Should I Agree To Carry The Note On The Sale Of Property?

Posted by: Adair M. Buckner

When should a property owner carry the note on the sale of a property? It may sound tempting as a way to quickly sell your property to someone, without going through all the formalities of the buyer qualifying for a loan, and closing through a title company. Don’t rush into it, though, without a clear picture of the dangers.

There are four key factors you should consider before deciding to finance the sale of your property.

black and white interracial couple smiling with attorney signing contract


1. Do you own the property outright?

If you own the property free and clear of liens, owner-financing is much easier. You would be able to take a first lien on the property to secure the note payable to you. The first lien position is highly preferable over a second lien.

Even if you still owe on the property, however, it is possible to take a second lien on the property. This is much riskier and more difficult legally. Your position would be subject to the first lien holder’s exercise of its rights to foreclose if the borrower defaults on its note. Or, even if a borrower is current on the first lien note, your right to foreclose after default on your note will be seriously affected.

If you are thinking about selling property on which you still owe a mortgage, you have to be sure that your sale does not trigger a “due-on-sale” clause contained in the first lien deed of trust, causing the entire balance to become due on the first lien note. 

2. 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.

If property values are falling, however, so that the value you would realize at foreclosure if the borrower defaults is less than the amount due on the note, the higher rate of interest may be offset by the loss of your collateral value.

3. Is it wise to take on the risk if the buyer can’t qualify for conventional third-party financing?

Oftentimes, there is a reason individuals cannot qualify for a bank loan and are seeking “owner financing”. They simply may not be a good credit risk for anyone. In that case, you should walk away.

Sometimes, though, a divorce, default on a note by a co-signer, identity theft, or a similar event in their history could cause a bank to shy away from making a loan although the buyer is otherwise creditworthy. It still might be worth taking on the risk for you to carry the note. You always have the protection of a mortgage against the property if the buyer defaults.

4. 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 and the wisdom of carrying a note.

So do you still think carrying the note is a smart idea? 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.)


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