The Biggest Mistake I See Private Mortgage Note Holders Do

I get a lot of calls from private mortgage note sellers with an almost limitless number of notes to sell. And while there are a number of elements of a private mortgage note that can make it difficult to impossible to sell a real estate note, there are a few that stand out in my mind as a note buyer. I thought I would go through these so that 1) note sellers will be aware of the added difficulty they will face when trying to get good money when selling a note and 2) property sellers considering owner financing will avoid these mistakes. So her they are:

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1) Allowing your buyer or mortgagor to pay in cash. It doesn’t matter if you give them a receipt. Not that you would, but receipts can be created out of thin air. Require (cover this up front, maybe even include this requirement in the mortgage note) your borrowers to pay by check. If they don’t have a checking account, require them to get a money order from the post office. Keep a log as well as copies of the checks or money orders. better yet, have a third party handle their payments.

2) Setting a very low interest rate. A very low (below 7% currently) interest rate will really hurt the price of the note mortgage note buyers will pay due to the way note discounts are calculated. The higher the future income stream (payments), the better the price.

3) Setting a term period too long. While there is nothing wrong with amortizing the mortgage over 30 years, (the longer amortization period will help you get a higher interest rate) set a balloon period of 5 to 10 years. If you don’t then a huge number of payments will be many years out and therefore really hurting the price of your private mortgage note.

4) Allowing the seller to put no money down. This increases the risk for a mortgage note buyer as the buyer can just walk away with no cost other than a hit to their credit which may already be damaged. Also, if you sell the property at below what you believe is market value, a note buyer may just not agree as many people in the real estate business, believe the price you accepted is the market value.

So there you have it, 4 mistakes that private note creators and holders make that significantly impact the price a promissory note buyer will pay for it.

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One Response to The Biggest Mistake I See Private Mortgage Note Holders Do

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