Once you’ve made the decision to sell your property, and then the decision to sell by carrying the note yourself, there are several factors to be considered. After all, the selling of any kind of property can be a complicated legal quandary. A seller financed mortgage is no exception, and the unprepared may find themselves mired in it.
What is your Goal?
Are you looking for a lump sum payment or a monthly income?
Seller financing can net you a substantial, dependable monthly income without the hassle of being a landlord. You can expect a better return on your money, and typically a higher interest rate than you would be able to get from simply investing the money.
If you are after a lump sum payment, the mortgage note can be sold to a mortgage buyer on the same day as the sale, meaning you can still set the terms and approve the buyer without the red tape inherent in a traditional mortgage, but still reap the benefits of a single lump sum payment, without any of the risks of carrying the note yourself.
Just as a bank would, it’s your responsibility as the seller to make sure your buyer actually has the means to pay back the loan. Now, you have a bit more flexibility here, as you are not beholden to the same stringent standards and regulations as a bank, especially if you are only financing one property, or less than three.
Still, understanding that you are the one assuming the financial risk in case of default is important. You must do your due diligence to ensure to the best of your knowledge that the buyer will be able to pay the loan, at least for as long as you hold it. Most seller finance investors aren’t interested in holding the loan longer than five or ten years before selling real estate notes to a mortgage buyer or having it paid off with a balloon payment (which is only allowed in some circumstances anyway)
Checking credit and verifying income is a good place to start. Keep in mind, though, that owner financed properties often appeal to buyers with less-than-traditional income situations. You may have more work cut out for you in terms of weighing risks if your potential buyer is self-employed or a freelance or commission worker.
Unlike a bank, that will have a ready made formula for what makes a good financial risk and what does not, deciding whether a potential buyer is a good risk for you as the seller is going to be a matter of weighing the information you have and then going with your gut.
Setting the Terms
Seller financing often gives you the option of requiring a higher (or much lower) than standard down payment and a higher interest rate than the current bank rates. That said, you have a good deal of flexibility in terms of what you require of the buyer.
When setting your interest rates in particular, you can often check the current rate online and set your own interest rate between 3% and 7% higher than the current rate.
You have a lot of creative power with a seller-financed mortgage, so it really is up to you as the seller what you require from your buyer. If this is a long-time tenant who wants to buy the property, you might be able to create a smaller down payment than you would for a buyer you had never met.
Contingencies are something like a trap-door or escape hatch in your seller agreement. They allow you (or the buyer) to back out of the deal penalty-free, under a specific set of circumstances. This protects you from any last-minute and undesirable surprises before you close. There are several contingencies that a buyer might insist upon, including zoning and environmental contingencies, which refer to the suitability and sustainability of the property for its intended use.
As a seller, the biggest contingency you will want to worry about is a financing contingency, allowing you as the seller to back out of the deal if the buyer cannot adequately demonstrate the ability to make the payments on the property. The language in this contingency should include the basic terms of the loan, including interest rate, the loan amount, and the term, or length of the loan.
How you structure your sale and what kind of language you use is going to be governed by laws, both federal and state. You can find your state laws here. It’s vital in this instance to know whether you live in a Deed of Trust or Mortgage state. Both can be seller financed, but there are slightly different considerations for each.
You also will want to look at the legal requirements at a federal level. The Dodd-Frank legislation governs seller financing deal, and you will want to look into what the requirements are for your specific situation. You can read more on that here.
It always pays to have a lawyer, especially one well-versed in real estate deals, look at your contracts if you are not familiar with what is required. If you are into a more DIY approach, form contracts can be found for free online, and you can customize them to fit your situation.
Seller financing can be an ideal solution for the property owner who is ready to stop being a landlord and guarantee themselves an income, either via monthly payments or in a lump sum paid from a mortgage buyer. As long as you take all of these things into consideration, you should be ready for a great closing.
The professionals at Amerinote Xchange are direct note buyers in all 50 states, and we are ready to assist you with every part of the note buying process, from structuring a valuable note to interpreting the legal jargon of the mortgage industry in your state. Click contact us or give us a call today at 800-698-3650