In the past few years, because of the tight lending standards in our country, hundreds of thousands of people have sold a property they own and financed the transaction by agreeing to be the bank. They agreed to terms with their buyer and “carried the mortgage.” The buyer signed a Promissory Note and promised to pay the agreed upon monthly payment.
This is good because a property exchanged hands. The problem is that the majority of sellers in these transactions are unsure of what they are doing, and don’t fully appreciate the risk that lies behind that “Promise to Pay.”
The biggest risk is that the buyer breaks his promise and stops paying! Now what? If he can’t get the buyer back on track, the seller may be forced to foreclose. Well, how long does that take? How much does it cost, financially and emotionally? How does the seller make up for the lost income?
What about other possible risks? The buyer could lose his job. He could have a serious illness or accident that stops him from earning an income. He could get divorced. A family member could die. A natural disaster could wipe him out. How about the property being destroyed by fire and the seller neglecting to get himself named as payee on the hazard insurance policy? You know how much the seller gets in this circumstance? Nothing !
The list of possible risks is endless. But, hey, the seller may hold the note until it is paid off and never encounter any of these problems. Nobody knows. Most note buyers have encountered all these problems, have learned from experience, sometimes painfully so, and use this knowledge in assessing risk in every particular note purchase. Most sellers don’t have the benefit of this kind of experience.
Many sellers don’t truly understand the level of risk in their note until things go bad. Or, they may get a better appreciation when they decide they want to sell and talk to someone like me, who points out some of the risks in their particular note. People sell because cash today is worth more to them than non-guaranteed monthly income for years to come. Maybe it’s better use of the money, maybe it is peace of mind and lack of worry.
Risk is relative for every note holder. The key is understanding the risk before it is too late.
