During the past few months, I have read several industry articles about happenings in the real estate market. Specifically, the surge in people becoming aware of seller financing and using it as a tool to sell their property. This is good for the particular seller and buyer involved in the transaction because it allows "something" to get done. And it is good for the economy because it provides a small stimulus as money is exchanged and gives people the opportunity to move forward with their housing decisions. Remember, everyone of us has to live somewhere, no matter what is going on in the economy or real estate market.
The authors of these articles are in the note business, and we all applaud the fact that more and more people are becoming aware of seller financing. However, we need more and more people to become EDUCATED about seller financing. I am writing this on a Monday. In a TV interview before Sunday nights Eagles/49 er's game, Mike Singletary, coach of the winless 49 er's, said his team needed to stop shooting itself in the foot. Once it stopped doing so, he said his team would be fine. ( They shot themselves in the foot again and lost the game).
Well, people who are creating seller financed notes continue to shoot themselves in the foot. I wish I could be their coach BEFORE they agreed on the terms, because when it comes to game time( they want to sell their note), they are getting beat up and losing the game. What do I mean? They created a lousy note, and the price to be paid is getting way less cash for that note.
We don't have control over the marketplace. We don't have control over real estate trends or prices. But as a seller of a property, we can establish some standards as to the terms we are willing to negotiate with a potential buyer. And if our intent is to offer seller financing and sell that note at some point in the future, there are certain mistakes we should not make.
So, let me be your coach. Here are the mistakes to avoid when you are selling a property and creating a note:
MISTAKE #1
You do not do a credit check. This means you do not know the true credit worthiness of your buyer. This means you have no sound basis for establishing the terms of the note. The give and take in your negotiating should be based on fact, not on the premise that he seems like a good guy, or I have known him for a while, or he told me he can't get a bank loan. You have a right to know. Verify. Any note buyer will have your buyer's credit worthiness an integral part of his pricing. So should you.
MISTAKE #2
You get NO downpayment. We have been in a declining market. Many properties have little or no equity. You must ask for and expect a downpayment. Ask for 20%, you might get it. You won't if you don't ask. Amazingly, buyers will somehow come up with the cash. Ask for as much as possible. Then, negotiate.
MISTAKE #3
You offer a 4% or 5% interest rate. Why would you offer an interest rate that equates to your buyer being a prime, top of the market financial risk when you know very little about their credit worthiness and they can't get a bank loan? The interest rate must reflect the potential risk. Offer 8% to 10%.
MISTAKE #4
You have a balloon payment due within 5 years. In normal times, this is attractive to note buyers because they get their money back sooner rather than later. But we are not in normal times. Any note buyer will presume that the buyer will NOT be able to come up with the balloon payment when due. This means then he will have to extend the due date or renegotiate the terms of the note. This directly affects the pricing and you will get less cash, unless you in fact have a strong buyer.
MISTAKE #5
You offer a 360 month amortized note. Some note buyers will hold a note until it is paid off. Others want to be "out" of the note within 5, 10, 15 years. Generally speaking, the longer a notebuyer has to wait to get his money back, the less cash he is willing to give you. The answer for you is to have the amortization period as short as possible that will work with your buyer's budget. Negotiate the best you can. You can only do what you can do.
MISTAKE #6
You offer an interest only note. Don't do this. Most note buyers have " no interest" in your "interest only" note. Get principal payments.
Here is the bottom line. Sellers are offering seller financing and creating terms that favor their buyer, not them. Why? Because they want to sell their property. That's fine, but when you decide to sell that note and have an objective third party look at your transaction, don't expect top dollar when you are shooting yourself in the foot. You will lose the game in the end.
Ask Mike Singletary !
Regards,
Denny Stanz
760-245-5366
760-245-5367 fax
dennystanz@verizon.net
www.CaliforniaNoteBuyerLLC.com
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