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

Ten Things to Think About When Creating a Note (Part I)


1.  Down Payment

When you sell property using owner financing the down payment sets the tone for the whole transaction and the value of your note. A common mistake among sellers is to accept a small down payment. It is amazing the price you can get for your property with little or no down payment. Just don’t be amazed when you sell your note the deep discounted offer you will receive.

Here is why it is important. For starters when you sell your property you want to get something out of it right away, like a good down payment so you can go onto you next project. Secondly, and more importantly, you want a 15% – 20% down payment because it puts skin in the game for the buyer. Meaning if times get rough for the buyer he is less likely to walk away with a larger down payment. Statistics prove that the larger the down payment the less likely of default.

Now let’s say that you did receive a 20% down payment on a $200,000 home, $40,000, and the buyer did default. You not only get to keep the $40,000 but you will get the property back, hopefully in good condition and not after a long foreclosure process. The $40,000 protects the seller in this case of default, because if that happens there is a period of time where no payments will be made and legal cost could be added in. You don’t want to be out of pocket for non-payment and legal costs.

Note investors look at the equity a note has in the property. A 20% down payment immediately provides the equity note investors are looking for and will pay top dollar for your note. You have to remember that note investors are looking for the cash flow. They are not looking for a note that has a high risk of default and a large down payment reduces that risk significantly. Note investors don’t want to worry about defaults.

My advice is to request a 20% down payment and take nothing less than 10%. That way you have solid equity in the note and it provides you with cash immediately as well as gives you options at a later time.

2.  Buyer’s Credit Worthiness

When you sell your home you need to have some idea of the buyers credit worthiness. You need to do two things before you finalize the transaction. First get the social security numbers of the payors and keep them with the documentation. Second you need to know what their credit scores are of the buyers. Have the payor go online and pull their own report at www.truecredit.com, it cost about $30.

You will want to have the buyer’s social security numbers as a part of the paperwork because if you decide to sell your note this will be one of the first items that the investor will request so they can check the credit. Having all the documentation and information you need in one spot can make the sale of your note go a lot smoother.

You as the property seller and bank in this transaction will want to know what the buyers credit score is so you can evaluate for yourself the credit worthiness of the buyer. You want to make sure that they will be able to make the loan payments each month.

Note investors offering top dollar for real estate notes will only do so for those note with payors that have credit scores above 620. Remember you as the note holder want to leave yourself with options should you decide to do something different later. In today’s current economy you will find many buyers that have a score below 600. You can still make the transaction work but just make sure you stipulate that the buyer gets in a credit repair program which all parties will benefit.

There is a saying: ” I can help those with money and no credit. I can help those with no money and good credit. I can’t help those with no money and no credit.” It is so true, you can always compensate in the transaction for poor credit, a bigger down payment. If you proceed anyway with the transaction make sure for the larger down payment, get them into a credit repair program and hold the note for at least 8 months for seasoning then sell your note.

If you are going to help those with no money and no credit, It is highly recommended that you put the note in a Land Title Trust.

The Texas Note Company offers note sellers a program where a credit repair specialist works with the payors to build their credit so you can sell your note for top dollar.

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