We have arrived at a time when property owners, investors, realtors, and other entrepreneurs have realized that their properties can sell faster by seller financing and still getting the cash they are looking for on the sale.

Now-a-days it is a commonly accepted practice when a property is sold to combine the sale of the property together with a seller-financed note. It is called “simultaneous closing” and is the way that many note deals are getting done.

Two important factors when structuring this type of sale are that:

1. The note can be easily converted to cash
2. The discount on the note is kept low.

Several key factors are considered when note investors, like ourselves, are looking into purchasing the newly created notes.

The type of property

When considering the type of collateral that is securing the note it is necessary to consider what kind of improvements there are on the property. A single family home is usually the easiest type of real estate to get financed and sell. Vacant land would be considered much more risky as collateral.

A lender has different levels of exposure depending on the type of collateral. Land or commercial property would be less acceptable as a risk than residential property. Various types of residential property are evaluated differently as well.

A mortgage lien on a condominium or mobile home or townhouse is less desirable than one on a single family detached home. The single family home is the most desirable type of collateral for an investor and is considered the easiest to buy and resell for the investor in private paper.

If you want to maximize the amount of cash you can receive; that is, having the largest universe of potential note buyers and minimizing the discount required on the sale, then a properly structured first position mortgage on a single family, owner occupied detached home is the type most investors will aggressively buy.

Most of the time a note payor that lives in his home as the primary residence will keep up the condition of the property and be more timely in the payments on a note than a property investor that is struggling to keep up with repairs, bills and collecting rents.

Recent or seasoned note

A note with a documented payment history is less risky for the cash flow note buyer to buy. One that is newly created raises a concern about how the note will be paid.

For payors with lesser credit there may be no alternative than to allow for several months of payments to make the note marketable. Even a payor with good credit may have over extended themselves when buying the property and even a few months of payments can lessen the concern about the ability to make the payments for the note buyer.

It is important to clearly document the payment history of payors with marginal credit. After several months of payments any concern about their credit history will be offset by their payment history on the note.

Down payment from the buyer

A home buyer that makes a down payment will be more stable for a note buyer. They are more likely to fight their way out of a problem before losing the hard earned cash they have invested in the property. 5% cash down is the minimum that cash flow note buyers require from a residential property but from the viewpoint of a note buyer it is preferable to see that a buyer put 10% down compared to a situation where little or no down payment is committed. It is also important that you document the deposited down payment clearly and conclusively.

Buyer’s credit profile

Potential property buyers with a demonstrated history of paying their credit obligations will be considered a better risk for note buyers and will command higher prices for the note than on those with a tarnished payment history. A buyer with a poor credit history can still be a good choice depending on where the problems were. A buyer with issues like a recent bankruptcy, foreclosure or judgment would be a larger issue than someone that had problems due to past medical payments. Are the problems recent or long ago? Has the buyer re-established positive credit?

Because there is more inherent risk associated with buying a cash flow note without an established payment history, you will want to choose buyers for your property with a better credit history. When dealing with newly created notes or real estate mortgages, try to look for prospective buyers who have credit scores in excess of 600 or 650. The alternative will be to potentially accept a larger discount on the sale of your cash flow note or allow the note to season for several months to demonstrate a track record of timely payments.

The terms of sale

When selling to riskier candidates you might want to limit them to a lower starting loan to value threshold for the mortgage in the 75% LTV to 80% LTV range. Those with less risk allow you to start higher, usually in the 85% LTV to perhaps as high as a 95% LTV range.

The same would apply to the interest rate. A higher risk buyer would require a higher rate in the 10% to 11% range. A lower risk buyer could be offered a rate in the 8.5% to 9.50 % range. In addition, the mortgage and note should contain a 30-day default clause, have acceleration remedies, contain no prepayment penalty, have a late fee provision, a due on sale clause, and non-assumability clause.

The whole package

By understanding how these factors influence the process you can tweak the proposed structure for the note in ways that will provide you the maximum amount of cash you receive for your note while reducing the note discount when selling it to a note buyer/investor.

Carefully structuring and optimizing your seller financed note to the buyer of your property can save a lot of frustration and headaches when trying to sell it to a cash flow note buyer. Properly done, the note can often be sold together with the property at closing. Consider the above variables carefully and try to be realistic in your expectations and you will save time and money in the process.