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December 1st, 2009 by Dawn Rickabaugh
Deadly Mistake #7: Don’t keep a careful accounting of the note payments you receive
Let’s pretend that you have a nice juicy note you’re trying to sell . . . you got a 20% down payment from a buyer who had a 700 FICO, the loan amount was $100,000 at 12% interest. Fully amortized over 20 years, you’re supposed to be enjoying $1,101.09 a month.
Wow, isn’t that great? Wouldn’t you be able to sell that baby for a nice fat price? C’mon . . . with an average discount, someone’s looking to bag a 15% return, for heaven’s sake!
Yeah . . . unless the payments don’t come in on time. You could have a 42.9% interest rate, but it doesn’t matter, the return is irrelevant if the money isn’t flowing.
When someone buys a note (or if you are holding a note for retirement income) the most important thing they want to know is how likely it is that future payments will continue to be paid as agreed.
Most note buyers (the ones that will give you the best price) are not buying hoping they’ll get a chance to foreclose and own the property. They just want a predictable return.
That’s why payment history is so important to document.
Now, if you’ve got a note that’s in default, the only people who will buy it are the ones that wouldn’t mind owning the property securing the note, and they’ll ask you to take a really steep discount for rescuing you from the foreclosure scenario.
Smart tip: Have a note servicing company service your note if you’re too ADHD to keep flawless records yourself.
Document when the payments come in, keep copies of cancelled checks and bank statements so you won’t have any trouble proving that you’ve got a ‘performing asset.’
And it’s really not a bad idea to have your note serviced by a third party note servicing company. It’s not expensive, and your payment history is flawless, which is very handy when you go to sell your note. They also file any relevant documents for you, such as 1098s and 1099s.
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.
So, over the last 7 weeks we’ve covered the 7 biggest mistakes sellers make when they carry paper, and how to avoid them.
The markets continue to be unpredictable, so it’s important for buyers and sellers to be equipped with alternative, but safe ways to continue to put winning real estate solutions together.
And if you’re a real estate professional, wouldn’t you like to put or keep more transactions together? We can do our part to keep the cogs greased in our economy, and preserve the dream of home ownership by helping buyers buy and sellers sell, regardless of market conditions.
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