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?"
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
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