on payments. Pick the right buyer and creative financing like this is very secure. Worst case, the seller gets his property back to put it on the market again. And the initial deal can be structured to ensure that the seller has sufficient funds to cover costs for this contingency.

The major obstacle to seller financing has been those pesky “due on sale” clauses that most lenders slip into their loan documentation. And they interpret “sale” as any event that impacts their interest in the property (i.e., just about everything). However, in today’s climate of low interest rates, defaults and slow-moving real estate, lenders are usually open to seller financing, although many will demand a quid-pro-quo by recasting the terms and/or interest rates on existing liens. Currently, FHA lenders are happy to just continue receiving loan payments and their HUD overseers will not usually exercise “due on sale” clauses.

Seller financing is a not a “do it yourself” undertaking. There are many statutes requiring compliance and complex legalities that must be addressed. Existing lender negotiations are an integral part of these transactions. Moreover, the financial aspects, risks and tax consequences must be understood and addressed.

Anyone contemplating offering seller financing should enlist a knowledgeable real estate professional to assist them. Lease-purchase installment sales and AITDs are proven processes. Realtors employ standard forms and checklists to simplify carry-back transactions, avoid pitfalls, minimize risks and ensure legal compliance. Working with a real estate agent simplifies the sale for Baby Boomers, allowing them to confidently focus on the next stage of their lives.

In summary, carry-back seller financing benefits all parties and is expected to fill the void left by strident lender policies. Those who are economically getting back on their feet represent a growing pool of eager buyers. And Boomers can sell their homes quicker, plus receive a higher return on their equities while enjoying tax benefits and a supplemental income during retirement. What’s not to like?!

Alternative Financing You May Not Have Heard Of

Need capital to keep your business going or to implement new growth initiatives? Well, just run down to your local bank. Wait… banks are still not lending to small businesses.

But, banks may not be your only option.

For decades, there have been many financing programs, some backed by banks but most not, that focus on assets based lending or that focus on the strength of the business – not just the business owner (meaning YOUR credit doesn’t have to score in the stratosphere).

Assets based lending is essentially using the financial asset of a business to secure a loan or advance for working capital, general operating expenses or even capital purchases.

This type of financing is more focused on the business asset generated and how easily or safely the asset(s) can be converted into actual cash.

Accounts Receivable Financing: If your business generates customer invoices, there are finance companies out there that will purchase your receivables, advance your company up to 90% of the invoice amount, collect the money from your customers (saving you the time and hassle), and then refund the difference back to your company.

These companies do not lend based on your credit or your company’s balance sheet but focus mostly on your customers’ strength in payment.

Purchase Order Financing: Does your business have customer orders in hand but not the working capital to complete or fulfill those orders? There are financing companies that will provide capital advances based on these unfinished orders; termed Purchase Orders Financing.

These Purchase Order Financing companies will advance your business cash, based on the amount of the purchase order, to complete the job or order. This means having the needed capital to purchase inventory and supplies or even hire additional needed labor.

Whatever the need, purchase order financing is a great way to use or leverage already acquired business to get the capital your company needs to grow and succeed.

Business Cash Advance: Many businesses, just by their nature like service organizations or retail operation, do not generate business financial assets like the ones mentioned above. But, there are still ways that they can acquire needed working capital to grow their business or to meet immediate expense needs. If your business accepts credit cards as payment from your customers, there are financing companies that will advance your business capital against (and get this) your FUTURE credit card receipts.

Benefits include receiving needed working capital today that can be used for any business or personal need, leveraging your businesses ability to generate future income, low repayment requirements based on a small percentage of your future sales – small enough not to harm your business’s future cash flow needs and these financing companies are more interested in your future sales ability (the strength of your business) than your credit history.

The down side is that some of these products, while they try to be very competitive, can be a bit more expensive than traditional loan products. But, keep this in mind, if you have no other alternative and believe in what you and your business can do with the added capital, then the potential benefits far outweigh the expense.

In business, especially for start up businesses or companies that don’t yet comply with traditional loan underwriting, accessing cash for grow or expansion (or even to just meet current obligations) can be a daunting task. But, instead of being intimidated by this process, let that entrepreneurial spirit kick in. Get creative and find ways to make these sources of capital work for you (that is what running a business is all about).

Further, with our current credit crunch (banks just not lending) these types of financing alternatives may be your business’s only option going forward – regardless of its stage or time in business.

Lastly, while the goal of any businesses is to obtain a needed business loan from traditional financial institutions like banks (it is kind of like validation for all your hard work when your bank approves your business for a loan), it is not always practical to do so – banks are very selective. But, by using these and other types of alternative financing options, many business owners may find that they can leverage these capital sources to grow their business to a point that they do become creditworthy in the eyes of their financial institutions – the irony is that when this point usually comes, the business in question no longer needs outside bank financing.

What will your business do?