Tips For Selling Property Using Seller Take Back Financing (contd.)

The Monthly Payment.  The amount of the monthly payment is determined by the amount of the loan, the interest rate and the term 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.

Taxes and Insurance.  Lending institutions generally require the buyer to pay one-twelfth of the estimated yearly real estate taxes per month and one-twelfth of the estimated insurance costs in addition to the monthly payment. At the end of the year, they then have the money on hand to pay the taxes and insurance. This is also the wisest thing to do. Since the loan will run over a period of time, there is always the chance that property taxes will be raised, so be sure to include a clause that provides for increasing the payment when this happens.

Underlying Debt.  If you currently owe on a piece of property, you do not necessarily have to payoff your present land contract or mortgage. Instead, you can sometimes continue to make monthly payments in the required amount just as before. (The original obligation is often referred to as "underlying debt" since it "underlies" - is superior to and existed before -the debt owed to you on the more recent sale of the same property.) However, check the mortgage you are making payments on, to see if there is a so called "Due on Sale" clause requiring you to payoff the debt if you sell the property.

Amortization.  How long a loan is scheduled to run is referred to as the amortization. The amortization depends on the size of the contract, the size of the monthly payment, and the interest rate being charged. (The higher the interest rate and/or the smaller the monthly payment, the longer the amortization will be.)

For you, the Seller, the shorter the contract the better. To shorten the length of the contract, you can increase the down payment and/or increase the size of the monthly payments. Contracts with 10-to 20-year amortizations are common and are preferred to contracts with 30-year amortizations.

You may also consider including a "balloon payment" due in 5 to 10 years. A balloon payment means that the full amount owed will be due at that time. Even if the balloon is not "popped" (paid in full by the Borrower), it gives you an opportunity to increase the monthly payment and the interest rate (or both), as well as set a new balloon payment one or two years down the road. By the time the balloon payment becomes due, such increases are generally easily accommodated by the Borrower and may be a preferred option to foreclosure.

As a service both to you and the Borrower, don't set balloon dates that are too near. One and two year balloon clauses are often unrealistic and create unnecessary difficulties for both you and the Borrower.

The Borrower’s Credit-worthiness.  Just like any lender, you have every right to information that shows the Borrower has an adequate source of income to pay their obligation.  Get references, find out where they work, annual income, and obtain a credit report showing how promptly current debts are being paid.  If selling to a person with less than a commendable credit record, insist on a large down payment or find another Buyer.

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