OfflineI thought this would be a good article to read
Its by Jay Koch.
Owner Financing: Five Costly Mistakes to Avoid
1. Not getting a big enough down payment
When structuring a deal, you need to be thinking of not only what will go right, but what might go wrong. You may think you are helping out the buyer when you finance 100% of the purchase price, but you are putting yourself at risk. If the buyer doesn't have anything invested in the property, he has nothing to lose by stopping payments to you. Even if you get 10% down, it may not be enough. If the buyer stops making payments, you have to foreclose, AND the buyer trashes your place before he gets out, the amount of money you made on the down payment may be gone with legal fees and repairs before you even have time to think about it.
There is a reason that mortgage companies usually ask for 20% down and only finance 80%. Follow their lead.
2. Not checking out your buyer with proper underwriting
The time to worry about a loan and the borrower is before the loan is made.
Get to know your buyer as much as possible. Someone who has given you indications of being deceitful or unreliable is probably going to continue to be that way when working with you, even if credit scores and employment histories are impeccable. On the other hand, someone with good character with bruised credit just might be worth the risk.
Get permission from the buyer to check his credit report. Learn to read a credit report. Has the buyer been late on a lot of payments recently? Have there been any recent foreclosures or charge offs? Does he have the ability to pay? Are the ratios between his income and expenses similar to what a mortgage underwriter would expect?
3. Not using professionals to help complete your transaction
Use a lawyer to help you draft your documents. Use a title company to close your transaction. Use a real estate broker to negotiate the deal.
These professionals know all of the ins and outs of their profession. The money you spend on them will keep you safe and legal.
4. Not planning an exit strategy in case of changing circumstances
Suppose you sold a $100,000 piece of property with 5% down. Right now, you may be happy with taking a note for $800 per month for 20 years at 8% for your $95,000 note. But, what if you need some cash and need to sell your note? A note buyer would not want to buy a note with 95% Loan To Value. Or at least not without a steep discount.
A better strategy would be to create two notes, a first for $80,000 and a second for $15,000. You might even write the second with a faster amortization so that the buyer's payment goes down in a few years when the second is paid off. An investor who would buy your note would be more willing to buy your $80,000 note than a $95,000 note.
5. Not maintaining accurate records of payments or hiring a servicing agent
Make sure that you keep track of every payment the buyer makes to you. Let the buyer know how much principal and interest is calculated for each payment. You don't want the buyer telling you after ten years that the note is paid off, and you still think he owes $3,000.
A better solution is to use a company that services these notes. A disinterested third party will give confidence to both the buyer and the seller that the balance is correct. A servicing company will also collect 1/12 of the taxes and insurance each month, and make sure that both are paid on time. A servicing company will also report interest paid and received accurately to the IRS.
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Avoiding these five mistakes will help make sure your owner financed real estate transaction is safe and profitable
RENinja
"Remember, success is a journey, not a destination.
Have faith in your ability."
Bruce Lee
Very good points to remember. I am about to put out a lot of advertising for FSBO and owner financing, so appreciate this. Thanks
Sandi
A better strategy would be to create two notes, a first for $80,000 and a second for $15,000. You might even write the second with a faster amortization so that the buyer's payment goes down in a few years when the second is paid off. An investor who would buy your note would be more willing to buy your $80,000 note than a $95,000 note. RENinja
I particularly liked this idea. Thanks,
peace,
Dana w/ Crossroads Solutions LLC
http://www.DanaLeigh209.com
http://www.DanaLeigh209.net
http://www.ULostThis.com
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I am direct to the VP of a $100 million dollar open-ended debt and equity fund which actively writes checks to fund businesses with an EBITDA of at least $1 million a year. We fund also have access to up to $500,000,000 for the purchase of distressed real estate, specially commercial $7,500,000 and up.
I've bookmarked it for future reference.
I particularly liked
thanks; and, peace,
Dana w/ Crossroads Solutions LLC
http://www.DanaLeigh209.com
http://www.DanaLeigh209.net
http://www.ULostThis.com
---
I am direct to the VP of a $100 million dollar open-ended debt and equity fund which actively writes checks to fund businesses with an EBITDA of at least $1 million a year. We fund also have access to up to $500,000,000 for the purchase of distressed real estate, specially commercial $7,500,000 and up.
I was reading it myself and I thought it can apply even when you are working with someone else to do owner financing for you. You can keep in mind what is good for the seller as well.
