Why Sell My Mortgage Note?

Accepting payments on the sale of real estate might have made sense at the time, but circumstances change.

Many sellers discover they would now prefer cash today rather than the small amount that trickles in each month.

Here are just a few reasons people have sold all or part of their seller financed mortgage notes for cash:

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Inflation & Recessions: Success Using Owner Financing

Inflation & Recessions: Success Using Owner Financing

housing recessionThere’s a lot of talk about what’s going to happen if inflation starts to show up in our economy.

With Owner Financing I have found you will not be affected negatively.

The question is, “What is the market?”

The CASH MARKET and OWNER FINANCE MARKET are two completely different markets.

When the recession of 2008 hit I was able to take advantage of both markets. I took back 35% of my owner financed homes. I was able to recapture any appreciation that had happened from the time I bought the house until the time they moved out…some had paid for up to 6 years and then simply disappeared.

When the recession hit, the prices of houses in San Antonio dropped about 15% to 20% in the nice areas and about 10% to 15% in the lesser parts of town, where fewer buyers could qualify for a loan. Then they raised the credit score bar from 580 to 650 to qualify for a long-term government backed loan. Now, NOBODY in the LESSER PARTS OF TOWN could qualify for a loan and the prices dropped 30%.

House prices dropped back to the times I was writing about in my book MY LIFE & 1,000 HOUSES (I was writing about my real estate dealing between 1996 – 2008).

Here’s the BIG weird dynamic…

  • What happens to rents when no one can qualify for a loan to buy?
  • When people can’t buy, what happens to rents?
  • Do rents go down? …or do rents go up?

Rents go up!

The Owner Financed Value

Suddenly, in the recession, I was buying houses for what I used to pay for them 12 years ago. I was buying with other people’s money (OPM) and then owner financing those houses to renters who wanted to own. I based my sales price on the rents. If a person can pay $850 for rent, then I’d back into my sales price based on that monthly rental payment. The goal was to sell this renter a home for the same monthly payment they were paying for rent.

For the full effect of this example, know that I acquired the property and am “all in” for $35,000.

So, I want to sell my property and I want to establish a viable Owner Financed Value… I establish that the rents in the area for this particular type of house are $850.

$850 rent
– $100 property taxes
– $  50 for Insurance
=$700 left over for Principle + Interest

It’s easy to establish very accurate rent numbers online. You can do it in minutes while sitting in front of a house if you have a smart phone or if you have a laptop with a link to the internet. Use RentoMeter.com, Trulia.com and Zillow.com for starters.

$700 payment means the buyer can afford to finance $70,000
(If you use the terms 10.5% for 20 years)
The exact amortization payment is $710.66….close enough!

So if the buyer can afford to FINANCE $70,000, what is the sales price?
Add 10% as a general rule.
$77,000 is the sales price!

So if the goal is to move a person from renting at $850 to buying at $850…
What happens to my sales prices if rents are going up?

That’s right…during the recession my owner financed houses were appreciating as far as I was concerned.

It was the perfect storm; Prices on little houses were falling because no one could get a loan. I was buying those houses with Private Money (Money from Private Lenders) at rock bottom cash prices. But the OWNER FINANCED VALUE of the houses was rising like a rocket because the rental pool was flooded with demand! My spread was getting bigger at both ends; I was buying for less and selling for more.

To top things off, I was getting much better buyers than I had ever seen, and the buyers were better payers and had more down payment than I was use to getting.

REMEMBER: Back then we DID NOT have to get an appraisal to sell a property with owner financing – period! Today, as long as the buyer is a qualified buyer; meaning the buy has enough income to make the payment – Qualified Mortgage (QM). As long as it’s a QM we don’t need an appraisal.

I hate being a landlord so much; I think I’m going to stick to my owner financed model through the upcoming turmoil. I’m thinking, I won’t get rich but I won’t go under either.

My losses to inflation will be offset by the houses I get back and by my ability to double my money when I buy in the down times. Also Rents will go up to the market value and people will still WANT to buy homes even more.

rent or buy owner financing

To believe in this model you have to believe at least 2 things;

#1. People would rather own a home if it costs the same as rent.

