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November 5th, 2009 by Dawn Rickabaugh
It’s tempting to offer a low interest rate to entice a buyer to give you a fat, juicy price for your property. It’s OK if that gets the job done and you’re happy with it, but you just have to know that you’re writing in the discount you will ultimately take on your note.
Don’t write a seller financed note at 5%, amortized over 30 years, and then get offended when a note buyer offers you .60 cents on the dollar. They’re not being mean or predatory, it’s just the natural consequence of how you structured your deal.
Perhaps you’re happy making 5% on your money . . . if so, great, sit back and collect those payments! But no experienced note investor will buy a note at a 5% yield. They’re going to want a minimum of 9-12%. There are only 3 companies in the country that want to buy a 5% note at face value. That’s Fannie Mae, Freddie Mac, and FHA, and none of them are going to buy a seller financed note.
There is usually no reason to give a borrower, who may not even be able to get a conventional loan, the same kind of low rate they could get with the best bank loan out there. This only benefits the borrower.
Smart Tip: Charge at least 2-3% more than the market rate.
If you’re going to take back a note (especially if you want it to be worth something on the secondary market) charge the highest interest rate that you can, without violating usury laws, of course.
Sellers will say, “The buyer said they could get 5.25% from Bank of America, so I gave them 5%.”
Why would they ask you to carry the financing if they could get 5.25%? They probably couldn’t, and even if they could, you should charge a premium (more than the going rate) for the ease of the financing you’re providing and the closing costs you’re saving them.
So, if a typical buyer can get a 6% 30-year-fixed down at the local bank, then you should shoot for at least 8-9%. This not only gives you a fair return for the service you’re providing and the risk you’re taking, but also greatly decreases any discount that you will take when you go to sell your note.
But sometimes, buyers have you over a barrel. They’ll say, “Take it or leave it . . . if you won’t give me the terms I’m asking for, I’ll go to the next desperate seller hanging out there on the market and get what I want.”
It’s not that charging a low interest rate is bad, or the wrong thing for you to do, you just have to go into the deal with your eyes wide open and know what you really need, now and into the future.
This excerpt is taken from “Seller Financing on Steroids: Pumping Paper for Power, Peace and Profits,” a guide that can be downloaded for free at: www.NoteQueen.com.
Always consult with your CPA, tax attorney and/or financial advisor before selling property or paper.
Dawn Rickabaugh is a RE broker with expertise in seller financing and RE notes (trust deeds). firstname.lastname@example.org