owner financing tips

Owner Financing Tips -How To Owner Finance A Home or Other Real Estate

I created this page to help home (or commercial property) sellers to not only inform people about utilizing owner financing to sell their property but also to 1) Teach people how to manage the resulting mortgage note in order to protect this valuable asset and 2) Educate sellers in how to create a move valuable and sellable mortgage note so they will get more money for the note if they ever need to sell it.

Below are several owner financing tips articles I have written that should help but first I would like to answer the number one question I get when property sellers contemplating owner financing ask, "How should I structure the note so I can sell it for a good price?"

Please DON'T Owner Finance your property without reading the below information. Do it right if you want to sell your Note so you DON'T have to wait 15, 20, or even 30 years for your money and get more money for your Note. We can give you cash now if you do it right, often AFTER ONLY 1 PAYMENT. If you still aren't sure, don't hesitate to Call Us. 877-655-5625

The following is just meant as a guide and not a guarantee as there are a lot of variables in valuing a note and they change daily. In addition, every private note buyer has different requirements and different discount rates. (Notes are purchased at a discount of the future cash flow with a discount rate (can vary by note) appropriate for the perceived risk by the note buyers of the note. But if I was creating a mortgage note to sell a property, I would approach it as follows:

  • Get as much a cash down payment as possible with a bare minimum of 10%
  • Have a good real estate attorney provide the paperwork and do the closing
  • Charge as high an interest rate as possible with a very minimum of 7%
  • Amortize the note over whatever period (15, 20, 30 years) so as to get the payment acceptable to the buyer but have a balloon payment of the full note balance in5 to 7 years.
  • Pull credit on the buyer so 1) You have their Social Security number so a note buyer can pull credit in the future should you ever need to sell the note and 2) Determine if they are a good risk for you or someone buying your note. I would set a minimum middle credit score of 620. Much below that and you may not be able to sell the note at an acceptable discount. And I know many note sellers tell me "If they had a credit score of 620 or better, they could get a traditional loan." This could be true but keep in mind that there are a lot of self-employed homebuyers with great credit and cash that can't get a traditional mortgage due to not enough income reported on their tax returns. I would try to hold out for one of these if I could.
  • Do not do any "side agreement" such as agreeing on a different payment than is stated in the note.
  • Require they buy homeowner's insurance and put you as the Mortgagee on the policy.
  • Lastly, if you have a mortgage on the property and want to use owner financing to sell it but most buyers don't have enough of a down payment to pay off the mortgage, depending on the state the property is in you may can do a land contract or contract for deed where you retain the deed to the property until your mortgage is paid off. You can sell a land contract just like a mortgage note as long as you pay off any underlying mortgage. You need to consult an attorney on this and you will most likely need get the agreement of your mortgage company. They'll find out anyway when you cancel your homeowner's insurance or even if you kept it and had your buyer pay it in the payment, the policy would change to a non owner occupied one putting up a red flag to your mortgage company.






3 Things You Must Not Do When Owner Financing A Home.

As a private note buyer, I see lots of private mortgage notes. Sadly, many are worth far less than they could be because of mistakes property sellers make when creating the note. At the time of the sale, the only thing most property sellers can think about is just to get rid of the property. And who can blame them? But with just a little bit more work, the resulting private mortgage note could be worth a lot more. Here are 3 very common mistakes to avoid.

1. Not pulling credit – Sellers who don’t pull credit are just asking for trouble down the road. I’m not even saying you shouldn’t sell to someone with blemishes on their credit, particularly if the problems occurred 2 or 3 years back. If you ever want to sell the note, the note buyer will pull credit. If your buyer has terrible credit, you probably won’t be able to sell the note at all or at best at a much larger discount. Also, if you don’t get social security numbers in order to pull credit at the time of the sale, there is a good chance that the buyers won’t give them to you later as they have little to gain from this.
2. Allowing a 30 year amortization with no balloon – Unless you only want the income and plan to never sell the note, you could do this but who knows what might happen 10, 20 or 30 years in the future. Even if this were the case, you could do a 30-year amortization with a 5 to 7 year balloon and when the balloon comes due, extend the balloon period for 5 more years. This way you have options otherwise, if you ever need to sell the note you will get a much better price as a dollar is worth a lot more in 5 years than 30 years.
3. Charging a low interest rate – Property sellers offering seller financing should realize that they are in the driver’s seat when it comes to the terms of the resulting mortgage note. They should not be charging an interest rate that is at market (traditional mortgage rates) or worse, below market. Charge a premium over market of 2 to 4 percent. If you ever need to sell the note, you’ll get a much better price.

