Property for Sale: Tips for Using Creative Finance Strategies

Many homeowners with property for sale are struggling to locate qualified buyers. Tightened lending criteria has made it difficult for many people who want to buy houses to qualify for home mortgage loans. Competition with low-cost bank owned homes has made it challenging to find buyers willing to pay current market value.

To obtain the asking price for property for sale, many sellers are offering creative financing strategies to attract buyers who cannot qualify for bank loans. These include owner will carry, lease purchase option agreements, and subject 2.

Entering into unconventional financing allows homeowners to generate cash flow from their property and gives borrowers the chance to improve credit scores while working toward purchasing a home.

Owner will carry involves the seller acting as the lender. Buyers provide a down payment to secure the property and submit monthly payments which are contributed toward the purchase price. A few options exist when entering into this type of agreement.

The first involves having the owner finance the full amount for 2 to 3 years. A real estate contract is executed by a lawyer which outlines the purchase price, interest rate, payment amount and due date, late payment fees, down payment amount, and a default clause.

Buyers must engage in credit repair strategies during the owner-finance contract period in order to qualify for a home mortgage loan when contract terms expire. Since there is no guarantee that buyers will be able to obtain bank financing, the contract should include legalese to address what measures will be taken if buyers cannot qualify for a home loan.

The second type of owner financing involves seller carry back mortgages. This can encompass sellers’ carrying full or partial financing. In most cases, sellers only carry back a portion of the purchase price and buyers obtain a bank loan for the balance. When sellers carry back part of the purchase price, buyers require less funding which makes it easier to qualify for bank financing.

When partial financing is offered, seller carry back mortgages usually extend for 2 to 5 years. Buyers hold two mortgages against the property. The bank is the first lien holder and the seller carries the second mortgage. A real estate contract must be executed to record loan terms and should include a default clause.

Lease purchase option agreements are often referred to as lease to own or lease options. Regardless of the name, lease purchase agreements involve renting a home while contributing funds toward the eventual purchase.

Sellers typically require a down payment to secure the property for sale. A portion of rent money is contributed toward the purchase price. Sellers rarely contribute the full amount. The average contribution hovers around 25- to 40-percent.

For example, if rent payments are $1,000 per month and sellers contribute 40-percent of rent monies toward the purchase, buyers would accrue $4,800 in home loan payments per year. If the contract extends for 3 years, buyers will have paid $14,400 toward the purchase price, along with down payment funds.

Sellers can allow buyers to lock-in the purchase price or require buyers to pay current market value when the contract ends. Buyers should submit rent payments via personal check and retain a copy of cashed checks to provide evidence of payment when applying for a home loan.

Subject 2 can be a good option for buyers with bad credit who can afford to buy a home, but do not qualify for financing. Buyers take over mortgage payments using the seller’s good credit and loan documents remain in the seller’s name until the buyer can obtain bank financing. However, property rights are transferred to the buyer, allowing them to take tax deductions.

Sub2 contracts can pose a risk for sellers, so careful consideration should be given before entering into this type of agreement. Buyers must engage in credit repair strategies to refinance mortgages as quickly as possible.

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Is There A Better Way To Finance A Business Loan? Consider An Asset Finance Strategy

When you need asset finance and a business loan in the 2010 economic environment alternatives are great. One of those solid alternatives is an asset based lending arrangement which focuses on what counts, your assets!

As a business owner and/or financial manager you are looking for business financing that makes sense. ABL is the acronym for one of the more exciting business financing alternatives that is growing in popularity every year in Canada. Are we actually saying that asset finance via an asset based line of credit is ‘ exciting ‘? We will let you decide that, but if this financing is easier to achieve than bank financing, is cost effective, and provides you with unlimited capital… well our clients are excited… you make your own thoughts on that!

Asset based lines of credit simply are drawn down by your firm based on the value of ongoing assets. The assets that are always there are inventory, A/R, and to some degree your fixed assets that aren’t already financed. By collateralizing your assets, and, most importantly, leveraging them to the max if you need to, you are creating available working capital.

We are always explaining to clients that this leverage of assets is not taking on debt, you are not borrowing on a long term basis, and you are simply monetizing current and fixed assets based on current values. What are those values, typically they are 90-100% of receivables under 90 days, 40-75% of your inventory, and a liquidation type value on any equipment you want to temporarily monetize. Clients always ask – ‘ Do you mean that we can borrow, if we need to, on a temporary but ongoing basis on our fixed assets?”. The answer is yes, if you are considering this type of financing strategy.

Let’s cover off the two key points clients always tend to focus on when they are investigating this unique business loan strategy- namely costs, and timelines to get the working capital facility in place.

In some ways cost is the most difficult area of explanation and investigation in an asset finance working capital facility. Putting aside the normal due diligence or commitment fee required to get a facility in place the reality is that there are a couple of key drivers that affect pricing. Asset finance revolvers can be just as competitive as a Canadian chartered bank financing (and less onerous to get approved) but prices varies all over the board in Canada because of the fragmented and specialized nature of this type of financing.

Typically we see rates as low as 9% per annum and as high as 1.5% per month. That’s a big spread and ultimately it depends on the size of the facility, the mix of your current assets, as well as any perceived industry or business risk associated with your firm. But again, we remind the reader, what price would you pay for unlimited working capital?

Typically it takes 2-4 weeks to close such a facility. In Canada as we noted the market is fragmented and these lenders are very focused, specialized, and by nature experienced in what they do, which is value your assets and finance them!

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