RENinja
"Remember, success is a journey, not a destination.
Have faith in your ability."
Bruce Lee
As a mortgage note investor myself, struturing the deal propertly is essential to being able to re-sell the property. Always have money down, 10-20% preferrably, find out what the payor can afford in payments..and structure your terms accordingly.. You do not want to have this high interest rate, just to make the paper look good..When we do our due diligence, we strongly look at the payors ability to repay the loan, so it minimizes our risk if we buy the paper. Credit is important, but we pay attention to the payors pay history as it shows their commitment to paying their debts..regardless of their credit. Owner financing is a forgiving way for one to rebuild their credit while at the same time, being able to own a home of their own in the process. A true gold mine for those that have fallen on hard times. Notes that are for sale are always welcome.. pm me if anyone has any they want to sell.
Holly
As a mortgage note investor myself, struturing the deal propertly is essential to being able to re-sell the property. Always have money down, 10-20% preferrably, find out what the payor can afford in payments..and structure your terms accordingly.. You do not want to have this high interest rate, just to make the paper look good..When we do our due diligence, we strongly look at the payors ability to repay the loan, so it minimizes our risk if we buy the paper. Credit is important, but we pay attention to the payors pay history as it shows their commitment to paying their debts..regardless of their credit. Owner financing is a forgiving way for one to rebuild their credit while at the same time, being able to own a home of their own in the process. A true gold mine for those that have fallen on hard times. Notes that are for sale are always welcome.. pm me if anyone has any they want to sell.
Holly
As a mortgage note investor myself, struturing the deal propertly is essential to being able to re-sell the property. Always have money down, 10-20% preferrably, find out what the payor can afford in payments..and structure your terms accordingly.. You do not want to have this high interest rate, just to make the paper look good..When we do our due diligence, we strongly look at the payors ability to repay the loan, so it minimizes our risk if we buy the paper. Credit is important, but we pay attention to the payors pay history as it shows their commitment to paying their debts..regardless of their credit. Owner financing is a forgiving way for one to rebuild their credit while at the same time, being able to own a home of their own in the process. A true gold mine for those that have fallen on hard times. Notes that are for sale are always welcome.. pm me if anyone has any they want to sell.
Holly
"The time to worry about a loan and the borrower is before the loan is made."
Of course you should check your buyers credit rating in the beginning, but you should also worry after the fact. When the payor starts paying late on credit cards, etc, the mortgage payment is the last to be made late. As a result you are the last to know he is having problems. As a creditor, you should have the payor agree you do not need permission to access the payor's credit report and you should do so periodically to get a picture if there are any problems.
"But, what if you need some cash and need to sell your note? A note buyer would not want to buy a note with 95% Loan To Value. Or at least not without a steep discount."
The worst thing you can do is sell the whole note as that will incur a steep discount. Better option is to offer to sell a certain number of payments for the amount of cash you need. For instance, let's say you've been receiving payments for one year and find you need $30,000 in cash. An investor could buy 5 years of payments from you for $33,000 that would yield him 15%. When you get the note back, there is still an $82,000 balance on the note. You are still getting more than 100 cents on the dollar for your original note. Much better than taking a steep discount selling the total 95% LTV note, No? Believe it or not, there are 23 ways to buy/sell a note, this is just one of them.
"Make sure that you keep track of every payment the buyer makes to you. Let the buyer know how much principal and interest is calculated for each payment. You don't want the buyer telling you after ten years that the note is paid off, and you still think he owes $3,000."
The amortization schedule will show how the principal and interest payments have been applied and what the balance is. In addition to the escrow of taxes and insurance, the additional value of some one servicing the note is that you have an impartial third party documenting the payment history of the note should you decide to sell it and the investor is more assured it is factual.
Having addressed the above mentioned mistakes, there are 3 others. One is improper tax reporting, but that needs more detail than I would care to address at this time. A second mistake is that the payor is carrying insufficient insurance on the property to protect your interests. A third mistake is infrequent property inspections. You want to make sure the payor is maintaining the property in a manner that will preserve it's value.
Hope this has provided additional insight.
I'm not a note expert, I just thought it would provide a better understanding to others like me with the same level of understanding.
Glad you could contribute.
Thanks!
RENinja
"Remember, success is a journey, not a destination.
Have faith in your ability."
Bruce Lee
RENinja - thank you for sharing. Those points are all very good things to look out for. Owner Financing can be a great option but there are always things to be careful about.
Thank you!
Karen
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