I talk to hundreds of note holders each year. I see hundreds of notes. I see the mistakes that people make when they sell their property and carry back the note. The seller may not realize the mistakes he has made until he talks to someone like me about selling his note. Then, reality sets in.
So, what are these common mistakes? Here is the short list. The seller does not:
1. Verify his buyer’s employment.
2. Verify credit.
3. Ask who will be living in the property.
4. Ask specifically why the buyer can not get conventional financing.
5. Ask for a sizeable downpayment( 10%+).
6. Demand a higher interest rate( 8-10%).
7. Use a service company to collect and service the payments.
It is not unusual to see transactions that have the buyer paying 0%-5% downpayment. I see interest rates from 0%-5%. I see no downpayment with interest only payments. In other words, the buyer is a “renter” – he has no skin in the game. It is too easy for him to walk away if/when things get tough. The seller has set himself up for failure.
If you are a seller, your best defense against a possible foreclosure is “protective equity.” The more equity your buyer has, the more committed he is. He has skin in the game.
Notebuyers are looking for “cash flow” in exchange for their cash. We are not in the business of owning real estate. We don’t want to take back a property because the buyer can’t make payments.
Do this: Avoid mistakes 1-7 above. Do the opposite. Protect yourself upfront. Find out what kind of buyer you are dealing with and then use that information when you negotiate. If you do not have a “preferential buyer”, don’t give preferential terms.
If you decide to sell your note for cash, a stranger will review your transaction. Make it as businesslike as possible so your note is attractive to a potential buyer and you can receive the cash you need.
Hope this helps.