There you have it, 3 mistakes to avoid when offering owner financing in order to sell your home or other real estate.



4 Mistakes To Avoid When Managing Your Owner Financed Mortgage Note

With the crash of the real estate market and complete pendulum swing in requirements to qualify for a mortgage, many home sellers are resorting to owner financing in order to move their property. Once the sale is completed, the seller now has in their possession a valuable financial asset. But managing an owner financed note is hardly a skill most home sellers possess or is taught in school or anywhere else today. As a private mortgage note buyer I get calls daily from note sellers wanting to sell a note that haven’t managed their asset as well as they should. Some of the mistakes can make a note un-sellable, or at least for a discount they can accept. Below are the 4 biggest mistakes I see on a daily basis.

1. Not monitoring whether the borrower is current on their property taxes – In a worse case scenario, this mistake could result in a total loss if the home were foreclosed on my the local municipality and sold off before the note holder even knew it.
2. Not insuring that the buyer is current on their homeowner’s insurance as well as has sufficient coverage – If the borrower let their insurance coverage lapse and had a fire, the note holder could again end up with a worthless note. Note holders should not only monitor the borrowers insurance coverage but should be sure they are on the policy as the mortgagee.
3. Not physically monitoring the property – Many property sellers no longer reside in the city the property they sold and owner financed or they live across town. As a result, they rarely if ever drive by the home which is the asset supporting the note they hold. What can and has happened on many occasions is that the borrower may have moved out and is renting the property out to a friend or family member who has a lot less incentive to maintain the property. This could also cause problems if a major insurance claim were made since the property is no longer owner occupied, requiring a different insurance policy.
4. Allowing the borrower to pay their mortgage in cash each month – If the note holder never needs to sell their note, this may not be a big deal. However, if the note holder ever needs to sell their note, they will not have proof of the servicing of the note. This makes a note worth much less and giving the borrower a receipt will not suffice.

There you have it, four mistakes to avoid in order to a) protect the value of a private mortgage note and b) make the note worth more money if you ever need to sell it to a note buyer.

Are You Thinking Of Private Owner Financing The Sale Of A Home? Then Here Are Some Important Tips You Need

As a note buyer, buying private mortgage notes I continue to be amazed at not only the terms of many owner financed notes but the pretty lax way they were allowed to be created. And while I do understand how a desperate home (or commercial property) seller could easily fall into the 'I'll do anything to sell my home' pitfall, many of these tips will not effect the purchase but will still help protect a newly created financial asset – the private mortgage note.

Following are some easy to follow steps you may want to consider taking when owner financing to 1) Form a more valuable and marketable mortgage note, should you ever need to sell the mortgage and 2) Better protect yourself from future financial loses.

1. Require at least a ten percent down payment, even if it has to be in multiple installments. A home buyer with no "skin in the game", as seen by the default rate on one hundred percent traditional mortgages is a much greater risk than one with significant money on the line.
2. Pull a credit report on the buyer. If you can't pull credit yourself, ask the borrower to provide you with a recent credit report from all 3 bureaus including scores. Keep a copy of the report, particularly if you plan on selling the private mortgage in the near future. Even if you don't turn a home buyer down because of less than pristine credit because you really have to sell, you can often use the below par credit to demand a higher interest rate. And don't forget, there may be legitimate reasons for the poor credit such as a job loss or a major health problem. Did you know that medical expenses are the number one driver of Bankruptcies in the U.S.? Even people with good income can be wiped out if they have no insurance. I've seen many people with health insurance take a serious hit in credit scores due to their health insurance company rejecting some reimbursements or paying really slowly.
3. Use a good attorney or title company to close the deal and be sure the note allows you to pull credit as well as sell the mortgage note in the future. Someone approached me the other day to sell a note, only to find out the note had a "non transfer" clause. You control this process. Be sure the note is created in your favor.

By following these steps when owner financing a home or commercial property sale, you significantly lower your chances of a financial loss in the future.



US Note Buyer