Prices and Terms of Payment

This area contains the following figures and dates: total purchase price, down payment, beginning balance remaining (the purchase price minus the down payment), monthly payment (or annual or semi annual payment, etc.), interest rate stated in terms of an annual rate, the date of the "balloon" payment (if any), and date that the first payment is due.

Purchase Price.  The purchase price (sometimes referred to as "consideration") is negotiated between the Seller and the Buyer.  Properties sold with Seller take back financing often sell for more than properties that are sold for cash because the Seller provides the all-important financing.

Down Payment. The down payment Is usually 10% to 20% of the purchase price. From your standpoint as the Seller, the bigger the down payment the better. It represents money that does not have to be collected in the uncertain future and it also represents the Purchaser's commitment to the property.

 A property sold with no down payment is, therefore, quite risky since the Buyer -initially, at least -is no more financially committed to the property than a renter would be.

 Similarly, non-cash down payments (barter items such as used cars, snowmobiles, applied rent, etc.) and down payments to be paid over time or borrowed from friends or parents are also riskier than those paid in cash out of the Buyer's own pocket. (See "Tips for Selling Property using seller take back financing.)

Balance Remaining.  Initially, this amount is the purchase price minus the down payment. The balance remaining should go down with each monthly payment made by the Borrower. An amortization schedule shows how the balance will be reduced by monthly payments made on time. (See schedule in the "payment Record Keeper" at the end of this manual), to see how the balance is reduced by monthly payments over time.)

Helpful Hint

Amortization schedules can be obtained from banks, real estate offices, and title companies for a small charge. Feel free to call us for a complimentary amortization schedule based on the balance remaining, interest rate, and payment amounts of your mortgage, trust deed or land contract.

The Monthly Payment. The amount of the monthly payment is determined by the amount of the loan, the interest rate and the terms of years (5, 10,15, etc.)  The higher the amount of the loan and the interest the higher the payment. The shorter the term of years the higher the payment.

Loans can be structured, interest only and a balloon (see section on balloons) or for a longer term of years and a balloon. This keeps the Buyer's payment manageable and gets the Seller paid off in the desired time. If you need any assistance in structuring this type of payment plan, please call us.

Helpful Hints

Some people have the monthly payments on their loans serviced by a bank, credit union or escrow company. Be advised, however, that banks, credit unions and escrow companies do not assist you In the collection of your payments; if the Borrower gets behind or defaults this is your problem, they merely provide a bookkeeping function. See the section of this manual entitled "Selling All or Part of Your Mortgage, Trust Deed or Land Contract for Cash" for ideas on how you can sell your contract for instant cash and never have to worry again about collecting the payments owed on your land contract.

Payment Due Date. This is the date when the first payment is due. A "grace period" in some contracts permits the Purchaser a few days each month during which he or she may fail to make payments and not be considered in default. Also, some mortgages provide for a late fee if the payment is not received on time or within the grace period. .

Helpful Hint

Do not let the Borrower get into the habit of making payments later than the due date or grace period. Be polite but insist on promptness.

Balloon Payment.  If your loan contains a clause that reads something like, "The entire purchase price and interest shall be fully paid within five (5) years from the date hereof, anything herein to the contrary notwithstanding," then there is what is known as a "balloon" in the loan (a five-year balloon, in this example).

A "balloon payment" is the term used for a large, final payment on the loan. Balloon clauses usually call for the final payment to be made in 5, 10, 15 years, etc. from the original sale date.

If the Borrower fails to make a balloon payment, this constitutes a default on the contact. (See the section entitled "Default” for a discussion of your options in the event that your Borrower fails to "pop the balloon" by financing the last, large payment they owe.)

Helpful Hint

It is a good idea to notify the Borrower by letter at least four to six months before the balloon is due. This will give the Borrower plenty of time to begin looking for a way to finance or otherwise pay that last, large payment.

For advice on what to do if your Borrower is unable to make a balloon payment, call us. We face these situations frequently and are experienced in exploring all the options available to someone who is owed a balloon payment by someone who can't pay it. We may even be able to provide you with all (or nearly all) of the money owed you by the Borrower without foreclosing or forcing a sale of the Borrower's home.

Interest Rate. The interest rate is stated in annual terms. When recording each payment made, interest is calculated for the payment period (usually monthly) by multiplying the interest rate by the balance due and then dividing this annual interest amount by the number of payments to be made each year. This number (total interest for the period) is then deducted from the payment. The rest of the payment is known as the principal portion of the payment and is deducted from the principal balance remaining on the loan.

Sound confusing? It's really not if you follow an example: Consider a transaction that has a sale price of $75,000, a down payment of $10,000, with a Seller take back loan of $65,000, payable with monthly payments at 10%. The interest portion of the first payment will be $541.67($65,000X.10 + 12) payments per year and the principal portion of the payment will be $85.59 ($627.26 - 541.67). The remaining principal balance on the loan after the first payment will then be $64,914.41 ($65,000- 85.59). (See the "payment Record Keeper" of this owner's manual to see a brief example of how interest is calculated and how you can easily keep records on your land contract.)

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