The mindset of many seller ‘s looking to sell their owner carryback note is pretty much like that of a person selling the home he has lived in for 20 years – “My home is the best in the neighborhood.” Translation – I deserve a higher price than anyone else.
To the home seller, it is irrelevant whether his home is, in fact, the best in the neighborhood. He has convinced himself that it is. His strong emotional attachment blinds him from reality. Realtors deal with this all the time.
Most of us have sold a home sometime in our past and gritted our teeth when the realtor suggested a listing price. “What’s he thinking, my house is worth way more than that?” We can relate. Seller price expectations rarely match up with market reality.
There is a similar but different dynamic at work when a holder of an owner carryback note decides to sell his note. Remember, there is no MLS in the world of note buying. When the parties agree to a transaction, it is what I like to call The Wild, Wild West at work. No bureaucracy, just two people agreeing to sell and buy a property based on mutually acceptable terms. No Big Brother looking over their shoulder. A handshake deal.
One of the common issues in an owner carryback sale, especially in recent years, is that the seller will never do another one. This is his first and last owner carryback sale. He found a buyer who for whatever reason could not obtain conventional financing. In order to get the property sold, the owner offered or agreed at the buyer’s request, to take the place of the bank. Many times, this is where the problem begins.
The seller wants to sell and the buyer wants to buy. Unfortunately, the result can be to agree to terms that strongly favor the buyer, and do not offer sufficient protection to the seller against default. These weak terms will also affect the price any note buyer is willing to pay.
If a seller is doing his one and only owner carryback sale, he may or may not know that a market exists for the possible sale of that note. Regardless, basic business sense would dictate that he should feel secure about his buyer and confident that the monthly payments will be made. The stronger the terms of the note, the more safeguard the seller has created to ensure the safety of the transaction.
What should a note look like that would be attractive to a potential note buyer and make him willing to offer the smallest discount possible, given market conditions? Here is a suggested note structure:
Residential
1. If no real estate agent is involved, ask the potential buyer to run his credit report and give you a copy. Use this information as a basis for your negotiation. If he refuses, find another potential buyer. You would like a credit score of 650+.
2. Minimum 10% Cash downpayment.
3. Minimum 8% interest rate.
4. Amortize the monthly payments. The shorter time period the better.
5. No interest only payments.
6. If a balloon payment is involved, no sooner than 7 years.
7. The more payments received the better. Can sell after 1 payment received.
Use a 3rd party servicing company to accept/monitor the payments. If possible, drive by the property occassionally to make sure it is being properly maintained. Check County tax records to ensure property taxes are paid. Make sure Hazard Insurance is current and you are listed as Payee.
If the property is a commercial building, you should expect a higher downpayment, somewhere in the 30%+ range and demand a few more percentage points on the interest rate.
These are suggested terms. The real message is this – if you agree to act as the bank – you are taking a risk. As the seller, you need to protect yourself as much as possible against the risk you are accepting. Your buyer needs to understand this. Your buyer needs to be committed. The suggested terms add to the mutual level of protection and commitment. The Wild, Wild West does not have to be reckless. It needs to be prudent.
