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 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.
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.
It never ceases to amaze me at all the funky agreements surrounding many private mortgage notes. What I see most often that make it very difficult to give an accurate mortgage buyer quote is around payment establishing and the resulting amortization issues. Case in point, I had a private mortgage seller wanting a quote on her mortgage note. After getting answers to a few questions, I realized the payment was an arbitrary number and had little to do with a calculated payment based on the other terms of the note. Two things happen when selling a mortgage like this. First, I have to calculate an amortization schedule based on the payment that was agreed upon and 2) Before the mortgage note can be purchased, the mortgage has to match the payment, necessitating a redo of the mortgage documents. So if you want to let your borrower have a payment different from the terms of the mortgage, simply adjust your terms and agreement to match. That way you will make selling a private mortgage much less stressful
