The months before the April 15 tax deadline are busy times for note brokers and note buyers. Why? Because note holders are looking for cash, to pay tax or take advantage of a better opportunity.

So, we look at a lot of notes, and some common problems continue to repeat themselves that prevent sellers from getting top dollar for their notes. If you are selling a property and thinking about offering seller financing, what should you be aware of IF you plan on selling that note? In other words, what are note buyers looking for? Here are some key areas to focus on:

CREDIT SCORE

Remember, you are a LENDER. You have a right to know the credit history of your buyer. Many future problems can be prevented if you discover up front that your buyer is not who you thought he was. Protect yourself and do a credit check. Investors will appreciate your businesslike approach.

DOWN PAYMENT

We see many notes with no down payment or 5% down payment. Ask for 20%, 30% even 50% down payment - who knows, you may get it! In this declining housing market and poor economy, little or no down payment means lack of commitment in the eyes of an investor, and your note becomes less desirable. The more invested your buyer is, the stronger your note. And, you want as much equity as possible in that property.

INTEREST RATE

A lot of notes are at 5% and 6%. A lot of notes are interest only.
Why? If your buyer cannot get traditional financing, is it fair for you, as his lender, to demand a higher rate than that offered by a bank? The answer is Yes. A lower interest rate - coupled with the lack of principal payments - weakens your note tremendously.

TERMS

If you create your note with a 15, 20 or 30 year term, that is fine if you want to enjoy the income from that note. But, if your intention is to sell that note, remember this - note buyers want their investment back over a short period of time, say 5-10 years. The longer an investor has to wait to recoup his money, the less he will pay you for your note.

BALLOON

Investors normally like balloon payments because they shorten the the term of the note. But, unfortunately, we are not in normal times. The question always arises - will your buyer be able to refinance or somehow come up with the money to pay off that balloon? Investors are skeptical about this happening given today's credit crunch. Some investors will not buy a balloon payment at all. Others may be willing to extend the note if the buyer can't pay off the balloon. Again, the stronger your buyer in all the areas mentioned above, the stronger your note.

Sellers of notes continue to be unrealistic about the "true value" of their note in today's marketplace. Bobby Abreu, a major league baseball player who left the New York Yankees as a free agent after last season, is a lifetime .300 hitter and averages 100 RBI'S per year. He was seeking a 3 year contract for $48 million dollars. No takers! He signed last week with the Angels for 1 year and $5 million dollars. The marketplace was speaking loud and clear, not as a reflection of his ability, but as a reality of the current marketplace.

If you decide to sell your note please remember that the marketplace will talk to you about your note. You may not like what you hear, you may choose to ignore the sound, or you may decide to sell.Take a cue from Bobby Abreu and understand that the marketplace does not lie.


Denny Stanz