Flexibility is the name of the seller financing game — or rather, the name of one of the benefits of owner financing.
Flexibility for home sellers who want interest income, flexibility for home buyers looking for affordable homes, and flexibility for investors to make a deal work. As the investor, you set your price. You can offset risk factors and costs with your yield.
But, even with all of their options, each investor has their hardline “no’s.” And you will find that many investors have the same list of “no’s.”
So, instead of a Real Deal Example. We are sharing our recent Real Deal Breakers.
Real Deal Breakers – Why Deals Have Gone Bad
Outside of the big two — performance and lien position — we have seen a few trends appear that have turned what seemed to be a decent note into a pass. Whether investors tightened their standards or note creators failed to check boxes, these stopped investors from purchasing a note.
Bad Credit or No Credit Score
Especially when working with banks as investors, bad credit scores or buyers with no credit are becoming a firmer line.
But hasn’t this always been the case?
Yes. Banks have always held a higher standard than independent investors regarding borrowers’ credit. When offset by years of on-time payments and a reasonable down payment, the scales can be balanced. But if the score is under 600, it will need some powerful offsets.
And, if the borrower is an LLC, please get a personal guarantee from a credit worthy individual when creating notes.
Vacancies
Vacant properties, even those in good condition, are cause for pause.
It’s not an immediate no, but we have seen this come up with a few deals recently because the vacancy was in tandem with another cause for pause.
There is a preference for owner-occupied properties over rental properties, especially vacant ones. This brings us to what we have seen lately—vacant rental properties with low down payments, a new note, short-term with a balloon, and/or an LLC borrower with no personal guarantee. See the issue? More than once in the past six months, we have sent out the email: “We would love to take a look when the property is occupied or 12 months of timely payments have been made.”
Property Condition
Is the property secured by the note in good shape, or does it look neglected?
Pride in ownership is a big bonus that can make a deal work—or tank it. If there have been late payments, if the borrowers have lower-income jobs, or if the borrowers have poorer credit, seeing deferred maintenance is a BIG red flag.
Property condition is also a significant factor for properties hit by natural disasters like Florida or North Carolina. You don’t want to worry about buyers who toss in the towel due to large home maintenance bills.
This leads us to…
Lack of Hazard Insurance
Flood, hurricane, and natural disaster insurance doesn’t come cheap. Here in Florida, we’ve all been left frustrated (and maybe with a wine or cigar in hand) seeing the rise in our insurance costs.
But, it’s a necessary evil. One that not all borrowers are on board with.
We recently had a deal that fell apart due to the lack of insurance. It was a lovely property with a one-finished home and two almost-finished renovated homes in the heart of Hurricane Country. In fact, the borrower purchased it for an excellent price after Hurricane Ian and worked on the renovations. The payment history was top-notch, and the value was good, but you know what wasn’t there? Hurricane Insurance. Poof—there went the deal.
Unrealistic Expectations
All note sellers want top-dollar pricing, and we get it! We would want that in their shoes. As investors, it’s our job to find a price that fits our goals AND is fair.
But sometimes, people come in with unrealistic expectations, and there is no way you’ll meet that magic number they have in their heads. No matter how good an offer is, the deal isn’t happening.
If you spend your time waiting for the “perfect” note, you will be wasting a lot of your time. But that doesn’t mean that you can make any note work. For us and other investors, these have been some real deal killers.
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