How to Create a Secure and Saleable Real Estate Note?
Following are the basics of how to use seller financing to create the most secure, saleable (at the lowest discount) seller financed real estate notes.
First a Real Estate Sale with seller financing:
- Sell the property to a buyer who will occupy it (called owner occupied). Get an appraisal and sell for the maximum appraised value. Why discount the property when you are offering financing?
- Sell the property to a buyer whose mid credit score is at least 600. The higher the better. It's your federal legal right to know all three of their credit scores.
- Sell the property to a buyer who you don't know and isn't related to you. (Called an arm's length transaction).
- Sell the property using a third party processor like an escrow, title company or real estate lawyer.
- Make sure to buy and receive a valid Title Policy with insurance in the amount of the sales price. Get a "Lenders Policy".
- Take back a mortgage in the first position (the most senior lien) for no more than 85% of the sales price. (you can use a second to achieve the 85% LTV if necessary-ask me how).
- Secure the mortgage or note with a valid Mortgage Deed or Trust Deed or land contract on the property. Have the documents recorded.
- Accept no less than 10% cash down payment. Self employed ok!
- If the buyer doesn't have a 20% down payment you can carry-back two notes. One in the 1st position for 80% (not more than 85%) of the sales price and another one, a 2nd position note for 10% (not more than 15%) of the sales price. These deals are called 80-10-10 (80% 1st position note, 10% 2nd position note and 10% cash). Now you can sell the 1st position note (the most valuable one) and keep the 2nd position note. These 2nd position notes make great cash flow, commissions and or broker incentives!!!!
- The terms of the 1st position note should include: an interest rate of at least 9% APR or a couple of points over the norm; Amortized equally, monthly for up to 30 years; Pre-payment penalty for the first five years; Significant and detailed late and default payment stipulations. Balloons are ok-5 to 7 years.
- Keep detailed records of the note and each payment (preferably a copy of the front and back of the payment check showing the bank cancellation stamp). Preferably a separate checking or savings account for the note. Or better yet have a third party service your real estate note.
- If the credit is towards the lower end of the scale, get a qualified co-signer for the buyer such as a relative or employer.