Mortgage Note Buyers and Sellers, Loan Servicing, and Hard Money Lenders

10 Things to Think About When Creating a Note (Part III)

6.  Term of the Note

Setting a term of 10 to 20 years is usually best when you think about how long to carry the note.  This is where you can be sensitive to the buyer and what he can afford each month.    Just don’t create a note with a low interest rate amortized for 30 years.  You want top establish a term where it is attractive to an investor and offers incentive for the buyer to refinance using traditional methods.  Investor usually like shorter term notes so they don’t have extend their money for 30 years.  A term between 10 an 20 years is usually right in line with what an investor will buy your note and pay top dollar for.  There is nothing wrong with creating a note that is for 12, 13, or 16 years in term.  If you can create a 10 year note with straight amortization then that would be what I would recommend. You need to make sure that it is affordable to the payor.

7.  Balloon Notes

Balloons is a good option but you need to be careful how you use it.  Don’t create a note amortized over 30 years with a three year balloon just because it sounds good and think you will get all your money in three years.  When using a balloon like that you need to make sure you have a clear exit strategy for that to work.  Some sort of event should occur in three years for that to work.  Besides a 5% interest rate like I said before is not attractive over thirty years even with a balloon.

There are some investors that like balloons and some not so much.  I have two thoughts, first for those investors that like balloons.   Amortize the note over 30 years with an interest rate of 10% and the balloon due in 7 years.  That will still provide opportunity for an exit strategy for the payor to refinance if  the payor is able to qualify using traditional methods.   Should you need to cash out of that position before then there are investors that will purchase that paper.

Secondly, for those investors that don’t like the balloons so much but like the cash flow.   Again amortize the note over 30 years with a 10% interest rate and have the balloon due in 17 years.  In this scenario I will be able to provide you with a partial offer.  We will make you an offer for the 17 years of payments and you keep the balloon when it comes due after that time period.  The other possibility is those investors who like balloons may make you a full offer as well.

8.  Clauses to include on the Promissory Note

Recently I had a note hold contact The Texas Note Company to sell their note.  Upon review of the note, it was a 0 % interest rate over 10 years and the contract just discussed the terms of the note with no Due-on-Sale clause or Late Payment clause or for that matter it really didn’t identify the lien.  Here the seller was only thinking of the buyer and not themselves.

Just a little note here before we proceed, real estate professionals, title companies, attorneys  and accountants don’t always know how to put a good solid note together and make sure all the numbers check out.  That is why it is important to contact a note professional that has a lot of experience and can help you sell your note.  It could have a significant financial impact to you the note holder.  Contact The Texas Note Company, PLEASE!

The due-on-sale is a provision in a mortgage note document which gives the lender the right to demand payment of the remaining balance of the loan when the property is sold. It is a contractual right, not a law. This means that if title to the property is transferred, the lender(bank) may (or may not), at its option, decide to “call the loan due.  The due-on-sale speaks for itself, the last thing that you want is for the buyer to turn around and resale the property to someone that you have not had the chance to evaluate and determine for yourself if they are credit worthy to make the monthly payments.

The other item you want to make sure that is included on the promissory note is the Late Payment Fee clause.   Without this clause you will not be compensated for a payor who is regularly late.  You want to be able to protect yourself from financial loss from a chronic late payor.

For those of you that offered owner financing on the sale of your property and want to defer capital gains you will want to have a prepayment penalty clause on the note and the deed.  You will want to verify that the law permits the clause based on the type of property your are selling and where it is.

9.  Title Insurance

One of the most common “short cuts” I see, where owner financing is offered, is the buyer and seller fail pay for a title insurance policy.  Often the title is checked, an abstract, but that does not guarantee that the tile is clear.   The buyer should demand that the title insurance to make sure that all taxes, HOA dues and any other potential liens accounted for and cleared.  If you don’t then you the buyer will be responsible for them.

No investor will purchase a note if there is not a title policy to go along with the note, and even if there is one they will usually require that an abstract be performed from the date the property last sold.  My recommendation is to include a title policy with the sale of the property.

10.  Real Estate Professional Services

When you offer owner financing for the sale of property, there are real estate professionals that can assist you with process and add a lot of value for their service.  A title agent, real estate attorney or accountant can facilitate the transaction to make sure that every item is accounted for and processed correctly.  I have had the best luck with Title Agencies.  They facilitate the transaction and make sure that each parties interest are accounted for and done properly.

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