12 Tips for the Investor Selling Property and Carrying Financing

When you create the note that declares the terms of a sale there are many variables in the creation that can later affect the sale of your note. The following are 12 tips that can enhance the resale value of your note, and why:

1)      Always shoot for the highest interest rate you can get

a.       Note investors seek high yield on their investment therefore a low interest rate constitutes a larger discount in order to create the high yield they seek.

2)      Fully amortized with shorter pay off terms are best

a.       Keep it simple. Crazy terms equal higher risk. Lower risk equals smaller discounts.

3)      Balloon Payments due on the note are good additions

a.       Balloons equal a shorter time frame for the investor to receive their money in full. Shorter payoff time equals smaller discounts.

4)      Plan to hold your note a minimum of 3,6,9,or even 12 months prior to sale

a.       Minimum seasoning is an unavoidable requirement.

b.      If you are flipping the property (selling with less than 12 months ownership) the longer you can hold your note the smaller the discount will be. 12 or more months is best, 6 is good, 3 is tough. (Personal note- I do note understand why flipping is viewed as a negative and demands steeper discounts. I believe it should be the opposite as most of the people you are flipping to are some of today’s most financially stable buyers - I am lobbying for investors to realize this but mindsets are not easily changed) 

c.       If you cannot afford to have your investment capital floating this long seller financing may not be your best exit strategy (even so please read on)

d.      The longer you hold your note the larger your overall profit can become when you calculate in the payments collected during this time, along with the down payment collected, and the note sale price.

5)      Minimum 20% down payment is a must have

a.       In today’s market investors are requiring a maximum 80% LTV on a note purchase

b.      When you sell your property below market value this new sale price will be viewed as “current market value” at the time when you sell the note

c.       With a sale price well below market value you can enhance the value of your note buy paying for a current property appraisal when are going to sell.

                                                               i.      Comparing the Appraised value with the sale price can create a smaller LTV which will enhance the value of your note and lessen the discount offered. However use caution on when to pay for an appraisal. Be sure the property value increase will improve the percent of value offered on your note enough to substantially offset the cost of the appraisal. A few hundred dollar appraisal for a few thousand dollar increase in sale price of your note is what you seek.

                                                             ii.      Lowering LTV by 5% or less may not achieve the results you seek. Shoot for a 10% or greater decrease in LTV when choosing to pay for an appraisal.

                                                            iii.      Keep in mind the full value of the appraisal still may not be the number the investor chooses to apply as current market value. They may determine it to be somewhere in the middle as property values in most areas continue to decline. Until we experience full, solid and confirmed reversal of this trend “current market value” is subjective.

6)      Never create a second position note. First position notes only.

a.       There once was a market for 2^nd position notes, but not today.

b.      ONLY if it is for yourself to hold to full maturity do you want to create a 2^nd. For future sale of the note…1^st position only.

7)      Credit Score is Key

a.       ALWAYS know your buyers score (Do Not take their word for it) Get the report!

b.      620 is the break to receive an average discount.

c.       Under 600 is a sellable note but the discount is very steep

d.      Below 540 and you are holding this note until your buyer can improve their score.

8)      Always be sure to keep good records

a.       Specific documentation is required to sell your note and having everything in one location and easily accessible will make your sale go smoothly and close quickly.

9)      Always include a due on sale clause. (self explanatory)

10) Always include late fee provisions

11) Including Tax and Insurance impounds is a great addition that lowers risk

a.       This may be a bit of a headache for record keeping but it does make your note more attractive.

      12) Always remember that you will take a discount when selling your note. Increasing your sale price may be required in order to realize the bottom line you seek.

a.   When offering seller financing you will need to wear different hats. You must not only be the seller of real estate but also an investigator and a salesman.

i. As an investigator you must dig deep into your buyer’s situation and determine their level of urgency or desire to buy this particular property, their inability to get financing and the reasons why, the amount of cash for down payment, and their willingness to make concessions. All this information will help you to  determine whether or not they are willing to make the concessions that you will require in order for you to realize your bottom line.

ii. As a salesman you must sell your buyer on the fact that carrying financing is a huge risk on your behalf and They Will have to make certain concessions in order for the deal to work for both of you. Pointing out that without their acceptance of these concessions they may not otherwise be able to make a purchase at all. How their acceptance can buy then the time they need to improve their situation so they can later refinance the terms for greater savings. Or in some cases (as to an investor opposed to an owner occupant buyer) by making these concessions they may be able to spread their investment capital further, possibly enabling them to make multiple purchases rather than just one and increase their net worth more quickly.

iii. Work the numbers in advance so you can show them the overall savings, and or profit and equity they can accumulate over time. Improving their current status and buying property today can prove to be a financially sound decision when compared to waiting and watching as prices and interest rates climb.

             As with any phase of real estate and real estate investment we are all well aware that the market place is ever changing, especially today with distressed property and government intervention having unknown affects on the future of everything real estate.

            Seller financing as an exit strategy can increase your potential buyers pool and help you to sell more property. This strategy right now is best for those who have the capital base to sit on notes for an extended period of time, if need be. Current market conditions make this a high risk proposition for the small time investor who must regenerate their working capital in order to progress their business. I wish I could say create your notes like this today and you will sell them for X amount tomorrow but, our volatile market will not allow for anything even resembling stability.

            The biggest factor affecting note sales, as with anything real estate, is of course the market value of property. Fear that LTV will increase to an unacceptable level with property value decline is cause for note investor concern. Unfortunately the attractive note you create today may not look so good if the value of the property declines before the required seasoning requirements are met.

On the bright side we are hopefully very close to actually reaching the rock bottom. Once this occurs and we are pointed in the right direction with no looking back all markets should experience more stability and maybe then we can today’s note IS good tomorrow.

I do encourage seller financing as an additional tool for you to sell your real estate, but I must also encourage caution in determining whether or not it is right for you. I do want you to utilize this strategy and then call me to sell your note (of course I do this is how I earn my living), but I do not want for anyone to engage in activity that is going to have negative results for their business. We must all grow stronger together if we are going to improve our real estate business and the real estate market as a whole.

I thank you for taking the time to review this information and hope this will benefit you, your business, and your families as you move forward with your real estate investments.

PSR Note-Ability is available to assist you in any way we can at any time you need us. I look forward to helping you advance your business combining seller financing with mortgage note sales and will gladly answer any questions you may have. Feel free call or email anytime.

In closing I would like to add that there is a growing market for defaulted notes. If you are holding any notes your buyer has stopped paying on, no matter how old they may be, we would be very interested to evaluate what you have and possibly cash you out of a dead end situation.