Owner Financing 101 – August 2015

Note industry statistics tell us that the overwhelming number of owner carry back transactions closed each year are done by sellers who will never do another one in their lifetime. They are one and done. Most of these transactions involve residential property. Some of these transactions include a real estate broker, some do not. Some involve the seller getting good advice from someone, bad advice from someone, or no advice from anyone.

When the seller in one of these transactions discovers that the note he is holding may be sold in the open market, he may become interested because, very simply, he would prefer to cash out. He does not enjoy being a landlord. In order to determine what a buyer would be willing to pay for his note – which will be discounted because of the inherent risk – all the facts surrounding the deal must be examined. Here is where the single, biggest mistake is discovered.

The seller does not really know his buyer!

What do I mean? Let me give you some real life examples:

Q: What kind of work does your buyer do? A: I think he is in construction.

Q: How long has he been in construction? A: He’s pretty young, I guess most of his adult life.

Q: So, you did not talk to his employer, right? A: I did not.

Q: Do you have any idea of his credit history or credit score? A: He gave me a decent down payment and his payments have been on time so far. He drives a nice truck. He looks like a good credit risk.

Q: How many people live in the house with him? A: I think he has a wife or girlfriend.

Q: Does he have any children living with him? A: I don’t think so, not sure.

Q:Any grand parents living there? A: Don’t think so.

Q: Has he lived in the area a long time? A: He just moved here from out of state.

This is just a taste. Get the picture?

If you are a professional in the real estate industry, you may not believe the above scenario. I can assure you that there are people selling properties across this country, agreeing to carry a note, and knowing very little about the person who will be moving into that property. It may be uncomfortable for some sellers to ask the questions that need to be asked, but that discomfort is nothing compared to the worst outcome possible – the buyer stops paying. Now the real emotional pain and loss of income begins.

If you are considering carrying a note for the first time, a real estate broker can do all the background checking for you on any potential buyer. If you decide to sell your property on your own, you can do some simple things to protect yourself:

1. Ask your buyer to give you a copy of his credit history and score.

2. Ask permission to talk to his employer, or for a copy of a recent pay stub.

3. Meet everyone who will live in the property.

4. Get to know him – where did he grow up, how long in the area, why does he like this neighborhood, how long in his industry, etc?

5. Have a firm and friendly conversation about sales price, down payment, interest rate, monthly payment, etc.

6. Make sure you both feel good – and committed – about what you are agreeing to.

If your potential buyer is reluctant to co-operate or the information provided makes you uncomfortable, it’s probably best for you to move on. Better to know now rather than later.

Licensed note broker Denny Stanz, of California NoteBuyer LLC, writes this monthly column on topics of interest to buyers and sellers of real estate. Contact him by email at dennystanz@verizon.net. Visit Denny’s website at: www.CaliforniaNoteBuyerLLC.com

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