A friend of mine got into a discussion the other day about Sellers carrying back notes on homes in this real estate market. Here is her point of view.
•1. It attracts more potential buyers.
•2. Seller wants to defer taxes.
•3. Creates more flexible terms and payment schedule.
Owner-financed notes can be very different, but always include an agreed-upon term, interest rate, payment amount and payment date which the buyer of the property must pay the seller. The conditions are formally and legally written in a note, also called a promissory note or installment note, similar to what is done with a bank loan.
The note holder has the option of keeping the note or selling all or part of the note. The value that would be place on the note varies due to many factors, with the most important being the amount of equity in the property (cash down payment plus principal payments received) and the credit of the buyer. The more equity and the better the credit the more the note is worth. Also, while second lien notes are marketable, there needs to be at least 25 % equity in the property.
Should you client decide to create a note here are some tips to maximize the amount that you would receive if you later need to sell it. These tips are useful even if you don't sell the note.
•1. Obtain a good down payment. This means at least 10 percent for a standard house and 20-30 percent for commercial properties. These numbers cannot always be reached, so try to get as much as you can without putting the buyer into a financially precarious position.
•2. Sell to a buyer with decent credit. A FICO score of at 680 to 625.
•3. Ensure that the interest rate being charged is at least as high as comparable bank rates.
•4. Have a due on sale clause.
•5. Include a notification should the first go into foreclosure that you will be notify.
•6. Make sure that the buyer understands that once the note is paid off there is a need for a reconveyance deed.
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