Thirty and forty years ago it was not uncommon for a seller to finance his buyer, in other words for a seller to carry the note for the buyer. In fact, many of those contracts were still being created 20 years ago, but with a mortgage market that became intensely competitive and focused upon getting everyone possible into a home, seller contracts faded.
Seller contracts in Sequim and Port Angeles faded for two specific reasons. First, buyers could find lower interest rates and higher loan to value ratios than sellers could reasonably offer for the risk. Second, sellers were favored by IRS treatment, which has reduced the capital gains tax threat for anyone selling their own home.
For a retired person who wants to sell their own home (and especially a rental or investment property), it might be a great time to consider financing the buyer.
In Washington there are two ways to carry the contract for a buyer:
- A Deed of Trust and a Promissory Note (see the deed of trust foreclosure process); or
- A Real Estate Contract, aka Land Contract (see the real estate contract forfeiture process).
Provided the seller still does his due diligence on the buyer (credit report, job history, references), and provided the seller gets a reasonable down payment, a seller can get a higher interest rate than a mortgage broker. The higher interest rate is justified, because it is a private contract and the seller bears the risk of default and foreclosure (or forfeiture in the case of a real estate contract).
The risks can be quite acceptable, because the seller is well secured by the real estate itself. If the seller has to foreclose, he probably makes even more money, since he keeps the down payment, all the monthly payments, and then re-sells the house at what may be an even higher price (or at least the same price). Of course, there may be some repairs required after a foreclosure, but it can still be lucrative, and in a market that has slowed down, this could be the key to selling the house now!
Of course, if the seller needs lots of cash now, he does not have this option. One last tip here. A seller can sell the note and promissory to a commercial note buyer at a slight discount. This would be a cash out (talk to your CPA about possible tax consequences). How much of a discount? That depends on the interest rate, the security, the buyer’s credit and so on. The competition for good secured notes has heated up in the last 10 years, and now some notes are selling for only a 1% to 3% discount. That’s pretty darn good. I used to work for the largest note buyer in Washington, and the discounts we got then were much higher (often 30%). It’s good to know your options in today’s changing real estate market. Be careful in all of this. Get good professional advice, because as always, there are Traps for the Unwary.
Last Updated on September 1, 2019 by Chuck Marunde
Hello Mr. Marunde,
I’m considering making an investment to become a note broker. I have two companies I’ve though about working with, but I’m not sure about the demand in this market or if it’s saturated already. As a former Mortgage Loan Officer, I can see a need but are there really that many people out there with a promissory note backed by real estate?
I’m also aware that these company’s basically exchange one lump sums for future payments. I guess my question is, is this venture viable enough to consider.
Thank You,
Todd
Todd, that’s a good question. Is this market large enough to have a note buying business? Thirty years ago there were a lot of private notes, but the market changed and loans got easier to get, and sellers accepted fewer and fewer personal notes, and now most sellers don’t even know it may be an option. We don’t have any way to track the percentage of private notes out there, but my best guess is 2% to 4%. That’s not a very big target market. But watch this: there may be an entirely new market opportunity to buy notes at a discount from banks or their REO’s. It’s already happening at the institutional level. I heard a large bank sold their loan portfolio for about 58 cents on the dollar.