Many note sellers are not even aware that they have the option to sell a partial note. Actually they aren’t exactly selling a partial note, they are selling a portion of the future payments for a lump sum of cash now. This is often a better deal for note sellers, particularly for the more difficult notes such as poor credit for the borrower, little equity and low seasoning. So how does selling a partial note work?
When you sell a partial note, you sell a certain number of future payments, usually 3, 5, 7 up to 10 years in some cases. You really can’t sell a piece of a note as the note buyer would not have the ability to foreclose should the borrower default. The note buyer (just as you the seller) needs to own the note and security which is a Deed of Trust, mortgage, etc. depending on the state. What happens at the end of the period you sold the payments for is the note and security revert back to you. However, in most cases the note or mortgage buyer will be very receptive to buying more month’s payments or even the remainder of the payments. Some sellers treat their notes kind of like a ‘piggy bank’.
If you don’t have to sell your note in full, a partial is nearly always a better deal since the payments aren’t discounted out as far so each time you sell some note payments, your discount is less.
We as pretty much all mortgage note buyers see a lot of poorly created private mortgage notes. Sadly, most home and commercial property sellers don’t really think about how to structure an owner financed note until they realize they want to sell the note. Hopefully, some property sellers thinking of owner financing in order to sell their property quicker will find this post and save themselves some future headaches as well as get more money for the note when selling. Following are 5 key elements to consider when seller financing a property, whether it be a residential property or a commercial one.
- Demand a decent down payment, at least 10% but preferably 20% or more. A higher down payment means 3 things to you, 1) More immediate cash in your pocket, 2) A less risky situation for and 3) lower perceived risk for any potential note buyer.
- What interest rate should I charge when owner financing? I would charge a rate well above the current conventional market rate which at this writing is 3.5% for a 15 year mortgage.
- Should I pull credit when owner financing my home? I get this question a lot. The simple answer is absolutely! Even if your buyer doesn’t have great credit, at least you’ll go into the deal with your eyes wide open. However, keep in mind if the borrower’s credit is much below 640, you may not be able to sell the note or at best sell only some of the payments, say 3 to 5 years of payments.
- Keep the note’s amortization period as short as possible, say 10 to 15 years. This makes the discount less when selling your note.
- Use a real estate attorney that is knowledgeable about owner financing transactions. Not all attorneys know real estate and not all real estate attorneys understand seller financing.
So there you have it, 5 tips on how to owner finance. Here’s a bonus tip. Be sure the buyer pays for a Lender’s (not Owner’s) title policy at closing. That could save you money should you ever need to sell the note.
Looking for non performing commercial mortgage pool sellers or buyers? We have both non performing commercial mortgage pool sellers as well as non performing commercial mortgage pool buyers, many who are sellers and buyers of non performing commercial mortgage pools. Both asset management companies with commercial mortgage note pools as well as banks often are selling or buying commercial non performing mortgage pools when their portfolio of mortgages gets out of line with their goals. Also, an FDIC audit can trigger a bank to become sellers of non performing mortgage pools as well as sellers of performing commercial mortgage pools to satisfy the FDIC mandates. Call us today to see what commercial non performing and performing mortgage pools are available or to see if any of our commercial non performing and performing mortgage pool buyers have an interest in your pool.
Call us today whether you are a sellers or buyers of performing and non performing commercial mortgage pools @ 1-877-655-5625. Ask for Ron Stone.