How to Structure Real Estate Notes
If someone wants to purchase your property but does not qualify for a traditional loan, you can structure a real estate note to finance the purchase. According to The Free Dictionary by Farlex, a real estate note is a written, signed, unconditional promise to pay a certain amount of money at a specified time at a specific interest rate in the exchange of real property. You either can structure your own real estate note or hire a mortgage broker to structure one for you.
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Instructions
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Negotiate the loan amount. Get a buyer's written permission to obtain a credit report from one of the credit bureaus, Experian, Equifax or TransUnion. Use this data to help you decide how much you want to loan. Note that while there is no standard down payment required, many sellers want a sufficient down payment to protect their equity, according to Elizabeth Weintraub, author of "Owner Financing in Real Estate."
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Negotiate an interest rate. Be careful of usury laws in your state when deciding on an interest rate, according to George Adair, president / broker of Omega Capital Management, Inc. Consider employing a mortgage broker educated in current laws to write your note as new legislation is regularly passed by state and federal governments to protect consumers as a result of the mortgage meltdown of the late-2000s.
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Decide on Terms. Note that most loans are at least partially amortized, meaning the buyer pays both principal and interest with each monthly payment. Note that if the buyer plans to refinance your real estate note as soon as he qualifies for a traditional loan, you may want to write the note for 3 to 5 years. Write it for 10, 15 or even 30 years if the buyer intends to keep the loan. Remember that new legislation has made it more difficult to charge prepayment penalties to borrowers, but you should write in a late fee of 10 percent for any payment that is received 10 days after it is due. Consider securing your real estate note with a deed of trust that is recorded in the public records.
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Service the loan yourself or hire a loan servicing company to collect payments, write late letters and prepare year-end tax statements for a nominal fee. Purchase an accounting software program or maintain a general ledger if you plan to service the real estate note. Check online for loan servicing companies if you want to delegate this task.
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Tips & Warnings
Check with current federal and state legislation prior to structuring your real estate note. Make sure your real estate note is legal and enforceable.
Hire a mortgage broker familiar with seller financing or consult a real estate attorney to structure your note for you when in doubt.
Note that you can purchase real estate note templates online for a fee.
References
Resources
- Photo Credit signing a contract image by William Berry from Fotolia.com
