How To Owner Finance – 5 Tips
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.