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Our Company specializes in the purchase of non-performing mortgages and trust deeds primarily from institutional lenders and hedge funds. However, we are also quite active in the purchase and sale of what is commonly called Seller Financed Notes, either performing or non-performing.
When a person, a trust, a partnership or other entity sells a property and creates a promissory note for payment of the property is falls into this category we will call Seller Finance. This Seller Finance term is really not completely accurate as the seller does not actually make a loan but rather trades equity in the property for payments from the buyer identified in a Promissory note.
These Promissory Notes when written properly can be bought and sold as simply as the notes from the institutions. However, the buyer must be aware of certain caveats when purchasing. When a note is purchased from a lender one can feel a bit safe that all the ts were crossed and the is dotted. Not so with Seller Financed. In most cases a seller does a seller finance one time and depending on who helped with the transaction the note. Because of this, safety is a large factor when considering the purchase of a seller financed note.
What contributes to the safety of the note;
First, Loan to Value or LTV. How much is loaned versus the value of the property. A good loan to value may be 80% and a poor one 100%. Second we should consider the down payment. The larger the down payment the more secure the loan. If the buyer puts nothing down the incentive to keep making payments is quite diminished over a buyer who puts 20% down. Third, credit score has an effect on the safety of the note, the higher the credit score of the buyer the more valuable the note. Fourth, the condition and location of the property is important. In addition, we like to consider the duration or term of the note as well as the interest rate in valuing the note itself.
Seller Financed notes can be a great investment, but you must be prepared to do your due diligence and know what to look for.
If you are interested in purchasing notes, give us a call, we’d be glad to help.