Best Terms to Use When Creating a Note

The down payment, interest rate, payment frequency, amortization term, and a balloon payment provision have a significant impact on the price you get when selling a note.  Even with perfect credit, a note with 0% interest, interest only annual payments with a balloon due in 30 years on a “no money down” sale is probably the worst combination of terms one could imagine. In fact, even one of these provisions could render your note practically worthless overnight.

Here’s what you need to remember when negotiating seller financing with your buyer:

Down Payment. More down is always better. Go for 20% or more, but no less than 10% if you want to sell the note in the near future, and no less than 5% if you want to sell the note in the next decade.

Interest Rate. Higher is better, to a point, and make it a fixed rate, not adjustable. If I sell a property and carry the financing, the “Bank of Me” charges 10%. If your buyer tells you rates are in the 3-4% range, suggest they contact their bank or mortgage broker to get that rate and that you’ll pay their closing costs for an all cash deal. You’d be better off pitching in towards their closing costs than selling the note later at a discount, but if they were willing and able to get traditional financing, they probably would have done that already and not be talking to you about owner financing. Of course you can negotiate the rate with them, but keep in mind that as your interest rate goes down, the more your note will have to be discounted to produce a yield that will interest a note buyer.

An astute negotiator will realize that sometimes it is better to give into a buyer’s desire for a lower interest rate in exchange for something more valuable right now: cash. Lower your interest rate in exchange for more down payment. Lower your sales price for more down payment. There is one rule in your negotiating, however, and that is Do Not Inflate Your Sales Price Above Market Value. Doubling your sales price to give the buyer 0% interest will create a note that few (if any) note buyers will want to buy. Don’t do it!

Payment Frequency. Stick with monthly payments and leave annual or quarterly payments for farm and ranch properties.

Amortization Term. Shorter is better, so go for 120 or 180 months instead of the industry standard 360 months. You can offer a 360 month amortization to keep payments low, but consider including a 60, 84, or 120 month balloon payment to encourage your buyer to maintain their good credit and refinance before the balloon payment becomes due. A balloon payment in 60 months can improve the value when you sell a note, but a balloon payment due in under 36 months makes our investors a little nervous given the constricted lending market and the prevalence of buyers walking away from their homes and mortgages.

What We Do

Are you collecting payments?  Why wait years to collect small monthly payments when you can sell mortgage notes you currently hold for the cash you need today?

We are note buyers in Texas, seeking Owner Financed Real Estate Notes, Promissory Notes, Deeds of Trusts, Mortgages, Contracts for Deeds, and Land Contracts for our own portfolio, as well as for other private investors, hedge funds, pension plans, and institutional investors.

We pay cash for notes secured by both residential and commercial real estate, notes created from the sale of a business, and most any other type of payment stream.

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