1. The down payment/equity in the property – A nice down payment and/or chunk of equity really helps the value of a note as it lowers the perceived risk for a private note buyer.
2. The amount of seasoning on the note – As with equity, a long period of seasoning lowers the perceived risk for a mortgage note buyer, therefore increasing the note’s value.
3. The credit of the borrower – Decent credit for the borrower not only lowers risk but it may even make or break whether a note buyer will even consider purchasing the note.
4. The amortization period – Long amortization periods make for bigger discounts as note buyers are discounting future cash flows. The further out incoming cash is, the larger the discount. It’s simply a function of time.
5. The interest rate of the note – If you had 2 notes that are identical in every way except for the interest rate, the higher rate note (depending on the difference) will be more valuable. This is due to higher monthly payments that when discounted, result in a higher present value.

So when estimating the value of a private mortgage note, you need to take into consideration the above elements of the note. Better yet, if you’re creating or considering creating a note, be sure and use your knowledge of these drivers so as to create a much more valuable mortgage note. The result will be more money in your pocket, even if you don’t sell the note.

1. Not monitoring whether the borrower is current on their property taxes – In a worse case scenario, this mistake could result in a total loss if the home were foreclosed on my the local municipality and sold off before the note holder even knew it.
2. Not insuring that the buyer is current on their homeowner’s insurance as well as has sufficient coverage – If the borrower let their insurance coverage lapse and had a fire, the note holder could again end up with a worthless note. Note holders should not only monitor the borrowers insurance coverage but should be sure they are on the policy as the mortgagee.
3. Not physically monitoring the property – Many property sellers no longer reside in the city the property they sold and owner financed or they live across town. As a result, they rarely if ever drive by the home which is the asset supporting the note they hold. What can and has happened on many occasions is that the borrower may have moved out and is renting the property out to a friend or family member who has a lot less incentive to maintain the property. This could also cause problems if a major insurance claim were made since the property is no longer owner occupied, requiring a different insurance policy.
4. Allowing the borrower to pay their mortgage in cash each month – If the note holder never needs to sell their note, this may not be a big deal. However, if the note holder ever needs to sell their note, they will not have proof of the servicing of the note. This makes a note worth much less and giving the borrower a receipt will not suffice.

There you have it, four mistakes to avoid in order to a) protect the value of a private mortgage note and b) make the note worth more money if you ever need to sell it.

1. Not pulling credit – Sellers who don’t pull credit are just asking for trouble down the road. I’m not even saying you shouldn’t sell to someone with blemishes on their credit, particularly if the problems occurred 2 or 3 years back. If you ever want to sell the note, the note buyer will pull credit. If your buyer has terrible credit, you probably won’t be able to sell the note at all or at best at a much larger discount. Also, if you don’t get social security numbers in order to pull credit at the time of the sale, there is a good chance that the buyers won’t give them to you later as they have little to gain from this.
2. Allowing a 30 year amortization with no balloon – Unless you only want the income and plan to never sell the note, you could do this but who knows what might happen 10, 20 or 30 years in the future. Even if this were the case, you could do a 30-year amortization with a 5 to 7 year balloon and when the balloon comes due, extend the balloon period for 5 more years. This way you have options otherwise, if you ever need to sell the note you will get a much better price as a dollar is worth a lot more in 5 years than 30 years.
3. Charging a low interest rate – Property sellers offering seller financing should realize that they are in the driver’s seat when it comes to the terms of the resulting mortgage note. They should not be charging an interest rate that is at market (traditional mortgage rates) or worse, below market. Charge a premium over market of 2 to 4 percent. If you ever need to sell the note, you’ll get a much better price.

There you have it, 3 mistakes to avoid when offering owner financing in order to sell your home or other real estate.