Should YOU Be the Bank? Real Estate Contracts in Albuquerque

by | Apr 11, 2022 | Albuquerque Real Estate Talk | 0 comments

Should YOU Be the Bank? Real Estate Contracts in Albuquerque

(Transcript Snippet): “Tracy:

I’m still anxious to get to the the topic of, should you be the bank, right? Should you sell a property and be the bank?

Tego:

Should you be the bank? And, and so one of the,

Tracy:

What does that mean? Should you be the bank? Yeah,

Tego:

No, it’s a, it’s a great question. So meaning you’re selling your home and maybe you could become the bank for the borrower maybe, or the borrower for

Tracy:

The buyer

Tego:

Or in this case, be the borrower also. But, but you become the bank. You, what we call it here is a seller seller financing is, is one term another their term is, or the vehicle is called a real estate contract.

Tego:

We hear E a lot. That’s the lingo. Sometimes they call ’em land contracts in other states, but generally New Mexico, we call ’em real estate contracts. And what a real estate contract is, or a, or a seller financing deal is what it is. It’s the seller is finance Ameen to the new buyer the new owner of the home, the, the, the property.

Tracy:

So does a house or a property that you’re selling have to be free and clear as in, you don’t have a loan on it to be the bank.

Tego:

I am, I am not gonna touch that one with a 10 foot pole Tracy, because good idea. Technically, when a, let me, let me say it this way. You’d, you’d wanna talk to an attorney about it, a real estate attorney about it. If you have a loan on a property and you’re gonna be selling it, and you’re gonna be selling it on a real estate contract, that, that mortgage now becomes wrapped into the real estate contract, we call it rap. That could be a problem for your current lender, cuz they, in most cases have what they call a do on sale clause. Meaning once you sell the property, you have to pay off that mortgage. So you’d want to consult an expert on that. And I, again, I’m not gonna touch

Tracy:

That one didn’t mean to go so deep, but I just thought it was gonna be a good question for our listeners.

Tego:

It is a good question. I think the, the answer is it depends and you just have to go into it eyes wide open. So let’s both the buyer and the seller,

Tracy:

Right? So let’s talk about a property where there’s no underlying loan on it, right? A free and clear property,

Tego:

Easy PEY. Yes. Yes.

Tracy:

The benefits of being the owner, finance whole older selling with owner financing, you’re getting

Tego:

Return on your money. You’re getting return on your capital, right? You’re getting return on that money. So you sell a property and you cash it out. Let’s say, let’s say you don’t need that cash to go by the next property. Right. Which, which is usually the situation. Maybe it’s an investment property. Maybe it’s part of an, the state maybe it’s whatever a piece of land could be this way too, where it’s, it’s free and clear, meaning there’s no loan, there’s no debt on that. That property. Be it again, vacant land or, or a home. And you don’t really need that, that cash in the sense of you’re just gonna go put it in the bank anyway. Well, if you offer seller financing now, well, first off, in many cases you can maybe push the sale price a little bit higher because now you’re, you’re offering favorable terms to a buyer. Well, now you’re also earning interest on that money too. And you know, these days, it, it depends, but well, we know mortgage rates have gone up, you know, almost two points now just in the last three months, you know? So, so real estate contracts generally are, you know, two, maybe three points higher than the going rate going rate these days is somewhere around four and a half five. So, you know, real estate contract might be seven, 8%. So you’re making 7%, 8% on that, that equity that you had in your home.

Tracy:

So a, a better way to invest that money. We call it

Tego:

Mailbox, mailbox, money,

Tracy:

Mailbox, money, you know, it’s it’s, if you need that in income, just every month coming in, somebody’s paying off the property, you sold to them. And they there’s a third party in here. We, we highly recommend, so we’ve got an escrow company, right? Yeah. So to protect you and the buyer, the buyer pays the escrow company, the escrow company pays you to make sure about the title and who’s ownership and things just to keep it fair.

Tego:

Yeah. We don’t need to get in the weeds on it, but I mean, there’s, there’s a lot of safeguards in place, so everybody’s protected and, and everybody knows what’s going on.

Tracy:

Right. And all the terms are negotiable. So if it’s a real house or property that you’re selling, obviously it’s in the seller’s best in to get a good down payment, right. We want the buyer to take care of the property and have some money out of pocket. And and then, but if it’s land, sometimes it’s low down payment, right. And you just have money coming in and land doesn’t, you know, doesn’t have rent on it for the most part. So it’s, it’s a good way to have some monthly income if, if you don’t need the money.

Tego:

So let me, let me offer a, a scenario where this may make sense for somebody you’ve got a rental property, Tracy, and you’re kind of tired of being a landlord, right? You don’t wanna be a landlord anymore. You don’t necessarily need to sell the whole property and cash it out. You kind of like having that, what we call of mailbox, money, just money coming in. So you could sell it on a real estate contract. You’re still getting your, your, your monthly installment. Now you you’ve done an installment sale right now. You’re, you’re getting your monthly income from that sale.

Tracy:

So instead of, but rent,

Tego:

But you don’t own the property any longer. Right. So instead of getting it from rent where you’re responsible for the property, now you’re getting the income just from the real estate contract and you’re not responsible for the property anymore.

Tracy:

Right. Right. And it may be, somebody’s moved in as a primary residence, or maybe it’s still a rental for whoever you sold it to. But in any event, you just get your money. So this,

Tego:

This whole real estate contract world is actually, it is kind of just like this sub world in the real estate world. And the, the truth is most, or let me rephrase that. A lot of real estate agents just don’t understand it and how it works. And, and so, you know, if you go down that road, get somebody that is experienced, like air con, our team is one is a pro at this. Right. Right. You know, I mean, I’ve done a bunch of ’em, so I’m pretty familiar with it. But you wanna get somebody that really understands how those things work and make sure it’s.