From the 1990’s until about 2006, there was not a lot of news about owner financing and real estate notes. Banks and credit unions had scrambled to find more customers by lowering their lending criteria and competing on rates so that nearly anyone could find a loan for their house or building somewhere. That is certainly not the case today, and times will remain tough as the credit market stays tight and foreclosures climb.

One excellent option that many sellers of properties use is offering owner financing. With owner financing, there is no bank involved, and the buyer makes the down payment and future monthly payments at an agreed upon interest rate and term directly to the seller of the property. The reasons for offering owner financing (creating a real estate note) vary, but include:

attracting more potential buyers (most important item for you)

seller wanting to defer taxes on gains

creating more flexible terms and payment schedules

managing sales between family members, or divorce agreements

So, if you are creating a real estate note, here are some tips to maximize the amount that you would receive if you later need to sell it, as well as help protect you if you don’t:

Obtain a good down payment. This means at least 10% for a standard house, and 20-30% for commercial properties, land, and mobile homes. These numbers cannot always be reached, so try to get as much as you can without putting the buyer into a financially precarious position.

If you can, sell to a buyer with decent credit, meaning a FICO score of 625 plus.

Ensure that the interest rate being charged on the real estate note is at least as high as comparable bank rates.

In regard to commercial notes, multi-unit apartments or general purpose office buildings are easier to place than specialty businesses like restaurants. A real estate note on a property that was previously a gas station or anything that could have adverse environmental consequences will be harder (though not impossible) to sell due to the potential liability

the property and surrounding area being in good condition

While 2nd lien notes can be marketable, there needs to be at least 30% equity in the property to make the note marketable (no zero down or 80/10/10 real estate notes).

If you have questions about structuring your real estate note or would like to discuss the possibility of selling it, feel free to contact me anytime.