What is the BIGGEST mistake sellers make when they carry back a note in order to sell their property?
They accept little or no downpayment!
This is extremely dangerous. This is very poor business. Why? Because the seller usually makes some kind of assumption about his buyer – an assumption not based on fact – that somehow his situation will improve and everything will work out. This can prove devastating if the assumption proves to be false. The seller accepts all the risk, the buyer has none, and if the transaction ultimately falls apart – default – the real answer is the transaction never should have happened. Not with this particular buyer, or not with the particular terms agreed upon.
Here is a simple idea. If the bottom line is the buyer can not come up with a decent downpayment, say at least 10%, try this. Let’s say you have a $100,000 note at 8% amortized over 30 years. The monthly payment is $733.76. The buyer can handle this payment.
Suppose the seller asks the buyer to increase his monthly payment by $50 beginning in month 13. The new payment will be $783.76. Every year thereafter the payment increases $50. Instead of making 360 payments, the buyer will make 168. If the increase is $100, the buyer makes only 131 payments. If $50 or $100 is too much, how about a 5% increase beginning year 2 and each year thereafter? The year 2 payment is $770.45, and the total payments made stretch over 174 months.
Here is the point. The seller must protect himself against possible default, and seek commitment from his buyer. The buyer should expect and desire increasing equity in his purchase. Stepping up the payments is good for both parties.
Play with the numbers. Make the transaction as sound and business like as possible.
Both parties deserve it.
