How does owner financing work when using a note? Does the seller sell the note to get money up front? Is there a negative for the buyer if the note is sold?

Verness Owens
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Mar 2, 2009 by Verness Owens
Category: Home Loans

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Brian Gibbons
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Advisor: Brian Gibbons, Real Estate
Feb 6, 2010  
Many states have Contract for Deed or Land Contract Sales. Selling on terms (helping the buyer buy) in this non-lending Bank market instead of getting cashed out is a good option most of the time.

We consult with sellers to get their home sold FAST on Lease Option or Land Contract Installment Sale. These contract are a minimum of 36 months to help the buyer or vendee get a good mortgage rate. The Seller gets a much higher sales price with no Realtor 6% commissions, netting more money.
Sanda Hnatjuk-Bahic
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Advisor: Sanda Hnatjuk-Bahic, Real Estate
Mar 5, 2009  
When the seller carries back the funds for the buyer a note and trust deed are prepared in escrow. The funds to lender to the buyer on the seller’s behalf come from the seller proceeds. The note will be in the seller’s name. If the seller chooses to sell the note the note would be modified putting it into the new Beneficiaries name and an assignment of deed of trust would need to be filed putting the trust deed in the new beneficiary name. The terms of the note would not change only the name of the beneficiary. There is no negatives for the buyer.
Mark Goldman
1 Votes
Advisor: Mark Goldman, Home Loans
Mar 3, 2009  
All of the preceding is good informaiton.

I would add that the seller can take all or a portion of their equity as a note at the time of sale. If there is not equity in the property, the seller would have to bring cash to the closing in order to lend it to the buyer. The seller can agree to allow their note to be subordinate to a new first mortgage. This is more risky in the event of a foreclosure.

Seller notes can be sold. Usually to private investors who will pay a price that is determined by their required rate of return. If the investor wants a 12% yield, and the note is at 6%, the offer price on the note will be at a large discount, depending on the term of the note and payment history and loan to value.
Dave Kramer
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Advisor: Dave Kramer, Home Loans
Mar 3, 2009  
Signing a Note to a seller is just like signing a Note to a bank. the seller can sell the note, but it is unlikely because they would take a big loss. there would be no inherant negative for the buyer if the seller sold the Note. both buyer and seller should make certain that the terms are reasonable for each party.
Brian Gibbons
1 Votes
Advisor: Brian Gibbons, Real Estate
Mar 2, 2009  
Owner financing can be a new 1st mortgage for a free and clear home or a wrap around new first (all inclusive trust deed AITD) if there is a current 1st. Other types of seller financing are land contract - installment sales.
To get a simultaneous close on a new note, you must work with a note buyer in your state with their forms and agreements. A negative maybe for the buyer of a home on seller financing is there is a new "tougher" owner of the note that will not tolerate any slow payments on the mortgage obligation.
Without a large downpayment, the buyer of the home has "nothing to lose" and can walk away, so many note buyers want 10% to 20% down.
Without a large downpayment, look at lease options with extra option payments to build a 10% downpayment if you are the seller. 3% option pmt down with market rent and a bit more as extra option consideration, say $200 per month extra will build a 10% downpayment option fund in approximately 24 months on a $200K home. Brian Gibbons
Marshall Ghant
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Advisor: Marshall Ghant, Real Estate
Mar 2, 2009  
what these others have told you is true. But remember the seller is still in control of the property. They can mortgage the property and if they owe on the property and don't make their payments the property can be repoed from them and you loose out. Be sure and have an attorney to prepare the documents otherwise it can be risky.
Sonja Babic
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Advisor: Sonja Babic, Real Estate
Mar 2, 2009  
Verness,

Sellers financing of a note works just as bank financing. If the note gets sold or not doesn’t really change anything for the buyers as condition of the loan remain same. Make sure to have a experienced Real Estate attorney prepare all the documents to make sure everything is executed properly. Good luck!
Radmila Rada Veselinovic
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Advisor: Radmila Rada Veselinovic, Real Estate
Mar 2, 2009  
I am sorry, I won't be able to advise you on this. Not my area of expertise.
Bruce Swedal
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Advisor: Bruce Swedal, Real Estate
Mar 2, 2009  
The seller who carries the note can do anything with it that a bank would do with the note. They can hold it and collect payments, they can sell it (usually discounted) to get cash now and in the case of default they can foreclose on the property. It really is no different than when a bank holds the note.



However one of the main reasons a seller carries the financing of a note tends to be because the purchaser cannot obtain financing through conventional means. If this is the case it severely limits the ability of the seller to re-sell the note and cash out. This causes many loans issued by sellers to be amortized over 30 years but callable after 2 or 5 meaning the purchaser has to pay off or refinance prior to the note being called.