Five Things to Look for When You Plan Seller Funding

As mortgage note buyers we frequently get questions about where to start with seller funding. Depending on your point of view it can either look incredible difficult or dead simple. Some people treat two party contracts as the simplest thing in the world, while others are terrified of missing an obscure point of law.

Avoid both extremes. Don't get scared, but do behave with caution and diligence. Here are five things you should look out for when it comes to planning your own seller-held mortgage note investment.

A Real Estate Lawyer: This one is more than a friendly tip – it's an absolute necessity, so important that we feel compelled to include it in virtually every article about seller funding. You should only act under the advice of a qualified real estate lawyer. By “real estate lawyer” we mean a specialist who primarily works in the real estate field, not your cousin who went to law school, just works in contracts and read a few books about property law once. And if you are a real estate lawyer? Get somebody else to take a second look at your papers, because nobody's perfect!

The Borrower: This is another point so important that it bears constant repeating. Do a thorough investigation of your borrower's prospects! He or she may not need to meet the requirements of traditional borrowers, but do need to be able to make note payments at every step in the loan's life cycle. Looking to the future is especially important for balloon payments. Don't rely on a promise that the borrower is due some big future windfall, and ensure that his or her income comes entirely from legal sources unencumbered by garnishments to prevent third party seizures.

Zoning and Local Laws: Every town and city has its own zoning and legal quirks, from limited property rights due to a nearby resource to strange zoning that you'll need to change or ignore to make a property viable. One of the most important things to double check is your real property lines, instead of the rough agreements that happen between neighbors. If you accidentally misrepresent the true boundaries of the property you're selling . . . that might cause serious problems.

Insurance: Make sure the property is properly ensured throughout the length of the loan. The last thing you need is an accident depriving you of your investment.

The Local Real Estate Market: Finally, take a look at the local real estate market to value investment properties, build a profile of possible buyer-borrowers, and understand which properties are in demand. If the demographic skews younger a rental property might be a better idea. If the neighborhood features settled families, new properties are in high demand and you should look for established professionals.