Crafting A Note For Buyers

In previous issues, the best method for selling a home in a tough market with seller financing was explained. The benefits to the seller from involving a qualified cash flow finder with a seller financed deal and having a note buyer "on board" before the note is created were also covered. While using seller finance techniques to sell a property are no more difficult than a traditional real estate closing, following a logical and proven plan is the best method for ensuring a successful real estate sale with seller financing.

The sellers’ misconception

Many property sellers stay away from seller financing because they mistakenly believe that creating a note is not a viable solution for selling their home. After all, if they can’t walk away with enough cash to provide the down payment on another property, they’ll be powerless to replace the property they’re selling.

As a consequence of this common misunderstanding, many sellers feel compelled to stick with conventional real estate methods, limiting their options and missing out on the benefits that seller financing could offer them.

In actuality, many notes created through seller financing are quickly sold and the seller ends up with the cash they need. Even better, if the note is created with buyers’ purchasing criteria in mind, the seller could walk away from the closing table with cash in hand. This means that the net result is almost exactly the same as with a conventional real estate sale!

In the cases where the note holder does have a problem selling their monthly payments, the difficulty in liquidating the note is typically a result of one general problem: the note was not created with the buyer in mind. Instead, it was created with only the payer in mind. To ensure that a newly-created note will be attractive to potential buyers, it is important to recognize that their purchasing criteria are important as well.

Too good of a deal

For property sellers looking to sell their note immediately, it would be a grave mistake to create the note by prioritizing only the payer’s demands. A buyer must have a compelling reason to agree to collect payments in order to buy a note, such as a substantial down payment, a respectable payer’s credit score (to minimize risk), a competitive interest rate, or a fairly short term.

An example of a "bad note" from a buyer’s point of view would be a seller financing situation where no down payment was collected, the payer’s credit score was not checked, and the interest rate is fixed at 3%. Basically, this is TOO good of a deal! Even payers that qualify for loans from traditional lending institutions would jump at this offer with no out-of-pocket money required and a rate below prime.

Clearly, the note payer and note buyer are looking for very different things. Payers would love a "no money down" purchase with financing at a low interest rate, but most buyers wouldn’t want anything to do with this sort of note simply because it is a bad deal for them.

In a situation without a reasonable down payment there is nothing holding the payer to their obligation. After all, a payer involved in a "no money down" purchase could walk away and lose almost nothing financially. Abandoning their obligation to pay may hurt their credit score, but it was their substandard credit that forced them into a seller-financing situation in the first place.

When there is no equity in the property (buyers will use the lower of the property value or the sales price to calculate equity), all offers to purchase the secured note will be discounted substantially in order to compensate for the buyer’s risk of default. A heavily discounted buyout offer often means the seller will not be able to get the money they need.

If the seller of a private note needs a large amount of cash immediately, they must be able to sell the note as soon as it has been created. And to quickly find a buyer, the note must meet the general buying parameters of these people, which include a solid down payment, a decent interest rate, and typical terms.

Creating notes that can be sold

Every buyer has their own criteria that determine what they will or won’t buy, but a down payment of at least 10% is a good minimum figure when creating a note. This upfront payment immediately creates equity in the property which acts as the buyer’s safety net in a foreclosure. A competitive interest rate is important because it will make it easy for the buyer to purchase the note and yield the desired profit without much of a discount to the note holder. Finally, keep in mind that people typically avoid notes that do not follow a traditional term (amortized over 120 months, 180 months, etc). A two-year, interest-only balloon term is a perfect example of a note that most buyers would avoid.

The points described above are only a rudimentary starting point for note creation; there are certainly other things that buyers look for when considering a note. It is always a good idea for the seller to contact a qualified note finder in order to get the specific information they need.

The finder will be able to utilize their experience in working with buyers to give the seller general guidelines about what should meet most buyers’ parameters. Of course, there are no absolute guarantees of a quick sale, but when the seller creates a note with the buyer.s needs in mind, it should not be a problem to locate an interested buyer who will give the seller the cash settlement they need.   

