Do you remember going through the process of getting your first mortgage? Sure, it was nice to look at the various houses, and ask the sales price, but, if you were like me, fresh out of college and not making nearly enough for my dream home, I needed a starting place. Someone wisely suggested I talk to mortgage brokers and get pre-approved. I would know ahead of time how much I could afford, how much I was approved for, and who I could turn to when I found my house.
If you are a real estate investor who wants to offer seller financing you must use the same approach. Before you sell your first property using seller financing you need to know potential exit strategies and who to turn to. While I use each week to give best practices in structuring notes, selling notes, and buying notes, it should be understood that one size does not fit all. There are potential note buyers all across the country, all looking at different criteria for buying a note. There are some standard principles to remember as an investor such as: taking a large down payment, having an appraisal done, and doing in-depth due diligence on your buyer. Those are the basics, yet, some note buyers have different areas of expertise on notes. Some prefer balloons, others do not. Some are buying your note for cash flow, others are buying it to convert it to a mortgage. To put it simply, you just don’t know what prospective buyers are looking for unless you ask!
When we first started seller financing we gave it our best guess. Notes were structured based on the negotiation with the home owner, not on a pre-determined exit strategy. As a result, those first notes that we wrote only had value to us and the person living in the house. They were unsellable! I found this out the hard way. I started shopping our notes in an attempt to cash out some notes for profit. I got a rude awakening.
Luckily, I met some great people along the path of realization. Several people took the time to share with me their note buying criteria and after several false starts to my note selling career, I was on my way. As it turns out, note sales are no different than getting pre-approved for that mortgage. If you know the note buyer’s criteria, and deliver on their requirements, you can build a nice business with note sales. The note investor will be happy, as they have a nice source of quality notes, and you are happy with the immediate cash. It opens up a whole new avenue of real estate sales.
Have you worked with a note buyer in the past using this method? Share your success story in the comments below. I appreciate your feedback!
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