When you are creating a seller carry-back note there are several things to look at. Here is a list of things that you should take into consideration when dealing with owner financing.
Step 1. Credit Check - The person that you are trying to sell the property to must have their personal credit pulled. This is important to find information out about our buyer. Not only is this information valuable to us, it is important to our note buyer.
Step 2. Collateral - The home that you are selling will be used as the collateral for securing the loan. In your file you should obtain an appraisal or a BPO (broker price opinion) to establish the value of the collateral.
Step 3. Amount of Down Payment - This is a very important component to selling the note. The bigger the down payment the better. This will ensure that the buyer has some "skin in the game" if they put money into the transaction they are not as likely to walk away from this deal. They have something at risk in this situation. And the seller would have something to gain if the property is foreclosed on.
Step 4. Terms of the Note - This will be the interest rate, number of years financed, it is best to have a balloon payment at about 5 years.
Step 5. Seasoning – This is where a loan has been on the books for at least a year and the purchaser has a satisfactory payment record. The seller should collect payments for at least a year to resell the note at a good price. Mortgage loans that have been on the books for a period longer than a year command a premium over unseasoned loans when sold in the Secondary Mortgage Market.
Step 6. Documents – The documents involved are very important to this transaction. You should be working with two separate documents a Promissory Note and a Mortgage or a Trust Deed. You may want an attorney to draw up these documents for you. Often a good escrow officer can do this.
When you are creating the note, there should be a first and second note (80/20)
The first note will be equal to 80% of the sales price. This note will have a 5 year balloon; the balloon should never be as short as 1 or 2 years. Also, there can be no outrageous interest rates charged. These rates should be at least one point to one and a half points higher than the going rate. This note could be sold after 2 years for 90% of its value.
The second note will be equal to 20% of the sales price minus the down payment, so if someone puts 5% down then the seller will be carrying a 15% second. Usually this note will be amortized at a 10 year period, and it will be at least 1 point above what the first is at.
Doing seller carry- back deals can greatly increase your ability to get deals done. I hope that this information will help you!
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