The Seller Finance Solution

Seller financing can be a great way to get a house sold without slashing the price. By recognizing the millions of people who can’t get traditional financing as potential buyers, resourceful property sellers (and their real estate agents) can minimize their time investment in getting a property sold. Even better, sellers who offer financing can usually get a higher asking price for their property, even in the slowest markets. Clearly this is a win-win situation.

Most home sellers never consider financing the buyer directly because they are not aware of the benefits or don’t fully understand how creating a note works. Let’s take a closer look at the advantages of owner finance.

Three Advantages

Seller financing is very powerful when the market is slow or when there are many similar houses on the market. Just listing the house as "OWC" – Owner Will Carry – will make the house stand out and attract more buyers. Because many individuals cannot get funding from a bank, offering financing will open the doors to these prospective customers as well, essentially significantly increasing the pool of potential buyers. So, advantage #1 is MORE BUYERS.

Seller financing also brings the property seller another critical advantage . the likelihood of selling for a higher price. Offering to carry back a note will not only greatly increase the number of potential buyers, but also bring a unique demographic of buyers who are willing to pay more for a given property than the general population. Advantage #2: MORE MONEY.

Additionally, when the property seller finances the buyer, they get to act as "the bank". That means they could structure the deal to collect interest. Over time, if the seller holds on to their note, this can add up to tens of thousands of dollars in additional income. Advantage #3: LONG TERM PROFIT.

The Seller’s Strategy

Even when these benefits to "carryback" lending are made clear, many sellers are still hesitant to offer financing because they are entering unfamiliar territory. It’s a natural, human response — everyone is uncomfortable with new things.

For many property sellers, considering owner financing when they’ve only dealt with buyers via traditional funding is definitely "thinking outside the box". But once sellers understand the process, they are likely to choose seller financing instead of the unattractive option of cutting the listed price or waiting indefinitely for the "right buyer".

A seller-financed real estate sale is simply a real estate transaction where the seller acts as "the bank" or lending institution. The seller sets the sales price, determines and accepts a down payment, and then finances the remaining balance. The final step is the part that may scare some sellers, but in actuality, it can be very simple. Here is an example.

If the sales price is $100,000.00, and the buyer gives the seller $10,000.00 cash (the agent’s fee will be deducted from this down payment), the seller will finance the balance of $90,000.00. The buyer and seller would then agree to the terms, such as the interest rate and the total term, and use an attorney to create the mortgage document and close the deal. From that point on, the buyer sends the seller monthly payments for the house he/she has just purchased.

Special Circumstances (and a Solution)

The whole process can really be that simple. But, there are some substantial differences between a seller-financed deal and one that relies on traditional bank funding.

First of all, the seller in this example does not receive a large, one-time payment at the time of the sale. In fact, they will only receive the down payment, and in some situations, most of that will go towards paying the real estate agent’s fee. On the other hand, the seller will be receiving monthly payments at a decent interest rate, but this income stream can’t be used as a down payment for a new house.

Since many home sellers are also looking to buy another property, the seller will need to get enough at closing to pay their own down payment. Without this payment, the seller’s hands will be tied when they look to purchase another house and need to have a substantial amount of funds available. There is a common solution to this issue, however.

The Solution

In order to get the money the seller needs from the loan they just created, the seller could sell the monthly note payments to a specialist buyer for a lump sum of cash. If the seller finds someone willing to buy the payments, now they can "have their cake and eat it too".

In summary.

Step one: Use the seller finance option to find unique customers willing to buy the house at a higher price than would have been possible otherwise and complete the real estate transaction quickly.

Step two: Decide on the terms of the deal and create the note.

Step three: If the property seller needs immediate cash to buy another house or for any other reason, their new incoming payment stream can be resold. The person who buys the future payments from the seller will provide the funding to act as a down payment on a new house, and every party involved in the deal comes out smiling.  

Future Payments or Cash Flow

Creative home sellers who offer seller financing to potential buyers can often sell their houses more quickly (and at a higher price) in a slow market.

While applying seller financing techniques isn’t more difficult than traditional real estate sales, it is important to recognize that the buyers looking for seller financing represent a different target market than typical bank-financed customers.

Similarly, the process for obtaining a large cash payment for the seller after a note is created varies from the conventional real estate closing technique as well.

