Are you taking back a note? STOP doing this right now!
Selling your property and taking back a note has numerous benefits, especially when considering the advantages of owner financing.
In fact, both Tracy and I have written articles about just that….OVER 10 years ago.
The Benefits of Owner Financing Don’t Go Away
Owner Financing – 10 Advantages To Using The Seller Carry Back and Should I Carry Back An Owner Financed Note?
The first article really discusses some of the benefits of carrying back a note, such as tax deferral, top dollar, and speedy closings. Those items are still on the table today.
The second article discusses creating a note you can SELL, should you ever want to.
I know what you are saying, “I don’t want to sell the note. I plan on keeping the payments.” Hey, if that is the way it works out, and I hope it does, that is great. I can tell you that plans change.
Setting Note Terms that Add Value
A large percentage of people who carry back a note THINK they are going to keep getting the payments, and then something, call it life, changes things.
- Maybe the payments will start coming in slowly.
- Maybe you need a lump sum of cash for a new investment.
- Maybe you just want to pay off some bills.
Whatever the situation, it is not uncommon for someone who has carried back a note to want to liquidate it for something in the future.
We talk a lot about what makes that note SELLABLE in the future when creating notes with seller financing.
- Getting a good down payment.
- Using a servicing company to document payment history
- Having a buyer with the income to repay along with reasonable credit
All of these are good things, but…
…HERE is what I want you to stop doing.
STOP WRITING YOUR NOTE FOR A LOW INTEREST RATE.
Let me put this another way.
You have agreed to provide financing by carrying back a note. You are acting like a bank.
More precisely, you are taking some risk but providing a great service to someone…
…and that should be compensated.
Right around 2021, the unthinkable happened. Traditional bank lending rates went low—like really low—like BELOW 3%. It never should have happened; if we have learned anything, it won’t happen again. That said, it created a problem for people carrying back notes.
They felt ‘pressure’ to act like a bank and create a low-rate note. So, why is this a problem? There are two reasons…
One, if you held the note and wrote it too low, you just sold yourself short.
We see many notes out there written with a face rate of 4 – 4.5%. You can invest in a CD and make more money right now by writing. In reality, that does not hurt anyone other than possibly reducing some of your purchasing power in the future.
But, should you decide to SELL the note, this is where the problem comes in.
Low Interest Rates Hurt Your Selling Power
Most notes are purchased at a slight discount. The discount amount varies based on property type, equity, credit, seasoning, and other factors.
True ‘discount’ is the difference between the rate you wrote the note for and how much the investor needs to earn on their investment.
If the investor wants to earn 10-12% on their money, and you wrote the note for 4%, I guarantee it will be a significant discount — and you don’t want that.
I will save all the math and calculations for another day. Just know this…
STOP creating notes at a low rate.
Start by looking at a rate of 3% or more above what banks are offering*.
*Consult your state laws and regulations for legal limits.
If someone says they can get a XX% rate at a bank, tell them to go to the bank and get the money—not just for now but for future selling power. You may never want to sell your note in the future, but it doesn’t hurt to be prepared if you do.
Additional Seller Financing and Note Investing Resources
- Creating Notes with Seller Financing
- Calculating Cash Flow Notes Master Class
- What is Minimum Note Discount and Why is it So Important?
- Interest Rates and Yields in Note Investing
- If Notes are So Great, Why Do Investors Sell Them?
- 300+ Free Articles for Creating Notes, Selling Notes and Investing in Notes
With respect and admiration Tracy you and Fred are such a valuable source to me and others who have been fortunate enough to have come across your websites and articles. I realize you are sharing some very helpful info. possibly learned through the school of hard knocks (hopefully that’s not the case), Thank you!
Thanks, Jon…it has been a wild ride, and I certainly learned along the way – as long as you always get smarter, right?!
Why, yes Mr. Property/Note Seller, why can’t you give me a 3%, 30 year loan? Simple answer – If your bank won’t do it, why should I again?
This is personal now as my 1 year loan on St. Louis is due to be converted to a longer Note for $50,000.00 on Tuerville. I think the buyer is going to try all his tricks to thin the debt. I just want my cash and to be on my way out of St. Louis. I got other plans.
However … if you would like to share some real life possibilities with me, Fred and Tracy, I am all ears.
Thanks, Lisa Hakanson
LOL – everything is case-by-case (especially depending on your basis) but as long as you are on the right side of the cash register you get to control the deal. We already try to create a win-win but certainly not get taken advantage of.