A. Interest Rate: Higher the better, but not so high as to gamble with usury law violations. Many states have usury laws that govern personal, consumer loans (e.g. WA has 12% “do not exceed” rate); however not all states have usury laws. So check before you structure your deal. Don’t know what a good interest rate is for your deal ? Ask a mortgage person. Or residential agent. They live with this on a daily basis and they’ll give you some good advice.The lower it is, the poorer deal for the note buyer and he’ll just make up by charging you more of a discount when he buys it.
B. Length of Note: Again ask what normal, going term is currently. Probably typical length is 5 years currently, or maybe 10 to 25 but with 3 to 5 balloon. Important to the note buyer, because he doesn’t want to wait forever to get repaid. But not too short...I’ve seen notes with 6-12 months go begging for a buyer because the note buyers feared the property buyer couldn’t pay it off in that time period.
C. Balloon: Again, the note buyer wants to have this on his books for no more than 3-5 years, so even if the new note has a 20-25 year amortization period, to keep the monthly payments within reason, the note should have a 5 or so year balloon for full payoff in that time.
D. Loan-To-Value Ratio: Total loan-to-value, of both 1st and new 2d, must be considered, and typically not to exceed 75% of provable value, for the buyer of the new 2d to be seriously interested. Also, many 2d buyers want ratio of the 1st to the 2d to be no more than 4:1. Translation: they don’t want a little 2d that’s behind a huge 1st, which might have a much bigger RATIO than 4:1. (e.g. $100,000 1st and $10,000 2d would be 10:1; but $30,000 1st and $10,000 2d would be 3:1). Do some shopping and learn what note buyers would accept, before you structure your property sale. Of all the elements listed here, this is probably the one most ignored by note buyers. It they like everything else, they might not care at all about the ltv.
E. Will the Lender on the 1st Permit the 2d You’re Willing to Carry?: Frequently the lender on a new institutional loan inserts a clause to the effect that it is permitting NO carryback loan by seller, and you’d better hammer this out up-front if you’re expecting to carry a 2d and expecting to sell it.
F. Security for your 2d: Normally should be a recordable Deed of Trust, or mortgage in non-D/T states, drafted to comply with laws of property situs (where it’s at !) to secure payment of the 2d. And to be recordable in Deed Records it should normally be signed, and acknowledged by notary. Further it should normally have provisions to the effect that any default on buyer’s part in payment of his 1st note is also a default in the carryback 2d. And, although frequently omitted, it should contain explicit, written permission for its holder to verify current status of the 1st.
G. Buyer’s Identity: If selling to husband and wife, make sure they ARE husband and wife and have both execute note and Deed of Trust individually. Don’t permit one to sign for both. Not permissible or binding on spouse in every state and you don’t even know for sure they’re still married. And if you’re selling to corp. or LLC, make sure you’re also getting the buyers on the note and deed of trust INDIVIDUALLY. I see too many notes where ONLY the corp/LLC is on there, and the people signing, sign ONLY as corporate officers-this doesn’t bind them individually and your note isn’t going to sell to note buyer.
Hopefully this outline will be of assistance in helping the reader structure his note so it will work and will sell.
And finally, if in doubt about any of these elements in your deal, give me a call and I’ll help you structure a note you CAN SELL.
Prosperitas Financial Services
John J. Merchant, JD
2522 N. Proctor # 222
Tacoma, WA 98406
Posted: 7/18/2001 3:41:09 PM