#2. There is a line of renters waiting to buy your home if the current payer fails.

And perhaps there is a 3rd thing you need to believe in….

#3. Wealth comes from chaos

About The Author: Mitch Stephen has sold over 1400 homes and is the author of “My Life & 1,000 Houses, Failing Forward to Financial Freedom”. He uses the technique of “Owner Financing” to create cash flow without the hassles of landlording.

Can I Sell Part of My Mortgage Note?

Owner Financing doesn’t have to mean waiting years or decades to receive money.

Sellers have the choice to sell all or just part of their future payments for cash today.

Option 1 – When note buyers purchase all the remaining payments on a land contract, mortgage note, or trust deed it is considered a full purchase.

Option 2 – When the note buyer purchases just a portion of the remaining payments it is considered a partial purchase.

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5 Reasons Owners Offer Seller Financing

Why would a seller allow a buyer to make payments over time for the purchase of property?

Wouldn’t the seller rather get paid now and require the buyer to obtain a bank loan?

Here are 5 reasons property owners offer seller financing:

1. Reduced Marketing Times

What is the first thing a real estate agent does when property is not moving and has been on the market for 60 to 90 days? They reduce the price and add the tagline “price reduced” to all advertising and signs. Rather than reduce the price, it might be beneficial for the seller to offer financing. Buyers provided with financing can certainly pay full price in exchange for the many benefits they receive with owner financing, including the money they save by not paying expensive loan fees, origination fees, and points.

2. Increased Inventory of Prospective Purchasers

By offering owner financing, the seller increases marketability with a wider group of available purchasers. Statistics show that almost 40 percent of the American population is unable to qualify for traditional bank financing. While not all of the “unqualified” group would be an acceptable risk for owner financing, it still widens the market of prospective buyers considerably. Anyone who has added the words “Owner Will Finance” or “Easy Terms” to a For Sale ad or Multiple Listing Service (MLS) listing knows the phone will ring off the hook with interested prospects.

3. Reduced Closing Times

Another advantage of offering owner financing is substantially lower closing times. A closing involving a third-party conventional lender can take six to eight weeks while closing a seller-financed transaction through a reputable title company can take as little as two to three weeks. This is due to the reduced paperwork and less restrictive due diligence process.

4. Investment Strategy for Hard to Finance Properties

There are many properties that encounter financing difficulties including mixed use property, land, mobile and land, non-conforming, low value, and others. Investors realize excellent returns by paying a reduced cash or wholesale price on a hard-to-finance property and then reselling at a higher retail price with easy financing terms.

5. Interest Income

Why let the banks earn all the interest? Sellers can keep the property-earning income even after they sell by offering owner financing. For example, a $100,000 mortgage at 9 percent with monthly payments of $804.62 will pay back $289,663.20 over 30 years. That additional $189,663.20 (over the $100,000 mortgage) is power of interest income!

Work with Owner Financing Specialists

If considering seller financing, be sure to consult with a qualified professional to properly document the transaction.

It also helps to speak with note investors to gain insight on appealing terms and structuring techniques. This assures top-dollar pricing should you ever want to convert the payments to cash by assigning your note, mortgage, deed of trust, or contract to an investor.


Safekeeping the Original Mortgage Note

Can you easily locate the original mortgage note?

This important legal document should be kept in a safe place, and here is why!

The promissory note is a promise to pay or IOU from the property buyer. It spells out the amount due and terms of repayment. In legal jargon it is known as a negotiable instrument. Similar to a check, the original must be presented to collect or prove ownership.

If the seller desires to sell and assign the payments to a note buyer, the investor will ask for the original note to be provided at closing. The promissory note is then endorsed over to the investor. Similar to endorsing a check, the holder signs on the back of the note.

Sample Note Endorsement on Back of Original Mortgage Note

Pay to the order of, (Insert name of investor), without recourse.


Dated this ____ day of _______, 2011.

(Seller Signs and Dates)

Sometimes the note endorsement is executed on a separate piece of paper, also called an allonge. The allonge is then attached as a permanent rider to the original note. The endorsement enables the investor to prove they are a holder in due course, with the same rights of repayment as the original note holder.

