Should I Carry Back An Owner Financed Note?

If you are selling real estate, especially in this market, you might be approached by someone asking if you are willing to “Owner Finance” or consider a “Seller Carry-Back” note.

Here are a few guidelines to consider…

How Do You Make Money When Owner Financing?

The whole concept behind seller financing is that you are acting like the bank. While that carries risk of receiving payment, you can also get a great return on your money.

I tend to recommend that if you are going to carry back a note, the face rate (interest rate) should start at 10%.

Many potential buyers will tell you that banks will lend to them much lower – well, if that is the case, then they can get the loan at the bank – it needs to be worth your while to carry back a note (financially speaking).

If someone wants a lower rate, look for a larger down payment. This also helps lower your risk of taking back the property due to non-payment.

For example, the minimum down payment I like to see is 10%. That would get you a note written at 10% interest.

If someone were willing to put down 20%-25% then I would consider creating the note at a rate or 9% or even 8%. – More equity equals a safer note.

Selling Your Owner Financed Note Later

In addition to getting a good return on your note, you may have the flexibility to sell the note at a later date if your financial circumstances change. How you create the note in the beginning can go a long way towards better pricing. Here is the short list of items to consider.

1. The bigger the down payment the better. Buyers are much less likely to walk away from a property with real equity.

2. The “discount” in selling your note is caused by several variables. One such variable is the difference between the face rate of the note and what the investor wants to earn. The higher your interest rates the better.

3. The shorter the term of the note the better – but not too short. A 15 to 20 year note is great. A seven-year note with a big balloon is not. There is too high of a risk the buyer won’t be able to refinance and the balloon will not be paid.

4.  Check out the credit history and income of the buyer. Find out upfront if the buyer can afford the monthly payments or  has troubles making any payments on time.

5. Have the monthly payments go through a third-party servicing center. This will provide a potential investor with a great payment history.

6.  Get the documents prepared by an attorney or licensed closing agent. You want to be sure that you have a secured lien against the property and keep in compliance with any legal issues.

Although every deal is different (property, buyers, area, etc), the above will give you a good place to start and help you make a good financial decision for you and your family.

For more information on owner financed notes you might want to check out:

10 Advantages to Using the Seller Carry Back

Disadvantages to Seller Financing

21 Insider Secrets You Must Know Before Selling a Mortgage Note

What to Do When a Balloon Mortgage Payment is Due – Real Deal #158

Owner financed notes often include a balloon payment requiring the buyer to refinance in order to payoff the remaining amount due the seller.

But what options are there for notes when a balloon is due but the buyer can’t refinance? Should the seller consider extending? Read more

Get Reliable Pricing When Selling a Mortgage Note!

Wondering whether to trust the pricing for the sell of a mortgage or land contract?

Here’s how to know if it’s a firm offer or just a soft quote when going to sell a private mortgage note. Read more

Understanding Note Endorsements

Does the seller have to worry whether an investor can demand payment once they sell their owner-financed note? The answer depends on how the note was endorsed along with the terms of the Purchase Agreement. Read more

Moneymaking Opportunities with Notes!

Whether a seller, investor, or note broker, there are many opportunities to make money with owner financed or seller carry back notes.  There is a lucrative secondary market for seller financed notes also known as the paper business. Here are a few of the most common ways people make money in the note business.

Maximize Selling Profits

A seller often takes back financing for a buyer to appeal to a larger group of buyers and maximize the sale price. A property seller may also elect to take back a portion of the sale price for long-term interest income.  Why should the banks make all the money?

Did you realize that a bank earns back almost 2.5 times the loan amount on an average $100,000 loan at 7.5% that runs for a full term of 30 years? The payment would be $699.21 based on a 360 month amortization which means the buyer will pay back over $251,715.60 after 30 years on the $100,000 loan.  All due to the power of interest!

Referral Fees

A note broker or note consultant earns a referral fee by acting as a financial middleman between a note seller and a note investor.  A note broker markets to note holders offering to help them liquidate their note payments for cash today.  The note broker then connects the note seller with a note investor, earning a fee at closing.  This fee can range from hundreds to several thousands of dollars depending on the size of the note and their relationship with the investor.    

Interest Income

Investors purchase notes for the interest income.  First an investor can earn the interest rate or face rate charged on the note.  An investor can further increase their return by buying the note at a discount.  For example if a note has a balance of $25,000 at 8% interest the investor can offer less than $25,000 to purchase the note for a return of 10% or more.  The greater the discount the more the return is increased!

Rather than holding for long-term interest income, an investor might also purchase a note at a discount and then resell at a later date for a profit.  This is often accomplished by combining several notes together in a group or portfolio selling at a higher price to a larger bulk investor.

Learn More About The Note Business

If you would like to learn more about being an investor or note broker you will also enjoy the following:

Learn the Note Business in 60 Seconds? – OK, you can’t really learn the cash flow note business in just 60 seconds, but this “speed round” of 11 questions will certainly get you started.

5 Myths About the Cash Flow Notes Business – I want to have a very candid conversation about working in the cash flow notes business. Just what it is, how you may be part of it, and some common myths and facts.

How Can I Find Cash Flow Notes – Knowing how to find cash flow notes is the most important skill note brokers can learn. It can also be the most difficult.

Finding Cash Flow Notes Training Videos – Watch this series of free training videos including 5 Ways to Find Cash Flow Notes.