This week, we're going to continue the discussion we started last week by talking about some of the things you need to be aware of when creating a seller-financed or owner-carry-back mortgage note.

Once you have located a buyer for your property and qualified them, have agreed upon a fair sales price and set the terms of the sale, and have carried out any necessary inspections, you will need to prepare to close the sale on your property. We always recommend that work with a qualified real estate attorney in order to make certain that your interests are protected. Your attorney will make sure that all necessary papers are in order and that nothing is overlooked which might endanger your investment.

If the property is being sold to more than one person, both parties should sign the note. For instance, if you are selling your home to a married couple, both the husband and wife should sign the promissory note. If your property is being sold to a corporation, you should make certain that the note is personally guaranteed. (You should also obtain and examine the credit report of the personal guarantor.) This helps to protect you from in the event of a default on the note and helps to remove the potential for fraudulent activities.

If you are creating a second mortgage, with an institutional lender providing the first mortgage, you need to make sure that your mortgage is recorded properly to comply with your local laws. Your real estate attorney should be able to help you with this.

You will also want to make sure that your second mortgage contains wording which makes a default on the first mortgage a default on the second mortgage as well. You should make certain your mortgage allows to check on the payment status of the first mortgage, which will require language to that effect written into the note.

Another potential problem you need to be aware of, if you are creating a second mortgage behind a institutionally secured first mortgage, is that the lending institution allows secondary financing. Some of them do not, in which case your seller-financed second mortgage would actually be a breach of the first mortgage contract. Being unaware of this type of restriction can certainly waste a lot of your valuable time.

Another "red flag" in creating an owner-financed mortgage occurs when the property value is far less than the sale price of the property. While you may get away with this if you are intending to hang on to the note yourself and collect all the payments until the note is finally paid off, you will find yourself looking at a huge discount on the note if you ever decide you need or want to sell the note.

This interest rate is another thing you'll want to consider very carefully when structuring an owner-financed note. While it is true that a higher interest rate will earn you more money over time, and will also make your note more valuable if sold, you need to be aware that there are laws governing usury and predatory lending practices. If you go afoul of these laws, you could very easily find yourself in a great deal of legal "hot water". Again, this is an area where a competent real estate attorney will be able to guide you. You can also find information about the current interest rates being offered by institutional lending facilities very easily and use these rates as a guideline.

On the flip side, you also want to be careful about offering an interest that is too low. The interest rate on your seller-financed mortgage should be fairly close to the interest rate being offered in the market. If it is too low, you will find yourself taking a large discount for your note when/if you sell it.

We hope you have this information useful. If you have any questions, please feel free to contact First Class Cash Flow Handlers for additional information.