Tuesday, November 17, 2009

Contract Home Buyers- Where Are They?

A couple of weeks ago I wrote about contract sales- the future of real estate. I wrote that the number of contract sales are going up as the number of qualified buyers who can't get traditional bank financing increase, even as more and more home owners are willing to sell on contract.

Questions: Where do you find qualified borrowers who can't get traditional bank financing? Isn't that an oxymoron? By definition, isn't the person who is not qualified to go to a bank or credit union to get a loan an un-qualified borrower? Or is there something special about how a bank works that eliminates a lot of people who would be good people to sell a home to on contract?

Why are the banks automatically disqualifying people?
Two reasons:

#1. There are internal guidelines written by loan policy committees. Underwriters need to follow these guidelines. To get an exception they need approval from higher up in the bank. Who wants to stick their neck out to get an exception to the rules?

#2. There are FHA guidelines. The federal government now buys 90%+ of all loans. The federal agencies will only buy the loans that follow their own guidelines.

Let's take a look at some of the conditions that automatically disqualify some borrowers at a bank that may not disqualify them from buying a house from you on contract.

Those Pesky Bank & FHA Rules
Let's start out with an obvious disqualification- Bankruptcy. This is an easy one. It takes about 3 years for someone who has declared bankruptcy to get a mortgage. Remember, not 2 years and 364 days- 3 years.

Foreclosure- If the buyer is trying to purchase there home back, then the three year rule applies again. We just sold a home back to the original owner of a home that we had purchased 3 years earlier. They tried to apply at about 2 years and nine months and they were told that they had to wait a FULL 3 years.

No Credit- There are people in this world who have always paid with cash who earn a lot of money, but how do you purchase a home without a credit score?

Bad Credit- Have you heard about the 24 year olds working the oil fields and making $40/hr with 20 hours of overtime a week, but can't pay their bills on time? Lot's of cash, really bad credit.

Self-Employed- Even business owners with six-figure incomes and W-2 wages find it harder to get a loan than their employees. This includes doctors, dentists, engineers, accountants, and many other professionals.

Finding Low-Risk, Unqualified Borrowers
So where do you find people to purchase properties on contract? Here are some ideas:

Bankruptcy Attorneys: Many people who just went through bankruptcy now have a lot MORE cash to spend than before. Some of them just lost their homes and need to find a new one. With a clean slate, they could be good purchasers.

Foreclosures & Short Sales: When someone loses a house, they need a new one. The biggest question is: WHY did they lose the house? Was it due to unrealistic financing? Did they pay regularly for 3-5 years and then get killed when the rate adjusted? Good candidates.

People Renting Homes: Often times renters want to own, but the bank is holding them back. Look for single family homes owned by companies or someone who lives out of state.

Human Resources Departments: Employers want a stable workforce. Homeowners are more stable. Companies look for "perks" that cost them nothing. Have a special offer for the employees i.e. $500 RC Willey or Home Depot gift card at closing. Don't forget the military. For example, Hill AirForce base is the biggest employer in Utah.

"Bird-dogs"- Beginning real estate investors often start by finding deals for other people. Get them looking for you.

WAIT- Aren't These People High Risk???!!!
That's why the bank and federal government disqualifies them. Let me ask you something- did the banks do a good job of making good loans? Do you really trust the government to come up with guidelines of who YOU should sell a house to? Besides- there are was to protect yourself when selling on contract that I'll cover in my next blog.

Have you sold a property on contract? Was it a successful sale?

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