3 Mistakes To Avoid When Offering Owner Financing To Sell Your Home

2010 June 6

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 go, 3 mistakes to avoid when offering seller financing in order to sell your home or other real estate.

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