Getting the Best Value For Your Seller-Held Note
Go to Complete List of
Getting the Best Value For Your Seller-Held Note
What's it Worth?
Don't overprice or underestimate a home's true market value. This is the same information Realtors use to price properties for their clients. Get up-to-date sales information for up to 15 nearby properties including sale date, price, square footage, lot size, bed/baths and more. Search Home Values
Free Rate Search
Searching for local mortgage rates is fast and easy. This no hassle, simple-to-use, free directory of nationwide lenders allows homebuyers to see detailed information on a wide range of home loan products. See rates in your area
When you agree to provide seller financing for the sale of real estate,
you are converting your equity in the property into payments of principal
and interest over time. Most of the purchase price will be paid to you in
There are two main ways of doing this. The first is a real estate
contract. The buyer signs a contract and agrees to pay installments to you.
He then receives title to the property (a fulfillment deed) when the
contract is paid off. The second is a note and deed of trust. The buyer
signs a promissory note and gets a deed for the property at the closing. He
also signs a deed of trust that gives the seller the right to foreclose if
the buyer stops paying.
Sometimes, after the closing, a seller decides he wants a lump sum of cash
instead of the installment payments. For this purpose, the buyer might agree
to an early pay-off, or the seller might borrow money and give the note as
security for the loan. However, more often the seller finds someone who will
"buy" the note. (For the purposes of this article, the word "note" also
includes a contract.) The value of the note will be less than the amount
owed on it at the time. Sometimes, the price may be quite a bit less than
the amount owing.
Here are some things you can do to maximize the value of a
- Credit check: When you sell your property, get a credit report on the
buyer. If you belong to a credit-reporting agency, have the buyer sign an
authorization and then order the credit report yourself. Alternatively, the
Purchase and Sale Agreement should require the buyer to provide a
satisfactory credit report. Check it carefully and make sure the buyer
doesn't have a history of late payments, non-payments, lawsuits, or
- Downpayment: Require a sufficient down payment. Some bank loans
require only a three to five percent downpayment, but that is risky for seller
financing. A low down payment means the buyer starts out with very little
equity in the property. The buyer might stop paying and walk away without
losing much money. Except under special circumstances, the minimum down
payment should be 10 percent of the price. However, it's much better to get
20 percent to 25 percent.
- Interest rate: The interest rate on the note or contract should be
at or above the "market" rate. Major newspapers publish home loan rates on
the business pages. Seller financing should be slightly higher (1.5 percent
to 2.5 percent) than comparable bank loans. Make sure the interest rate is
sufficient, and it will be much easier to sell the note.
- Payment schedule: Monthly payments are better than quarterly or
annual payments and a shorter period of time (say 10 years rather than 20
years) is also better. However, shorter time periods mean larger installment
payments so make sure the buyer can afford the higher amount. The shorter
period is usually better, because a buyer of your note won't have to wait as
long to recover his investment.
- Balloon payments: Sometimes a note will include a cash lump sum
payment in addition to the regular installments. That creates an extra
payment of principal to reduce the amount owed, which reduces the risk of
default. A lower risk of default will help you realize a higher price if you
sell your note.
- Timely payments: Regular and timely payments are essential. A note
with a history of late payments is less valuable, so make sure that you
receive the payments on time. If a payment is late, don't be complacent.
Write a letter or hire an attorney to do so. Insist on timely payments.
- Special clauses: The note should require payment of attorney's fees
and should have a late payment penalty. These conditions will encourage
payments on time. It's also a good idea to include a "due on sale" clause so
the buyer can't sell the property and let someone take over the payments
without your permission. (The new person might not be a good credit risk or
as trustworthy or reliable.) Finally, consider a pre-payment penalty. That
means the note ensures a certain flow of principal and interest over time,
with a penalty if it is paid off early. (Your attorney can advise you on how
such clauses should be drafted.)
All of these suggestions help to increase the re-sale value of a note by
increasing the property buyer's equity or showing that the buyer is a good
credit risk. More equity in the property and good credit decrease the risk
of default. The seller financing will be a better investment for you, and
the note will be more attractive to someone who buys seller-held notes. You
may not be able to include all of the items, and you may need some
professional assistance, but every suggestion will help maximize the value
of the note if the time comes to sell it.
© Copyright 2000 by NoteWorld. All Rights Reserved.