Structure your note so that it is valuable to an investor. You, as the property owner, are in the driver’s seat. Before you start marketing the property, you must complete an appraisal of the property. It is imperative that you know the real value of the property, not just a random shot in the dark. Do not sell the property for more than the appraisal or for less than the appraisal. If you sell the property for an inflated price, no investor will be interested in the note you created. If you sell your property for less than its value, you are stealing money out of your own pocket.
The drawback here is that when you take the note to market, the investor may not accept your appraisal, since most investors will want to order their own third-party appraisal of the property in question. If they don’t accept it, they won’t accept it, and getting angry isn’t going to change that fact. To improve the chances of an investor using the Seller’s appraisal, the appraisal should be a URAR 1004/Interior complete with photos of the exterior in question, the street scene and interior in question, and comparisons of recent sales in close proximity. of the property in question OR; the internal inspection type appraisal 2055 where the value of the land must be addressed by the appraiser. Discuss the requirements with the appraiser before you are hired and take a close look at the entire appraisal, making sure that the appraisal you got is the one you requested.
Gain control of the sales transaction from the moment a potential Buyer walks through the front door. I suggest you have a copy of your Appraisal, a stack of Credit Report Authorization forms, Fannie Mae 1003 Standard Credit Application, each form arranged in order, along with a stack of Offer to Purchase/Deposit Agreements. Seller should have already completed the terms of sale in the Purchase Agreement. Yes, I said, “refilled.” The Sale Price, the Interest Rate and the duration of the Term, the most common (60 to 120 months) with amortization in the term that you decide. Don’t forget that as the Seller, you are in charge of the transaction. You are the money lender and as such you have THE POWER. The deal you make with the Buyer could pay off in the long run, possibly thirty years!
A good rule of thumb in today’s market is for the Seller to get NO LESS than 10-15% of the down payment, with an amortization period of 10-15 years, with one payment in full, known as a “balloon payment,” due in 5 to 7 years (be sure to use a specific due date in the future), 8%-12% interest (depending on credit), and a buyer with DECENT credit. Balloon payments are good if you plan to carry the note yourself, but if you plan to sell the note at some point in the future, then the balloon payment will devalue it. You don’t want to find out later that the terms you agreed to will cost you thousands of dollars in discounts, because the buyer has LITTLE credit.
It is important for the seller to remember that 85% to 95% of the face value of the note is possible if the contract is created correctly. If the seller sells the property in question FSBO, he has already saved big costs in real estate commissions and closing costs up front. When looking at the discount on seller financed notes, it is very important to consider the money down payment received and the money saved by not using a real estate agent or the large reductions in sales price that are often required. to attract a cash buyer. Remember that there are many more Buyers with 5-10% down payments and good credit in the market than cash buyers.
*****BUYER’S CREDIT: The dollar difference a Seller will receive for a promissory note written by a Good to Excellent Credit Buyer and a Bad Credit Buyer can be staggering. Also, the higher the purchase price, the higher the buyers credit score. A buyer must have a credit score of 620+ with a purchase price between $50,000 and $350,000, 650+ with a purchase price between $350,000 and $650,000, and 680+ with a purchase price of $650,000 or more.
*****PROPERTY VALUE: Please do not inflate the true value of the property and hope that an investor will not discover the overvaluation and “pass” the note. There is no need to inflate the valuation if the terms of the deed of trust or mortgage are well worked out.
*****DOCUMENTATION: A title company or attorney must be involved in the closing process to ensure that the transaction complies with all federal and state lending laws. A note that does not comply with all federal and state lending laws is less desirable to a third-party investor in the notes. Buyer must sign all required Federal Disclosures to remain in compliance. Additionally, title insurance must be used within the transaction.
*****DOWN PAYMENT: What usually happens is that the seller takes a small down payment to get a quick sale. Remember, the higher the down payment, the more committed the Buyer will be to the property. Theoretically, the financial risk of the investor is diminished by a favorable LTV/ITV. Investors feel very uncomfortable when the Buyer has ZERO financial commitment to the property. Defend your position. It is your property. Take absolutely NO LESS than a 10-15% down payment.
The buyer’s credit score should determine the down payment you request from the buyer. In general, a buyer with a FICO score of 640+ can provide the lowest down payment of 10%, while a buyer with a FICO score of 550+ must provide a down payment of 25% or more.
*****INTEREST RATE: Interest rates are currently low. No. I mean, don’t let the Buyer talk you into taking low interest on the purchase note. If the Buyer wants bank fees to go to the bank, immediately to obtain a loan to buy his property. In most cases, this will not happen. Many people fear the scrutiny of a bank’s credit policies. Some buyers are very savvy and invest in properties, which can be turned around quickly for an inflated profit. These Buyers are usually very sharp and very social and also, to the Seller’s detriment, these types of Buyers often dictate the terms of the purchase, knowing that most Sellers are either desperate to sell, or uneducated in the financial market of the Seller. Whatever the reason, Buyer is seeking financing from Seller and, as such, must pay Seller’s financing fees. Remember, the cash flow interest rate can be worth thousands of dollars over the purchase price when evaluated by an investor.
PLEASE, PLEASE, don’t even consider a variable, floating, or prime rate anymore. Most investors will use the minimum or lowest possible rate that the note will pay when considering these types of transactions for purchase. Do not disadvantage the note. Stick with the basics. Stick to what investors want. The last thing an investor wants to see is potential changes in the value of an account receivable.
***** AMORTIZATION: The incremental reduction in the principal balance of a mortgage or other debt. The longer the repayment period, the lower the monthly payment. The shorter the repayment period, the higher the monthly payment. Sellers typically use a 10, 15, or 30-year amortization framework, with the 30-year schedule by far the most typical.
***** TERM: Most seller-financed notes are fully amortized over thirty years with a settlement clause; creating a “balloon payment” in five, seven or ten years. Most investors don’t want to see a balloon payment in a short period of time, especially if the buyer has fair to poor credit, so don’t create a note with a balloon payment of 12, 24, or even 36 months, These short-term balloon payments often add greater risk from an investor’s point of view and will usually be discounted accordingly. Investors often prefer to collect a stream of payments, while allowing the buyer to accumulate capital and be in a strong position to retire the note by obtaining bank financing before the maturity date.
***** CONDIMENT: Investors like to see a payment history. However, this does not apply to concurrent purchases, as the note will be purchased at the closing table, but a higher down payment is required to satisfy the LTV/ITV ratios that investors in the note will desire. A note with a buyer who has an excellent credit score is desirable between 6 and 12 months and a note with a buyer who has a credit score of 625 or less will be desirable after 12 months or more.
*****STRUCTURING THE DEAL: I am often asked by prospective sellers, “How can I structure this transaction to get the best possible payment on my note and lower the discount rate?” Most of the time, with note purchases, an investor will want to limit their exposure or risk on a particular transaction (usually around 70-80% of the value of the collateral), that being said, there are ways to decrease exposure to potential investors may have. Many smart sellers will create a first lien note at 65-70% of the total sales price, collect 5-10% of the down payment, and carry the remaining balance (20-30%) in the form of a second lien position. By structuring the deal in this way, you, as the seller, ensure that you receive a maximum payment from the sale of the first lien note without needlessly losing dollars on an investment to reach the value limit. In addition, you have also created a continuous payment flow for yourself in the form of a second link note. This scenario is often beneficial to all parties involved. The buyer gets into the home with a smaller down payment than a bank would normally require, the seller gets the cash they need at closing and also creates an income stream in the form of a second lien, and the investor buys the note in an investment-value relationship with which they feel comfortable.