Structuring Your Owner-Financing Sale for Maximum Value

By Maria Fee

Owner financing allows you to be the bank and earn steady cash flow after the sale of your property! Conservative lending institutions want low risk and high-return investments and so do you! Several advantages exist to owner financing, but one big advantage is you (the seller) get to name your terms and conditions; therefore, you know your rate of return at the start of the transaction unlike most other real estate and non-real estate transactions!

Because many buyers do not have all cash or stellar credit, owner financing allows them to purchase the property and pay you (the seller) in monthly installments. Instead of selling and putting all your money in the bank so you can earn 4% to 5% on your sales proceeds, you can earn a much higher interest rate in exchange for your waiting to receive your entire sales price. Additionally, this investment is one that you actually understand - unlike many traditional investments that promise great returns but which you have no control.

Good Returns and a Safe Investment

So how can you earn very good returns safely through owner financing? To start, work with a real estate attorney and CPA to prepare documents and evaluate a viable interest rate return for this investment. Secondarily self educate! No one will look out for your money more than you will and many times these same professionals make mistakes or overlook clauses to add to your contract. You need to understand the elements that make a note profitable, secure, and low-risk - to protect yourself, your borrower, and your investment. By taking time to self-educate and create a valid and profitable note, you will minimize legal pitfalls and if you decide to sell the note later, you will get top value for your note from a note buyer. The last thing you need to discover when you need the money is that you did not structure a note for maximum profit and that you have to take a huge discount!

Benefits to Borrower

The benefits to the borrower is that they pay little or no closing costs, no points or bank fees, all of which increase the costs of conventionally financed properties. The market has changed and traditional lending requirements have tightened; thus, owner financing is an attractive method for selling and acquiring properties privately.

Some Considerations When Structuring a Note

The most important job facing you (the seller) is creating and structuring a property sale and promissory note that fully complies with all the state and federal laws related to lending (usury laws, RESPA, TILA, etc.). These laws vary from state-to-state and apply differently depending on the number of properties that you will owner finance in one year's time. A low-risk note is created when the seller applies solid underwriting practices during the note creation process and everything is documented thoroughly and completely, thereby creating maximum salability, flexibility, and liquidity with the note at a later time.

You should structure the note to consider the following aspects:

• Request a 10% to 20% down payment so your buyer has a vested interest. Note that many buyers have cash but may not have bank accounts and/or may not want to show they have money. If the buyer pays a sufficient down payment, this enhances the value of the note if you sell it and it reduces the chance of them walking away from their obligation.
  
• Use a non-usurious interest rate but with a yield that offers a good rate of return. Consider language in your contracts that adjusts the interest rate at intervals for long-term notes (10, 15, 20+ year notes), so as prime rates increase over time, so will your interest rate on your note.
• Structure the note with length of time (terms)
  that meet your financial needs in the years to come (which may not be 20 or 30 years into the future). Consider college costs for your children, retirement date, wedding costs, etc.
  
• Avoid a prepayment penalty to enhance the value of your note.
  
• Obtain title insurance for the full value of the property and also be sure you are listed as the mortgagee, trustee, or first contract holder on the policy.
  
• Add other protective safeguards for both parties such as:
  • Escrowing for taxes and insurance.
    
  • Property insurance is for the value of the property and that the insurance increases on the property as the property appreciates. A note on a property that is not insured is risky! Make sure that you are added as a beneficiary on the insurance policy and that your borrower provides annual proof that insurance is in place.
    
• Work with an experienced real estate attorney to prepare your documents. Consider it good sleep insurance!

All rights reserved, used with permission. Maria Fee is a full-time real estate entrepreneur, author, and teacher. She is a licensed mortgage professional and note buyer. Maria has been a key note speaker locally, regionally, and internationally. She is President of REMI KNOX, LLC, a company that buys and sells notes nationwide. She is also the co-author of Owner Financing Made Easy which is available at www.REMIKNOX.com. Maria and her staff are reachable by calling 1-866-871-5914 and by email at Info@REMIKNOX.com. REMI KNOX provides free, no obligation note appraisals and other services to professionals and consumers.