If you’re taking back a second you should definitely be getting your price unless you’re charging a decent interest rate. What’s a decent interest rate? I dunno, do you have any debts – like credit cards? Charging 9.5% interest when you are paying 12% on some debts is a losing proposition … unless you think you’re getting a better price by offering to carry a second than by going without.
You seem concerned as to whether he can refinance and pay off your second. I would be concerned too … except isn’t he asking you to carry that second on a different property? Without knowing what other liens exist on that property we can’t know how easy or hard it will be for him to refinance. If it were me, I’d want to know a LOT about that new property that’s being brought into the equation.
As for checking on the status of the first many banks have it set up to where a person can call in and use the automated system to check on the status of their loan. Usually you just need the loan number, the last 4 digits of the person’s social security number and a touch-tone phone. I wouldn’t be shy about asking the borrower to walk me through how that’s done. And I’d call every couple of months to make sure everything was cool.
As for renegotiating the note – why not do that right now? He wants to have you paid off in 12 months and you want that too. Why not just stipulate that if the note isn’t paid off in 12 months the interest rate will increase? That’s far more satisfying, profitable and motivating (imo).
I have sold a number of properties myself but never carried paper, so I am a novice in that regard. I am selling an apartment building and the potential buyer has proposed the following:
> Purchase price $392,200
> Conventional financing 75% (he has a lender)
> Seller to carry 10% (= approx $39,000) @ 9.25 fixed,
interest only, but due in 12 months.
> The second will be secured by another property he
owns, not the subject one.
My questions:
If I am taking a second, shouldn’t I be getting my
price? In other words, does a buyer normally pay
some premium for seller financing?
Is 9.25% fixed an adequate rate at this time, with
rates rising?
When carrying a second does one typically get a rate
that is above the market/bank rate…say 10% in
this case?
How do I make arrangements with the holder of the
first on the collateral property to ensure I am
notified if buyer defaults on that loan so I can
step in to protect my interests?
Is buyer being overly optimistic to believe he
can refinance in 12 months? Even in this strong
market (Los Angeles) this seems slightly
risky…for both of us. I don’t want to end up
renegotiating the terms in a year because he
couldn’t refi.
Also, I am offering to carry a second because I thought it would be mutually advantageous i.e. I get a better price, and buyer gets to go with substantially less down.
Is my thinking here sound?
Any input from those more experienced than I would be much appreciated.
Interest only for 12 months is not much of a discount. If he pays at the end. The collateral in the substituted property is the question. You will have NO interest in the old property. There are a couple of things that you can do. One is require the payments on the substitute collateral be collected by a neutral third party that will notify you if there is not a payment made. You can also write a letter to prior lein holders expressing your interest to make up back payments if needed. Another thing, if allow in your state, is to file a request for notification at the recorders office. The foreclosure trustee must notify you if there is a default. Of course the most important thing is the strength of the collateral. Things like LTV, original closing docs, and appraisal are important. You can certainly ask for more collateral than the note amount. It will all depend on how much you want out of the apartment business.