Since you have agreed to provide the buyer of your "for sale by owner" home, in essence you will be converting the equity you have in the property into payments. The buyer will be making payments to you just as he would to a loan company.
There are two methods commonly used when doing owner financing. One method, the buyer signs a real estate contract with the agreement to make payments to you. He will receive the title to the property after the contract is paid in full. Another method, the buyer signs a deed for the property at the closing and a promissory note along with a deed of trust which allows you, the seller, to foreclose on the property should the buyer default on the payments.
If the seller wants cash paid in one large sum instead of waiting for the payments, the buyer could agree to an early pay-off on the loan. Another possibility would be for the seller to borrow the money using the note as security or the seller could find someone who will buy the note from him. The seller will ultimately get less for the loan by selling than he would if he waited for the payments, but it is an alternative.
It is a good idea to get a credit report on your buyer when you sell your home. If you belong to a credit-reporting agency, you would have the buyer sign a paper giving you the authority to order a copy of his credit report. Once you receive the report look it over carefully. You will want to note any negative reports, such as late payments, judgments, or non-payments.
Get a large enough down payment. Bank loans require anywhere from 3% to 5% down payment, but to the owner financier it is probably too low. As the "for sale by owner" seller you will want the buyer to pay a healthy portion of the equity. The amount of down payment you should get for your home is a minimum of 10% of the purchase price. If you can get more, you will be better off.
The interest rate on the seller-financed note should be higher than a market note. In the business pages of your local newspaper you will be able to find the current market rate on home mortgages. As the seller you should be able to get interest at 1.5% to about 2.5% higher than a bank note, which will make the note easier to sell should you go that route.
You want the buyer to make monthly payment rather than quarterly or yearly payments and the term of the note should only be about 10 – 20 years rather than 30 years. The institution likely to buy your note will prefer a shorter-term loan than a long-term loan.
A note where the buyer is making regular payments on time is much more likely to sell than a note where the buyer is late consistently.
The note should also include payment of attorney’s fee as well as a late payment fee. When you have all these things in place you will get more a better return on your investment even if you should decide to sell the note.
