Seller Held Notes Are Ideal for a Short and Sweet Mortgage? |
| Seller held mortgage notes, trust deeds and other real estate instruments work a little differently than counterparts issued by large institutions. An institutional mortgage functions according to consensus standard laid out by the industry. These standards aren't always logical and don't do right by everyone, but they're fairly consistent across reputable financial institutions. |
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Seller held notes are about the relationship between the lender and the borrower, including their individual needs. A successful seller-funded note is attractive to the borrower in a fashion that also fulfils the needs of the lender. These include the need for reliable repayment and a loan that meets practical investment goals.
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| As a result, seller held notes are ideal for shorter mortgages in two respects. First of all, prospective borrowers need to possess greater financial security to make larger down payments and monthly payments than they would for a note with a longer term. As the seller, you should consult with a real estate lawyer to screen qualified borrowers, but generally speaking these stricter qualifications screen out the type of borrower who would be more of a problem, as these often cluster toward the bottom of the market. This helps meet your requirement for reliable repayment.
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(It should be said that people with smaller budgets aren't necessarily worse at handling their finances, but more of them tend to be at a life stage where they're not as skilled at managing their finances. Compare your financial skills at the beginning of your first mortgage compared to now, for example.)
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| Second, it generally isn't practical for a private individual to finance a long term loan, and it's certainly less rewarding from month to month. The fact is that you've almost certainly decided on seller-financing to enjoy the full investment sooner rather than later.
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| Seller held notes work for these shorter mortgages because of the features you can build into the loan, tailoring it to meet the needs of all parties. For example, you may build in a balloon payment to reduce the borrower load for monthly payments, as long as you're confident that he can pay of the balloon when it comes due. This is especially desirable in cases where the borrower expects to sell the property himself in a fixed period of time, applying the proceeds to the balloon.
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| In all cases, the secret to a successful, short term seller-held note is to know your borrower. Investigate the borrower thoroughly to ensure his or her reliability and you can feel more confident with a short term note. Even if a longer term is the best option you can always cash out a properly administered mortgage or trust deed. All you have to do is sell your note. The better you've managed it, the smoother the process will be.
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