Commercial Note Buyers
Buyers of Commercial Owner Financed Promissory Notes

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Seller Financing Note Creation Tips

If you are creating or thinking of creating a seller financed real estate note through seller financing, there are a few things you would be well advised to consider if you want to sell a note for top dollar. I highly recommend you consider these suggestions even if you never plan on selling your note as you never know what the future holds, particularly considering the length of time most real estate notes are contracted for. Following are my top suggestions for the terms of a note for getting the best price.
Before I get into the terms of your note, there are two related items that will also have a big effect on how much overall you walk away with from selling your note. I cover these and other items in more detail in my owner financing tips post. These are down payment and credit of the borrower. You want to get as large a down payment as possible as you end up with more cash in your pocket overall (smaller note amount to take a discount on) and you lower the perceived risk by a note buyer, whether we are talking about commercial note buyers or residential note buyers. This should lower the discount rate applied to your future note payment income stream. For borrower credit, you should ask the borrower or borrowers if both will sign on the note to provide a tri-merge credit report. Look over the report for recent bankruptcies or foreclosures, which can be a problem in not only what you can receive for your note but maybe even whether you can sell it or not. As to credit score, look for a middle (of the three) credit score of at least 600 and ideally 650. Obviously the higher the better in what you get for your note if you need to sell but also in the risk for you that the borrower may default.
Now to the terms. The private note buying industry purchases owner financed notes at a discount. This discount has two components, the discount rate applied to the future income stream and the actual discount calculation on this income stream using the note buyers’ discount rate (percentage). These calculations make interest only (non-amortized) notes less favorable to a note seller whether it’s with interest only commercial note buyers or interest only residential note buyers so just be aware if you want to sell an interest only note, it will lower your net amount. So to improve the price of your note, set the interest rate as high as you can and set the amortization as short as possible. Both of these note components affect the monthly payment (higher is better) amount which raises your net amount and the shorter amortization period also means the future income stream being discounted is earlier meaning the discounted dollars to current are better for you the seller. Think about it without all the financial calculations. Would you rather have a thousand dollars in 5 years or 10 years, 10 years or 30 years?
So there you have it, tips to creating a higher value real estate note. Good luck.

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