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: