Question: I've been trying to sell my house for a year. Every potential buyer has been hung up in today's mortgage challenges. I don't really need the proceeds of the sale right now and there isn't a mortgage on my property. I've heard about seller financing and "holding the paper." What's that about?
Answer: Seller financing is becoming a more common inducement to facilitate a real estate sale in today's market. Seller financing can take many different forms including lease with an option to buy and wraparound mortgages. "Holding the paper" usually refers to a seller financing option more accurately called a purchase-money mortgage.
When you as the seller accept a note that is secured by a mortgage or deed of trust on the property for all or part of the purchase price, you have entered into a purchase-money mortgage agreement. This means that, based upon the terms of the mortgage, you will receive payments over an agreed upon period of time until the mortgage is satisfied. The ownership of the property is transferred to the buyer at the time of the closing but the property is considered to be the collateral of the note.
Notes secured by a first or second deed of trust or mortgage are negotiable instruments and have a cash value. The true value is usually lower than the face value of the note. The difference between the cash value and the face value is the discount.
Brokers can sometimes find private investors who buy these notes, as long as the equity in the property and the credit worthiness of the buyer meet the investor's standards. Equity, the difference between the fair market value of the property and the total amount of the loan, is the primary factor in determining the marketability of a note. The smaller the equity, the greater the risk for the holder of the note.
The discount is the second most important factor. This must be sufficient to meet the required return on the investor's cash investment. The discount to reach the investor's required yield depends upon four factors. The first is the interest rate that the note demands. The second is the date that the remaining balance becomes due and payable in full. This is called the due date. The third factor is the amount of monthly payments expressed as a percentage of the face value of the note. This is called the payoff rate.
Finally, the investor will want to assume that the note is transferable.
Entering into an agreement such as a purchase-money mortgage is an important decision with many ramifications. Consider consulting a real estate attorney before deciding that this is the right seller financing option for you.
Attorney Sylvia Heldreth is a certified specialist in real estate law. Her office is located at 1215 Miramar St., in Cape Coral.
This article is not intended as specific legal advice to anyone and is based upon facts that change from time to time. Individuals should seek legal counsel before acting upon any matter involving the law.