Many sellers accept owner financing without any idea of how much the buyer can actually afford to pay.
The last thing a seller wants is to stress over receiving monthly payments or worse, getting the property back through foreclosure.
Would you rather have $97,000 to sell your $100,000 note or only $80,000? The difference in usually comes down to the big three. Here’s the three biggest mistakes note sellers make and how to avoid flushing money down the drain.
Can you easily locate the original mortgage note?
This important legal document should be kept in a safe place, and here is why!
Why would a seller allow a buyer to make payments over time for the purchase of property? Wouldn’t the seller rather get paid now and require the buyer to obtain a bank loan?
If you sold property with seller financing chances are you’ve wondered about selling the real estate note. Here’s how to sell a mortgage note, trust deed, or contract in 7 easy steps.
Understandably, a buyer that stops making payments is a major concern when using owner financing. After all, a seller-financed note is a very valuable asset.
Unfortunately many sellers fail to protect their asset when it comes to another area…verifying current property insurance and taxes.
Sadly, a lapse in insurance can be devastating to both the buyer and the seller. If the property burns down and is not insured, the seller will probably never see another payment from the buyer.
If a buyer fails to pay the real estate taxes for long enough the county can actually foreclose on the property. In most states, the lien for county taxes even takes priority over mortgage note holders, leaving an unsuspecting seller high and dry.
For insurance, require a copy of the declaration page showing the buyer as the insured owner and the seller as the insured mortgagee. Next call the insurance company to verify the policy is current and the annual premium has been paid. As the mortgagee listed on the policy you should receive notice of cancellation but it is safer to verify on or before the date premiums are due from the buyer.
To verify taxes are current simply check the county records using the property address or tax parcel identification number. This can be done with a phone call, a visit to the county tax assessor, or online.
Most documents require the buyer to keep taxes and insurance current and failure to do so qualifies as default under the note. Sellers can demand the default is immediately cured or start foreclosure.
Sellers as lien holders may also elect to pay the delinquent amount to protect their interest and add back to the amount due, depending on the terms of the actual note, mortgage, deed of trust, or contract.
Some sellers prefer to avoid the headache by setting up reserves through a third party servicing agent. This way the buyer pays an amount equal to 1/12th the annual amount for taxes and insurance establishing an escrow reserve account from which the bills can be paid.
A note buyer will also verify the taxes and insurance are current should the note holder ever decide to sell the mortgage note, trust deed, or contract.
Whatever the method, smart sellers know to protect their valuable asset by verifying the real estate taxes and hazard insurance are being kept current on the property!
Wondering just how much your mortgage note is worth?
Accepting payments on the sale of real estate might have made sense at the time, but circumstances change.
Many sellers discover they would now prefer cash today rather than the small amount that trickles in each month.
Here are just a few reasons people have sold all or part of their seller financed mortgage notes for cash:
The only way to decide what is best for your situation is to know the options available.
When you request a free note analysis it reveals the current market value of your payments – similar to what a real estate appraisal provides for real property. Sometimes referred to as a “note appraisal” or “request for quote,” it lets you know how much your future payments are worth in cash dollars today!
We recommend having your note reviewed once a year as note values change based on market conditions.
Protect yourself with outside closings!
When an investor has performed their research and is ready to purchase a private mortgage note they will ask the seller to deliver original documents (note, recorded mortgage, etc.) and sign the transfer package.
The note buyer will want these original documents before the funds are released to the seller.
A note seller may understandably wonder,
“How do I know I will ever receive my money once I turn over the documents establishing ownership?”
So the note buyer wants the documents before the money is released and the seller wants the money before the documents are released.
Using an outside closing through a title company, attorney, or escrow company easily solves this impasse. The outside closer will act as an independent third party (or fiduciary) protecting the interests of both parties.
An outside closing is basically an exchange of money for documents. The outside closer will receive the proceeds from the investor into their trust account and also receive the documents from the seller. It is not necessary for either the investor or the seller to physically be present for the note closing with the use of overnight delivery and wire transfers.
The fee for outside closings average $200 – $400 and can be paid by either party or split equally. Any legitimate note buyer should be willing to participate in an outside closing through a licensed and bonded closing agent.
Outside closings offer protection and peace of mind to both sellers and investors when selling mortgage notes.
In today’s real estate market obtaining a mortgage can be a large stumbling block to home ownership. In the midst of this sub prime mortgage meltdown it is difficult to obtain a loan, especially for anyone with less than A+ credit and a 20% down payment.
While there are many reduced priced properties for sale few are offering a solution to the financing challenges. By offering owner financing the seller can reduce marketing time and maximize price while providing the buyer an economical alternative to bank loans.
The buyer makes a down payment and the seller accepts payments over time from the buyer. In essence the seller becomes the bank and is able to collect interest on the balance financed at the agreed upon rate.
Rather than collect payments for 20 to 30 years most sellers will prefer a balloon payment provision that requires the buyer to refinance and payoff the seller in 3 to 5 years. The seller also has the option of selling all or part of the payments to a note investor for cash now.
Back in the 1980’s the use of owner financing increased when interest rates were in the teens and borrowers had troubles qualifying based on the high monthly payments. Seller financing is now offering a similar solution to the financing challenges caused by the mortgage crisis.
Offering owner financing can be a very effective way to reduce marketing times, provided a property is priced at fair market value using comparable sales. Simply add the words “Owner Will Finance” to the advertising and watch the inquiries increase.
