OK, you sold your property in 30 days by advertising “Owner Will Carry” (OWC).   You received your asking price from a buyer who could not qualify at a bank.  This buyer put 10% down, signed a Promissory Note with you at 8.5% and you closed in five business days.  Sound good?  Be sure to see last month’s article.

A few months go by and you spot another property you really want.  This is a smaller property so you want to pay cash.  But, how can you pay cash for this property when you haven’t received all of your money out of the property you just sold?  As a smart investor, you should know that you can sell your Promissory Note for cash! 

This Promissory Note is most often called a Seller Financed Note.  A Seller Financed Note is a Note carried back by the seller of the property to facilitate the sale of the property.  This Note is secured by a Mortgage, Deed of Trust or Land Contract.  It is not a mortgage or loan that is being created or given to the buyer. 

You do not have to accept receiving monthly payments on your Promissory Note.  You can sell it on the open market, but it will be discounted.

How much of a discount?   Each Seller Financed Note is unique so there is not a “standard” amount of discount on a Note.  The amount of cash you will receive for your Note depends on three categories:

1.  The property you sold: type, value, condition and location

2.  The buyer: credit, down payment and payment history;

3.  The terms of the Note you constructed:  interest rate, seasoning and monthly payment, balloon.

How can I make my Seller Financed Note more saleable, in other words, worth more to a Note buyer?

Once you locate a buyer for your property, here is an ideal structure for your Seller Financed Note (this is a residential property with an owner occupying buyer):

  • 10% cash down payment or more (15% down from an investor buyer)
  • 8% interest rate or higher
  • 30-year amortization
  • 7 year balloon (meaning entire loan balance is due to you in seven years)
  • 650 middle FICO score or higher (675 for an investor buyer)
  • If you owned the property for one year or more before you sold it, only one payment from your buyer is sufficient.  If not, one year of seasoning is ideal.

A Seller Financed Note can be carried back on any property with or without existing loans on it.   Ideally, the property should be free and clear of mortgages or your existing mortgage should be no more than 60% of the price at which you sold. 

Here is a comparison of an all cash sale and a sale using seller financing (and a subsequent sale of the Note):

Cash Offer Seller Financing
Asking Price                              $100,000 Asking Price                               $100,000
All cash offer                            $80,000 Down Payment                            -$10,000
Real estate commission(6%)     -$4,800 Seller Financed Note                    $90,000   
Total net to seller                      $75,200  
  Sale of Note (approx)                   $73,472
  Real Estate Commission (6%)      -$6,000
  Escrow to seller                            $67,472
  Down Payment                           +$10,000
  Total net to seller                         $77,472

Keep in mind you can choose to sell only part of your Note.  In fact, by selling only a number of payments, you can actually realize a greater gain than the amount at which you sold your property (it’s a math thing). 

I actively purchase and broker Seller Finance Notes through my company called Seller Finance Capital.  Should you have any questions about this, call me or go to my website sellerfinancecapital.com.

Be an Investor – Not a Landlord!