When should a property owner carry the note on the sale of a property? There are four key factors you should consider before deciding to finance the sale of your property.
Top 4 Considerations When Financing The Sale of Your Property
should YOU carry the note on the sale of YOUR property?
Do you own the property outright?If you own the property free and clear of liens, owner-financing is much easier. You would take a first lien on the property to secure the note payable to you.
Even if you still owe on the property, it is possible to take a second lien on the property. However, this is much riskier and more difficult legally. If you are thinking about selling property you still owe on, you have to be sure the first lien deed of trust does not contain a “due-on-sale” clause that could trigger making the entire balance due.
Is carrying the note a smart investment?A mortgage on real property can be a very good investment. You can get a higher rate of return on the mortgage interest on a note than on a CD or money market account. You should compare what you could earn as mortgage interest to the return you would receive on another investment of the cash if you sold the property outright. As long as property values are staying steady, the risk of substantial loss is minimal.
Is it wise to take on the risk if the buyer can’t qualify for conventional third-party financing?Oftentimes, there is a reason an individual cannot qualify for a bank loan. They simply may not be a good credit risk for anyone. Sometimes, though, a divorce or similar event in their history could cause a bank to shy away from making a loan, but the buyer is otherwise creditworthy. It still might be worth taking on the risk of carrying the note. You always have the protection of a mortgage against the property if the buyer defaults.
Are you willing to do the necessary legal work to protect yourself if the buyer defaults?The lien granted to you in the deed of trust securing the note can be foreclosed if the buyer defaults on payment. You ultimately can get the property back in this situation. There are, however, a number of complicated legal steps involved in foreclosure that you must be prepared to take on. The expense of a foreclosure is a factor to consider at the front-end in evaluating the strength of your security.
If you have reviewed these considerations and have decided that it is a good move for you to finance the sale of the property, you definitely must have the correct legal paperwork drawn up to protect you. This is not the time for Do-It-Yourself legal work.
If you need legal assistance, contact Adair M. Buckner for a free initial consultation*.
*(The free consultation does not cover actual review of documents or giving legal advice on a specific situation.)