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Real Estate Note Creation

Over the last several years, interest rates have been fairly low. Owner financing has been pretty quiet. All of the financial institutions have been running around trying to get new customers by relaxing their lending criteria and trying to compete on the rates. Almost everyone could qualify for a loan for a home or business. The climate still exists today, however this sector is shrinking because of the steady climb in interest rates. Foreclosures seem to be matching the pace as well.

That being said, there are still a plethora of real estate owners who are open to owner financing on their properties. There are many reasons why they do this.

The seller may want to defer taxes on the gains. Some sellers want to bypass the closing costs and fees associated in dealing with banks and lending institutions. The seller can also create payment schedules and terms that are very flexible. Also, the buyer may not have strong credit and may have been turned down by the same banks and lending institutions.

Sometimes sellers want to keep it in the family, perhaps with a divorce agreement or a sale to a family member.

Although these real estate notes can vary greatly, they always include interest-rate, payment amount, terms, payment date, etc.... these are all packaged together in a real estate note, sometimes called a promissory note or installment note.

Although the seller almost always would like to receive all of the cash up front, circumstances may dictate the facilitation of this type of instrument.

Just about any type of investor will buy these types of real estate notes. Generally, the note is discounted to provide a profit for the buyer while at the same time providing immediate cash to the seller who may need this for emergencies, special investment opportunities, family needs, etc. The amount that the note is discounted can vary greatly from note to note. But rest assured both parties almost always benefit from these types of transactions.

If you are getting ready to create a real estate note, here are some important things to think about.

Tried to get as much of a down payment as you possibly can without putting the buyer into a dangerously precarious situation financially.

Try a to find a buyer with a decent credit score. Mid 600s are pretty good but be prepared to take a larger discount. Also, just because the buyer may have a lower credit score does not mean that they will not make timely payments or act responsibly.

Always tried to keep the rate of interest you charge the same or higher than the current bank rates.

The shorter the term of the real estate note, the better. A 1-year note is worth much more than a five-year note.

Real Estate Note article