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Taking back a seller financed mortgage?
How to make sure you get the highest price for your note if you wish to
sell it.
- Buyer's credit.
The better the credit rating of the buyers, the more valuable your note.
- If they are a husband and wife, find out the credit rating of both of
them. often the wife is earning more than the husband.
- If you don't have a credit report, they can
order a credit report from us.
- Sale price of real estate.
If this is Higher than the actual value of the real estate expect to take a
bigger discount when you sell the note.
For example your home may actually be worth $100,000 on the open market. But
you may have found an inexperienced, over-eager first time home buyer to pay
you $120,000 for it.
This is certainly not a bad thing for you and the buyer may be happy too if he
has limited funds and poor credit.
However, an experienced note buyer will want to
have some equity in the property in case the buyer defaults.
In the case above, assume it is was a nothing down sale, and you took back a
$120,000 mortgage for this house worth $100,000. Don't expect to get $120,000
when you sell the mortgage. You will probably get closer to $80,000. And maybe
less.
- Actual, provable value of the real estate.
If you are taking back a first mortgage note there is no legal reason to have an appraisal.
But if you intend to SELL the note, any experienced note buyer will
want to know what the property is worth. It may be harder to access the
property and have an appraisal done after you close on the sale. See our article
on mortgage fraud. Also our article on unusual clauses to include when you
take
back a mortgage.
- Loan to Value ratio. LTV.
For a note to be marketable the total LTV, that is including the first and
second mortgage (if any) should be no more than 75% of the actual value of the
property.
However, if the buyer's credit is good, this 75% could refer to the
Investment to Value or ITV. The word Investment means the amount the note buyer is
investing in the note.
Thus if the property is worth $100,000 and the buyer
has put down a 10% payment, has good credit and a steady job and you gave him a $90,000 mortgage, you could get $75,000
(75% of the value) for your note. See our charts for
safe mortgage lending.
- Who are the buyers?
If the buyers are husband and wife they BOTH need to sign the note. If the
buyer is a corporation, trust or LLC then make sure the principals also
PERSONALLY sign the note. If they refuse to do so this could be an indication
they will let the note default if the deal doesn't work out for them. Of of,
this need not apply if the buyer is a substantial corporation. (I wouldn't ask
Bill Gates to personally sign on a note from Microsoft. :-) But how about a
note from WorldCom or Enron?) If the borrower is NOT a substantial corporation
then the note could be either unsaleable or only saleable at a much larger
discount to reflect the lack of personal liability.
- Seasoning, aging.
There is no doubt that a seasoned note, where the buyers have made payments
for a year or more, is easier to sell and will get a higher price than a new one. But of course you won't
have this option if you want to do a simultaneous closing.
- Institutional lender allows secondary financing.
There are many institutional lenders, banks etc. that will not allow
secondary financing behind their note. Why not? After all, their lien is
senior anyway. One answer is simply that they do not want to the borrower to be
stretched to make their payments. Also they would sooner the buyer put down
more cash or pay for mortgage insurance (a fancy way of saying a higher
interest rate.)
- Loan properly secured.
If your mortgage is a second mortgage, it should be a properly recorded
mortgage or deed of trust to comply with your local laws. Any documentary and
intangible taxes should be paid. Without this the mortgage may be
unenforceable.
- Title insurance.
You should have proper mortgagee's title insurance.
- Rights with respect to first mortgage, if you hold a second.
If you are holding a second mortgage it should contain language to the effect
that a default on the first mortgage is a default on the second. Also that
you, as second mortgage holder have the right to check on the payment status
of the first. We prefer language that REQUIRES the borrower to mail us proof of payment of
the first mortgage when they mail us the check for their payment on the
second.
- Interest rate.
Other things being equal, the higher the interest rate, the higher the price
you will receive. But be aware of laws concerning Usury and Predatory lending.
A below market interest rate will demand a hefty discount to be saleable.
- Length of note to short.
Typically it is hard to sell a note with a short balloon, or a balloon due in
just 6-12 months. The note buyer will be concerned that the borrower won't be
able to refinance and pay them off.
But a loan with for example, 3-5 years to run, and a 30-year amortization is
going to be saleable, other things being equal.
- Length of note too long.
The private note buyer won't usually want to wait 30 years to get paid off, but these
notes can often be sold to institutional note buyers.
- Proper, acceptable mortgage and note documentation.
See the next page.
The mortgage and note to use.
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