Posted by David Butler on October 23, 2006 at 09:41:24:
In Reply to: Re: A cookie Cutter approach to Use posted by Chris Hackett on October 22, 2006 at 20:10:45:
Hello Chris,
In conjunction with Mike's helpful response, I'd like to point out the unusual perspective you present here.
For those of us operating in the private cash flow sector, the issue is one of convincing sellers, and/or their advisors (especially real estate agents - too many of whom are myopic when it comes to understanding and accepting the benefits "seller-financing" CAN bring to the table in the right situations) to use seller-financing. Persuading a buyer to accept easier terms and lower cost financing is not the challenge
you seem to think it is?! ;-)Some things to keep in mind when deciding how to offer seller-financing in the face of the widespread use of explosive subprime "time-bomb" loans...
Market trackers such as DataQuick routinely confirm the obvious trend you have pointed out here - lenders today are issuing more subprime loans. Though most subprime loans are still used for refinancing, more and more are used by people stretching financially to buy the home of their dreams.
What too many folks often fail to pay attention to, is that these same reports usually point out the dark side of the equation as well – subprime loans are made at higher interest rates – to riskier borrowers. This is something we have pointed out frequently over the years. Subprime money has its own costly issues. And, though their usage has exploded again, after every major subprime lender in business at the time was slaughtered back in the early 2000's.
A recent Federal Reserve home loan analysis noted that nationally, the number of borrowers depending on "subprime" or other high-cost loans jumped from 15.5 percent in 2004 to 26.2 percent in 2005. Typically, borrowers with lower credit scores or difficulty documenting their income tend to rely more on subprime and other non-prime loans, in which borrowers charge higher interest rates to compensate for greater risks. The Fed concluded substantial house-price appreciation in recent years "likely caused more borrowers to stretch financially to obtain loans." In addition, the income needed to qualify for a loan increased markedly.
Thus, many loans are not considered "subprime", but rather "nonprime". This is generally so when credit is not so much the issue, as is the fact that the borrower is stretching to meet income qualifiers - often to as high as 55% debt-to-income ratio, as opposed to FNMA-FHLMC's preferred 38% DTI guidelines. The Fed cited an 84 percent increase in higher-priced "piggyback" loans, or second-lien financing used to bridge the gap between home price and the buyer's finances. Meanwhile, the number of conventional home-purchase loan applications winning approval dropped from 67 percent in 2002 to 58 percent last year.
The numbers appeared in the annual Home Mortgage Disclosure Act report, a federal inter-agency study that compiles loan data submitted by more than 8,800 lenders. This report looks at a broad spectrum of borrowing trends, including home lending by race, income and – starting last year – by interest rates paid. The report considers loans to be non-prime when consumers paid 3 percent more than what traditional borrowers paid. Like subprime loans, which often have big prepayment penalties and balloon payments that put borrowers at greater risk of foreclosure - also tend to have much higher closing costs, with loan fees often nearly double, or higher, in comparison to conventional loans.
It's been practical advice for years, as we pointed out again in a recent series of articles done for NoteWorthy, PaperSource, and right here at CREOnline - that simply the using words "Seller-Financing", and/or "Owner Will Carry" in signage and advertising - has consistently proven to be a powerful sales motivator in many markets for decades.
Hope that helps, and Happy Selling. And...
Have fun for a living!
David P. Butler
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