All across America rural communities turn to the seller carry-back to provide financing for areas that large-scale mortgage lenders have historically bypassed for larger metropolitan areas.
When banks declined a mortgage loan in rural Kentucky owner financing provided a creative financing solution.
A long-time renter wanted to purchase the property they had been living in for several years. The seller was retiring to Florida and did not want to manage property long distance. Although the renter could easily afford the payment they had not been able to save up for a down payment. The combination of a low value rural property with no down payment made it a “no-go” with conventional lenders.
Knowing the tenant had always paid the rent timely, the seller agreed to owner finance the 1,150 square foot 2 bedroom 1 bath home. They agreed to a note and mortgage with the following terms:
- Sales Price $25,000
- Down Payment -0-
- Seller Financed Note $25,000
- Interest Rate 5.0%
- Payment $265.16
- Term 10 years (120 months)
Almost three years went by and the seller desired cash now rather than payments over time. The buyer had paid down their principal balance to $18,760.97 and had 7 years of monthly payments remaining.
The seller contacted a note broker advertising to provide cash now in exchange for future payments. Knowing this was just the type of investment that private investors targeted for self-directed retirement accounts, the broker contacted our office.
After reviewing the documents and performing due diligence, an offer was made to purchase the note and mortgage for $12,546. Because the note was discounted for risk, the investor anticipated an 18.2% return on investment. The broker deducted their fee of $800 and the seller received $11,746 at closing.
The only thing that changed for the buyer was where they mailed the monthly payment. All terms including the 5% interest rate, stay the same when a note is purchased.
The buyer continued to make payments to the investor for another 5 years and then ended up paying the full balance off early, without prepayment penalty. Since the note buyer received the money sooner, the actual yield increased to 19.10%. The investment had been made in a self-directed retirement account so the gains were tax-deferred (or tax-free with a Roth IRA).
Real deals are based on actual transactions completed within the past ten years. Market conditions change frequently resulting in pricing and underwriting changes by note investors so actual results may vary. Work with qualified professionals when creating new notes to obtain accurate and up-to-date pricing and investment parameters.