Tips For Creating A Very Marketable Owner Financed Mortgage Note

Can you explain how to best structure a private owner financed mortgage note if I ever want to sell my note for a great price? This is a question I get all the time. And while there is no one way to structure an owner financed note, below are some suggestions that may help.

For those homeowners as well as commercial property owners frantically needing to sell their property, offering owner financing can be a terrific tool to get a property sold fast and for top dollar. However, many property sellers don't do enough front-end work in structuring a mortgage note. The result is a owner financed mortgage that won't receive a good price if it ever needs to be sold to a private mortgage note buyer.

When creating a private note in order to sell your property don't just slap together a private note in order to get the borrower's agreement and sell your property. Home sellers that do this often end up with a note that they would either have difficulty selling or would have to discount greatly in order to sell. Buyers who would like owner financing really can't be too choosy as not every home seller has the option of offering private financing. Keep this fact in mind as you the seller have the upper hand in your negotiations. One way to avoid the mistake of creating a private mortgage note that is one-sided in favor of the borrower is to have plenty of home buyers to pick from. Begin by advertising the fact that private financing is an alternative but be sure and include in your marketing that a certain minimum down payment is necessary. I would suggest at least ten percent or more. This will minimize having to deal with homebuyers looking for a miracle 95% or 100% financing. Also, if you plan to sell the note you may want to choose a buyer with more of a down payment over another buyer even if you have to sell your home for a somewhat lower price.

Next to take into account in your private mortgage note is the rate of interest. Believe it or not I have seen a number of super low to zero interest rates on private-financed notes. Yes, I said zero! I have also seen notes with no payment except the balloon. This type note effectively never seasons. Prospective homebuyers as well as business property prospects know they will probably have to pay a premium over current market interest rates. I would suggest 2 to 4 percent over market, depending on the buyer's credit and down payment.

That brings me to credit quality of the prospective buyer. Always pull credit or have the prospective buyer provide a credit report that is less than 30 days old that has all three credit bureau's scores. Use this report to your benefit in the give and take process. The lower the borrower's credit scores, the higher the interest rate and perhaps down payment you should require. And if their credit scores are less than the high 500s, you may well have to hold the note for some time for it to season in order to get a good price if you should ever want to sell it.

Last of all, you need to contemplate the term of the mortgage note. Up until recently, 30-year mortgage notes were fetching top dollar from private note purchasers. With all the concerns of inflation on the horizon, many private mortgage buyers are looking for shorter periods. If I were structuring a note that I planned on trying to sell, I would do a fifteen year amortization or a 30-year amortization coupled with a balloon payment in ten to 15 years. You could even sell a portion of the note such as the payments up until the balloon or the payments and a part of the balloon. Selling a portion of a note can get you a better deal (percentage wise) than selling the full note payments.

One added suggestion is to use a competent real estate attorney to draw up the private note and conduct the closing so you are protected. Also be sure the note is transferable should you need to sell it to an investor.