An investor may also ask for the original recorded mortgage or deed of trust at closing. However, if this original is lost, an investor will usually accept a certified copy from the county recorder’s office.

A lost original note, on the other hand, can cause a problem. In most states the note is not recorded. If the original note becomes lost a note investor may ask for a duplicate or replacement note to be signed by the payer or maker. This means going back to the person that owes you money and asking them to resign. This relies on their cooperation and can cause delays.

The investor will also ask for a lost note affidavit from the seller or note holder, stating the note has been lost and it will be presented if found at a later date.

Some investors will consider accepting just the lost note affidavit with a copy of the original note.  However, this is increasingly rare as a lost original note can create problems foreclosing should the buyer stop making payments.

The best option is to avoid losing the note by keeping it in a safe deposit box or a fire and waterproof safe. Some sellers elect to have the original held by their attorney or a third party servicing agent for safekeeping.

Whatever method you choose, be sure to keep the original mortgage note in a safe place that is easily located!


Seller Financing – How Much Can The Buyer Afford?

Many sellers accept owner financing without any idea of how much the buyer can actually afford to pay.

The last thing a seller wants is to stress over receiving monthly payments or worse, getting the property back through foreclosure.

3 Ways to Calculate Payment Affordability Before Accepting Seller Financing

The amount a buyer can afford to spend on a house depends on their income, overall debt, cash they can put down, credit rating, and the mortgage terms.

There are three different calculations that are traditionally used by mortgage companies to determine how much house a buyer can afford. These are known as the Income Rule, the Debt Rule, and the Cash Rule. While owner financing does not require the strict use of these rules, it makes sense to utilize the standard as a guideline. (Better safe than really sorry, right?)

1. Income Rule

If you ask a real estate agent or lender for an estimate of how much house a buyer can afford, they’ll typically use a version of the Income rule. The Income Rule says that the monthly housing expense — which is the sum of the mortgage payment, property taxes, and homeowner insurance premium — cannot exceed a percentage of income.

This is often referred to as the front-end ratio and ranges from 27 percent to 30 percent for most lenders.

If the maximum percentage is 28 percent, for example, and the monthly income is $4,000, the monthly housing expense can’t exceed $1,120 (4,000 x .28 = 1,120). If taxes and insurance on the home are $200 per month, the maximum monthly mortgage payment is $920. At 7 percent interest for a 30-year loan, that payment will support a loan of $138,282. Assuming a 5 percent down payment, the maximum price of the home this buyer can afford would then be $145,561.

2. Debt Rule

The Debt Rule says that the total debt expense – which is the sum of the total mortgage payment plus monthly payments on existing debt like cars, credit cards, etc. – cannot exceed a percentage of income.

This is often referred to as the back-end ratio and ranges from 36 percent to 43 percent.

If this maximum is 36 percent, for example, and the monthly income is $4,000, the monthly payment can’t exceed $1,440 ($4,000 x .36 = 1,440). If taxes and insurance are $200 a month, and existing debt service is $240, the maximum mortgage payment the buyer can afford is $1,000. At 7 percent interest and a 30-year loan, this payment will support a loan of $150,308. Assuming a 5 percent down payment, the maximum price of the home would then be $158,218. (You’ll notice that’s significantly higher than what we calculated using the Income rule.)

3. Cash Rule

The Cash Rule says that the buyer must have cash sufficient to meet the down payment requirement plus other settlement costs.

If the buyer has $12,000 and the sum of the down payment requirement and other settlement costs are 10 percent of the sale price, then the maximum sale price using the cash rule is $120,000 (12,000 divided by .10 = 120,000).

Since this is the lowest of the three maximums in this example, it would be the affordability estimate that is safest to use for this scenario.

Putting It All Together for Seller Financing

How much house a buyer can afford is easy to overestimate if you ignore one of the three rules. Don’t make the same mistake as many of the mortgage lenders that ignored these standards in past years.

Granting loans to buyers that could not afford the payment played a large role in the current sub prime toxic mortgage mess that is currently in the headlines. There is no federal bailout program for sellers accepting owner financing.

Play it safe and be sure the buyer can afford the house payment before accepting payments over time.