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October 19th, 2009 by Dawn Rickabaugh
Last week’s #1 Deadly Mistake was to take a small down payment.
This week we’ll talk about Deadly Mistake #2: Don’t ask for the buyer’s SS# and don’t run a credit report, (or, if you’ve actually done these things, try to lose the credit application and report so it’s unavailable to give a prospective note buyer).
There have been a few times I’ve been able to offer a really good price for a note, just to have the deal fall apart because the note holders couldn’t come up with social security numbers for the Payors.
The investors out there that will pay the most for your note (ask you to take the smallest discount) will want you to have a Social Security number on the buyers (note Payers), and they’ll want their FICOs to be 620 or above.
There are note buyers out there that will buy your note even if you don’t have the buyer’s SS#, but they’ll probably be offering you a LOT LESS for your note.
And even a great note by all other accounts will be hard to sell if the Payers’ credit scores are low. It’s almost impossible to sell a note where the FICOs are coming in below 600.
Why? Because, statistically speaking, the lower the credit score, the greater the chances that the buyer (note payor) will default.
Smart tip: Have the buyer provide their SS# by filling out a credit application (1003) and signing it, run credit, and if it doesn’t come back above 620, run from the deal, unless . . .
There are always ways to compensate for the risk of lending (your equity) to a buyer with poor credit, but still, it’s a tough conversation with credit scores in the 500’s.
If you’re going to do the deal anyway, be sure to take a larger-than-average down payment, and be willing to season the note (collect at least 12 months of payments) before trying to sell your note if you want a decent price for it. You might even want to work with the Payors to improve their credit scores before you put your note on the market.
And even if you’re not thinking of selling your note, don’t you want a strong investment that doesn’t have you addicted to Milk of Magnesia? Don’t you want to leave a good asset to your heirs and beneficiaries?
Putting your transaction together in a way that will make your paper (note) valuable on the secondary market, will automatically assure you that you’ve placed yourself in the most powerful position possible, no matter what happens down the road. It provides the most flexibility long term.
If the down payment is small, and the buyer’s credit scores are low, then I HIGHLY RECOMMEND that you consider using the Title Holding (Land) Trust. (But only if you don’t plan on cashing out. You can’t sell a beneficial interest in a trust the same way you can sell a note).
This excerpt is taken from “Seller Financing on Steroids: Pumping Paper for Power, Peace and Profits,” a guide that can be downloaded for free at: www.NoteQueen.com.
Always consult with your CPA, tax attorney and/or financial advisor before selling property or paper.
Dawn Rickabaugh is a RE broker with expertise in seller financing and RE notes (trust deeds). www.NoteQueen.com 626.641.3931