This review originally appeared in Real Estate investor’s Monthly.
Owner Will Carry by Bill Broadbent and George Rosenberg
Owner Will Carry was written by
real-estate brokers. It was published by Creative Solutions, Inc.
It also mentions Creative Real Estate, Inc. My Real Estate B.S. Artist
Detection CheckList (www .johntreed.com/BSchecklist.html) says, "The
following words seem neutral, but for some reason they are used
especially heavily by B.S. artists. Be suspicious of anyone who uses
these words a lot or uses one very prominently, like in the name of
their company or product." "Creative" is one of those words.
The perspective of the book is that of agents who see sellers taking
back mortgages as a way to increase the number of persons willing to
buy the property in question. That's correct, but one should consider
who those additional buyers are. The only people who care about seller
financing are those who cannot qualify for an institutional loan or
who want better terms than a competently-originated loan.
I can see why agents wouldn't care about the distinction. They aren't
the ones taking back the mortgage. But sellers, who are the ones who
take back the mortgage, should not be very eager to seek offers from
people who cannot qualify for an institutional mortgage or offer
Goose and gander
If an agent takes a listing with a cash sale price, then asks you to
take back a mortgage, the agent should get his commission on the exact
same terms as you get your equity. For example, if the agent urges the
seller to take back a seven-year mortgage for 40% of his equity, the
agent should do the same regarding his commission. Furthermore, the
seller's obligation to make the installment payments to the agent
should be contingent on his receipt of the payments from the buyer.
What's good for the goose…
Owner Will Carry actually has a bibliography. However, my book How to
Use Leverage to Maximize Your Real Estate Investment Return, which has
two chapters on taking back a mortgage, is not in it. I suspect I know
the reasons. They are instructive.
Cash resale value
My book says that you should look only at the cash resale value of any
paper you take back when selling real estate. It further says that if
you do that, you will generally find that you got less for your
property than you would have received if you had refused to take back
It says that sellers take back mortgages because they are unwilling to
admit that their property is not worth what they are asking. The
corollary to that is agents like sellers taking back mortgages because
it saves them from telling the seller to cut his price to what the
property is really worth.
Probably the most important reason How to Use Leverage… would not be
on a Realtor's(r) recommended list is my strong stance on the issue of
suitability. Owner Will Carry breathes not a word about suitability.
Suitability, also known as the "Know your customer rule," says that
you should not sell someone an unsuitable investment. As a general
rule, a seller mortgage is an unsuitable investment for a homeowner.
Suitability is derived from an interview in which the client is asked
about their net worth, income, financial goals, age, health,
mortgage-lending experience, and so forth. A seller mortgage would
usually be suitable for an income-property seller, because such
sellers are financially sophisticated.
I once wrote an article called "Seller mortgages are junkier than junk
bonds." A stock broker who sold a junk bond to the typical retired
couple would probably be fired and might lose his license. But
real-estate brokers, who call themselves "professionals" and are
sometimes affiliated with Wall Street securities firms, don't have a
clue about suitability. Their ignorance of the subject is exceeded
only by their indifference to it. This is a long-running scandal and
an outrage, but I'm only one man.
'Better than a CD'
The authors repeat the old saw about seller mortgages having a higher
rate of return than certificates of deposit. That's not really true.
The default rate on CDs is zero; on seller mortgages, much higher. Net
of defaults seller mortgages have lower returns than CDs.
They discuss low-interest rates on seller loans, but they fail to
mention IRS's imputed-interest rules at all.
As is often the case in real estate, the authors are from California.
They repeatedly tell readers that although they are explaining
California laws and practices, other states must be the same. What the
authors should have said is, "This is based on our California laws,
but there is no such book for your state, and probably never will be,
so deal with it." That is, research your local laws and practices and
make modifying notes in Owner Will Carry to make it applicable to your
Indeed, the only reason to read this book in addition to my How to Use
Leverage… is its discussion of CA law. How to Use Leverage… is more
comprehensive and objective.
Owner Will Carry says, "Some people believe that mortgage money will
be less available in the future," "Some of the world's greatest
financial geniuses have called compounding 'the eighth wonder of the
world,'" and "Lenders have tightened their credit requirements."
You can say anything after the phrase, "Some people believe…" I
suspect the only "financial genius" they have in mind is Jimmy Napier.
And lenders have greatly loosened their credit requirements, not
tightened them. There is now a whole subprime lending market segment.
Owner Will Carry is OK as far as it goes, but it only tells about half
the story owners need to hear.
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John T. Reed, a.k.a. John Reed, John T Reed, Jack Reed, 342 Bryan Drive, Alamo, CA 94507, Voice: 925-820-7262, Fax: 925-820-1259, Email: firstname.lastname@example.org