05 Jul Seller-Financing: How to Have a Good Exit Strategy?
Many home sellers using owner financing deals do not realize that there is a risk on this investment. Going through this type of investment requires some research and knowledge from the expert. Good thing that you are in Note Seekers blog. We will help you how to have an excellent strategic deal out of your seller-financing note. Here are some problems more sellers deal and the solution to it. Check it out now!
Problem 1 – Not checking the credit score history of the buyer.
The credit score of the buyer will tell you how he handles his bills in the past. Does he make payments on time? Did he make some lapses? If he is a good payer, then this is a good indicator that he can also pay on time the seller-financed note you have from him. It has a huge factor in your future investment in this real estate niche. But sadly, many home sellers never check this record when offering an owner financing deal. In the end, you may end up not receiving the payment in the future.
Solution: Page application for credit score.
You can ask your buyer to fill out an application form which grants you to pull out credit information. You can also ask the buyer to give you their credit score report before making the deal. The best credit score to accept an owner financing deal is above 650. Avoid accepting any below 650 scores.
Problem 2 – Charging the buyer with a low-interest rate.
Every penny today counts. You don’t know what tomorrow holds. Just a simple scarcity of food can escalate to a dollar in a matter of a minute. How much more in a year or two? This is why the value of money will play a huge role in many investors when it comes to pricing. Many owner financing deals only charge 5 percent or less as interest rates. What if a potential investor demands a 10 percent? Many investors will likely to buy your note if it has high-interest rate.
Solution: Charge two to four percent rate above any bank loan demands.
For a similar loan like owner financing, as a home seller, you can charge the buyer just a margin of two to four percent above any regular bank loan. Just make sure you consider the location of the property, its condition, credit and the down payment you receive from the buyer. You can justify how you put the interest rate based on those factors.
Problem 3 – Not asking a high down payment.
The equity of the buyer on each transaction is determined through the down payment he made for the loan. The greater the buyer’s equity, the lesser the loan turns into default. If a buyer put a big investment on the loan, it is likely he would turn his back on the mortgage. That is why many banks require at least 20% down on every loan. But some sellers are desperate and ends up accepting no down payment at all. Sad to say, these buyers are less serious than the renters of your property. At least when you rent your property, there is a security deposit.
Solution: Charge at least 20% down payment.
This is for your protection, so your money and property won’t go to waste. Plus, the higher the down payment the best exit strategy you can have with your promissory note.
When it comes to valuing your owner financing note, these three problems should be avoided. If you want to be compensated well in the future, make sure you avoid the problems and follow the solutions.