Fulfilling a Seller’s Need for Cash

In some seller-financed real estate situations, the property owner may have an immediate need for more cash than is available from the scheduled principal and interest payments. This situation often comes about when the seller needs to have enough money to use as a down payment for their next real estate purchase.

In order to quickly obtain a large proportion of the money due from the loan they just created, the seller could sell the monthly note payments to a buyer for a lump sum of cash. By locating someone willing to buy the note payments, the seller will have ready cash for a down payment or any other pressing financial need.

In order to streamline the seller finance sale situation, it is advisable to have potential buyers for the newly-created cash flow at the ready. A seller can start looking for buyers before the note is created, or even before a seller-financed buyer is "lined up". This way, the property seller could have a buyer for the payment stream ready to make the purchase as soon as the new private mortgage is created.

Locating the Right Note Buyer

But what is the best method to find these note buyers? In stark contrast to locating seller-finance buyers for the real estate itself, a classified ad in the paper is not the best option. Most people looking to purchase a stream of monthly payments do not look in the newspaper for potential cash flows to add to their portfolios. An alternate marketing strategy is required for finding note buyers.

In recent years, the Internet has become the best place to find cash flow purchasers. Using keywords such as "buy monthly payments" or "buy mortgage payments" at a popular search engine website should lead to many interested buyers.

Sometimes there are so many potential buyers, it can be difficult to figure out where to start. Also, cash flow buyers tend to have distinctly different financial parameters; an opportunity that meets the needs of one person perfectly may not be attractive at all to another. Therefore, it is often best to work with someone who could give the seller a general idea about how notes should be structured.

Using Note Finders…

In the secondary finance industry, a unique group of individuals exists who specialize in locating note buyers. These cash flow specialists – often known simply as "finders" – have a unique understanding of what most buyers are looking for. These finders are happy to work with agents and their clients. Many of them utilize online marketing and have Internet websites to facilitate the buyer location process.

The best of the bunch also look in the newspaper for property sellers offering financing, so sometimes a good finder will contact the seller if their property is advertised as FSBO. Finders specialize in helping property sellers locate buyers for secured notes.

Once in contact with a finder, the seller should explain the details of the situation. While note finders won.t be able to offer any legal advice or assist with the creation of a note, they are qualified to give general recommendations about what types of terms are attractive to note purchasers. Most importantly, note finders will be able to help locate a buyer for a newly-created cash flow.

Remember, these finders are not note brokers, meaning they will not "show" the seller’s note to buyers or act as a representative. They will only pass the information along to someone who would be interested. Once a commitment to purchase the cash flow has been established, the buyer will step in and complete the deal.

When working with a property seller who needs a lump sum of cash immediately after selling their real estate, contacting a finder early in the process of creating a real estate note makes sense. By involving a qualified note finder BEFORE a note is created, the property seller can receive invaluable input about the payment characteristics that note buyers prefer.

Without this knowledge, the property could sell quickly with the creation of a new note, but the seller might end up collecting the payments long-term instead of being able to quickly "trade" the future payments for an upfront cash settlement. If the property seller will need a large amount of cash quickly, it makes sense to plan ahead for a buyer to purchase the cash flow and involve the services of a note finder.  

What Is Your Note Worth

Another way of asking this question is “How much of a discount must I take if I sell my note?” All notes are purchased at less than the remaining balance of the note if the whole note is purchased. This difference between the remaining balance and the purchase price of the note is the “discount.”

There is no standard discount because there are no standard notes or standard properties. Each note is different and each note must be individually researched in order to determine its highest value.

If you do not need all the cash from your note immediately, it is possible to receive 100% or more of the remaining balance of your note by selling only a part of the payments on our note now. This is illustrated in the Note Holder’s Handbook. (This should become a link to the Note Holder’s Handbook order page).

The best way to find out how much your note is worth is to get a quotation from a professional note buyer. Be wary of some people who may approach you offering to buy your note for cash. Many of these buyers will attempt to give you a low-ball offer, whereas a professional note buyer will be more competitive with current secondary mortgage money market rates.

Also, many amateur note buyers don’t know how to structure partial offers tailored to your needs as a note holder and many don’t know how to close the transaction properly so both the note holder and the note buyer are protected.

If you want to get a no-obligation quotation on your note, click here: