Note Owner's Manual

Innovative Solutions

2272 El Paso Street

Lancaster, CA 93535

(805) 946-2289

Why a Note Owner's Manual?

Introduction

Legal Description of the Property

Prices and Terms of Payment

Taxes and Insurance

Borrower's Duty to Maintain the Premises

Default

Tips for Selling Property Using Seller-Take-Back Financing

Selling All or Part of Your Mortgage, Trust Deed, or Land Contract for Cash


Why a Note Owner's Manual?

This manual is designed to assist people who will be selling property or who are receiving monthly payments on properties they have already sold (mortgages, trust deeds, or land contracts)

Mortgages, trust deeds, and land contracts can be excellent investments.  These are all referred to as "seller-take-backs," or privately-held loans.  But, like anything else, it pays to know a few basics ... pitfalls to avoid and opportunities to explore.

Please take a few moments to read this manual.  It is full of valuable information -- from what to do if the purchaser fails to make a payment on time to how you can sell some or all of the payments on your loan to obtain cash in a matter of days.

Although mortgages, trust deeds and land contracts are relatively simple documents, we suggest you read these documents, and this Note Owner's Manual, once a year.  There's no better way to know your rights as well as your options.

Helpful Hint:

The materials herein are provided with the understanding that the author, company and/or publisher are NOT engaged in rendering accounting, legal, investment and/or tax advice or services.  Questions regarding your specific accounting, legal, investment, and/or tax needs should be addressed by your own professional advisers.


For valuable advice on how to sell property using seller-take-back financing...

Helpful Hint:

For valuable advice on how to sell property using seller-take-back financing, see Tips for Selling Property Using Seller-Take-Back Financing in this manual.


Introduction

A mortgage, trust deed, or land contract is a written contract between a person who has sold property and the person who bought that property.

At the time that you sold your property, odds are that you would have preferred a cash sale.  Taking back financing, however, provided a quick and inexpensive way to sell the property without the rigid guidelines, hassles, and delays of bank financing.  This loan also provides you with some monthly income at, hopefully, a good rate of interest.

Taking back financing is a sensible way to sell property and is extremely common all over the United States.  The terms used to describe this financing vary by state and range from trust deeds, contracts for deed and land contracts to deeds of trust, notes, and (privately held) mortgages, but they all represent the same thing -- a way of selling property by allowing the purchaser to "borrow" from the seller rather than paying cash up front or borrowing from a bank.  All these vehicles are referred to as "seller-take-back" financing.

Terms You Should Know


Terms You Should Know

When a property is sold and a seller-take-back mortgage is used, the seller, who is now also the lender, is called the mortgagee.  The buyer, who is now the borrower, is called the mortgagor.  When a property is sold using a seller-take-back trust deed, the seller is the beneficiary, the buyer is now the trustor, and there is a third party who acts as the title holder called the trustee.  When a land contract is being used, the terms purchaser and seller are used.

In this manual, we use the term "contract" to refer to the agreement between the buyer and the seller regarding a loan, whether that agreement takes the form of a mortgage, trust deed, or land contract.


Legal Description
Legal Description of the Property

In the contract, the legal description is the detailed description of the parcel of land the seller agrees to sell to the purchaser.  The city, village or township of the property is noted, together with the country and state.

Along with the actual "soil" sold, the seller also conveys such things as any buildings, easements, tenements, hereditaments, improvements, and appurtenances.  In short, the seller conveys everything that is permanently affixed to the property sold.

Believe it or not, many contracts do not mention the actual street address of the property sold.  If this is true of your contract, jot down the actual street address next to the legal description of the property on the contract.

Helpful Hint


Next to the legal description on your contract, write in the property parcel number

Helpful Hint:

Next to the legal description on your contract, write in the property parcel number (also known as a "tax ID" number or a "Sidwell" number) used by the tax authorities.  This makes it easier to check to see if the property taxes have been properly paid by the purchaser each year.


Prices and Terms of Payment

This area of your contract contains the following figures and dates:  Total Purchase Price, Down Payment, Beginning Balance Remaining (the purchase price minus the down payment), Monthly Payment, Annual Interest Rate, amount and date of the Balloon Payment (if any), and the date that the first payment is due.

Purchase Price

Down Payment

Balance Remaining

Monthly Payment

Payment Due Date

Balloon Payment

Interest Rate

About Amortization Schedules

How to Handle Late Payments


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 terms are more favorable for the buyer.


Down Payment

The down payment is usually 10% to 20% of the purchase price.  From your viewpoint 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.

Therefore, a property sold with no down payment is quite risky, because initially the buyer 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 and the like), 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.

Helpful Hint


Amortization Schedule

About Amortization Schedules

An Amortization Schedule is a table which will show you, for each payment of a loan, the amount of the payment, the interest paid, the principal paid, and the remaining balance.

Amortization Schedules can be obtained from banks, real-estate offices, and title companies for a small fee.  However, we will be glad to send you a complimentary amortization schedule based on the balance remaining, interest rate and payment amounts of your mortgage, trust deed, or land contract.  Just call us.


Monthly Payment

The Monthly Payment

The amount of the monthly payment is determined by the amount of the loan, the interest rate, and the term of the loan in years.  The higher the amount of the loan and the interest rate, the higher the payment.  The shorter the term, the higher the payment.

Helpful Hint


Helpful Hint:

Some people have the monthly payments on their loan serviced by a bank, credit union, or escrow company.  Be advised, however, that these companies do not assist you in the collection of your payments.  They merely provide a bookkeeping service.  If the borrower gets behind on his payments or defaults, it is your problem.

See 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 payments.


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


Prompt Payment!

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.

See Also: How to Handle Late Payments


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 five, 10, 15 years, etc., from the original sale date.

If the borrower fails to make a balloon payment, this constitutes a default on the contract (see the section, "Default" for a discussion of your options in the event that your borrower fails to "pop the balloon" or obtain financing to make the last, large remaining principal payment).

Helpful Hint

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 of the options available to a 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.


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.


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 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 ($65,000 x .10 / 12), and the principal portion of the payment will be $85.59 ($627.26 - $541.67). (* A financial calculator is used to get $627.26).  The remaining principal balance on the loan after the first payment will then be $64,914.41 ($65,000 - $85.59).

Helpful Hint


Helpful Hint:

Call us if you would like a free Amortization Schedule for your note.  It will tell you, for each month, what the remaining balance is and what the principal and interest amounts are.  Just provide us with the loan amount, term in years, annual interest rate, and payment amount, and we will be happy to mail it to you.


Taxes and Insurance

Who is responsible for making tax and insurance payments depends on the terms of the mortgage.  The three most common ways to handle the payment of taxes and insurance on the property are:

1.  The borrower pays the taxes and insurance;

2.  The lender (seller) pays taxes and insurance but then adds the amounts paid back to the balance of the contract;

3.  The borrower makes monthly contributions to an escrow account held by the seller, and the seller pays taxes and insurance out of this account.

If the borrower ever fails to pay taxes or insurance bills, you have the right to pay them at any time after they are in default and then add the cost of these expenses to the balance on the contract.  It is always a good idea, therefore, to inform the insurance company that you should be notified if there is a cancellation or some other lapse of coverage.

Helpful Hints Regarding Insurance

Helpful Hints Regarding Taxes


Helpful Hints Regarding Insurance:

You should verify that the insurance policy is issued for an amount that represents AT LEAST the full value of the amount still owed you (the borrower should want to insure the property for its full value).

Be sure that you are listed as the mortgagee, trustee, or first contract holder on the insurance policy.  This way, you will be entitled to the proceeds from any insurance claim ahead of the borrower.  If you are listed this way on the policy, you should get renewal notices each year from the insurance company.  You should also get a notice of cancellation if the borrower fails to keep the policy current.

If you ever get a cancellation notice, or for any reason find the property uninsured or underinsured, immediately contact the borrower regarding this breach and purchase your own coverage until the problem is remedied.


Helpful Hints Regarding Taxes:

You can determine if the taxes are current by calling the county where the property is located.  We recommend doing this on an annual basis.  The borrower's failure to keep current on taxes is a breach of contract and an indication that he or she may not be able to afford the property, even if the monthly payments are current.  There is nothing more discouraging that foreclosing on a property only to discover that the first expense you have is several thousand dollars of unpaid back taxes.


Borrower's Duty to Maintain the Premises

It is the borrower's responsibility to protect the value of the property until it is paid in full.  This clause is important because the value of the property is what motivates the borrower to keep making payments.  If the borrower ever defaults and suffers foreclosure, it is the value of the property that will enable you, the seller, to re-sell the property and get your money back without a loss.

Most loans require the borrower to notify the seller in writing before the borrower or any third party neglects the property or allows it to be used in a way that lessens its value or removes, changes or demolishes any buildings or improvements on the premises in a way which may diminish the property's value.

Helpful Hint


Helpful Hint:

It is a good idea to drive by the property you sold on a regular basis.  If you've moved out of state, have someone you know do this for you.  Fundamental changes to or deferred maintenance on the buildings on a property can seriously diminish the value of your loan, while improvements to the property (a new roof or new landscaping, for instance) can make prompt payments by the borrower more likely than ever.


Default

See Also: How to Handle Late Payments

If the borrower fails to perform any significant part of the contract, the seller may have the right, after notifying the borrower in writing of the exact nature of the default, to take legal action.  If the default continues, the seller has the right to declare the remaining balance due and payable and, if the default is not then cleared up or the loan is not paid in full, the seller can begin steps to foreclose.

Defaults by the borrower may include failure to properly maintain the property, failure to adequately insure the property, or failure to pay taxes on the property as they become due.

REMEMBER, you are not the "bad guy"... the borrower is the one not making payments.  They can sell the property, re-finance the property, or bring the payments current.  The ball is in their court, so to speak.  Advise the borrower of the available options and that you are prepared to take legal action.  After an initial phone call and a certified letter, only swift and decisive action taken with the assistance of legal counsel is likely to motivate them to act.  Be honest, firm and considerate.  Don't harass, but don't delay!

Helpful Hint

A failure to enforce any clause in your contract can, over time, establish the precedent that the clause is not binding and has no effect.  In other words, actions can speak louder than words.  Consistent conduct over a period of time, in fact, can take precedence over the actual wording of your contract in a court of law!  In short, stick to the contract or be prepared to find it difficult to enforce in court.


Important Note:

Declaring a loan to be in default and starting the foreclosure process is a serious matter and should be handled by an attorney familiar with the laws of the state in which the property is located.  The biggest mistakes made by sellers in this area are:

1.  Trying to take matters into their own hands, and

2.  Delaying the exercise of their rights.

Begin to think in terms of foreclosure when the borrower is one month behind, not three or four months.


Foreclosure

Foreclosure:

If legal action is required, a seller has the right to initiate foreclosure proceedings.  Find an attorney with experience in the area of real estate foreclosure.

Also, because your attorney may be required to appear in court, it is best to hire one who lives near the property in question.  This will save you from paying travel time and other unnecessary expenses.

Important Note!


Helpful Hint:

Keep records of all written and spoken conversations with the borrower, including dates, times, and what was discussed.  You'll never know how or when these records will come in handy until you need them but don't have them.  Then it's too late!


How to Handle Late Payments

The way in which borrowers most commonly default is, as you would expect, by failing to make timely payments.  If a payment is ever late, we recommend taking the following steps:

1.  Check the contract to see if a grace period exists; if so, you must honor it.

2.  If no grace period exists or it has expired, phone the borrower and ask about the payment; insist upon payment, and make a note of the date and time of the call and keep this information with your land contract.

3.  On the same day as the above phone call, write a letter that identifies the default and summarizes any action the borrower has failed to perform, and mail it to the borrower, certified mail, return receipt requested.

4.  If the above steps do not produce the desired results, contact an attorney immediately.  Trying to cure a default by yourself can cause problems for you, the seller.


Tips for Selling Property using Seller Take Back Financing
Tips for Selling Property Using Seller-Take-Back Financing

Using seller-take-back financing can be an excellent way to sell your property quickly and at a good price.  As conventional financing becomes even more costly, more difficult to obtain, and more time consuming, seller financing will become even more popular (we estimate that approximately 15% to 20% of property sold is now sold with seller financing).

If you're thinking about selling some property and taking back financing, here are some things you should know that could be beneficial to you in the future -- especially if you should want to sell that mortgage, trust deed, or land contract for cash someday.  The way a mortgage is planned and written can have a lot to do with its sales value in the future.

The Purchase Price

The Down Payment

The Interest Rate

The Monthly Payment

Taxes and Insurance

Underlying Debt

Term of the Loan

The Borrower's Credit Worthiness


The Purchase Price

The purchase price is negotiated between you and the borrower, but there are some objective standards that can be used as the basis for negotiation.

One way to establish such standards is to have three different Realtors do a market analysis on the property, complete with two or three "comparables" each (Comparables are properties that are comparable to the subject property and can be used to determine its market value).  An average of these three analyses will usually give you a good idea of what the property should sell for.  This service is often free since the Realtors will be competing for the right to list your property (Be advised, though, that Realtors may over-estimate the value of your property in order to win the right to list it).

A second method is to hire an independent appraiser to do a complete appraisal of your property, which would include (as above) three comparables.  This method can cost from $150 to $600, but is more authoritative than the first method.


The Down Payment

The down payment should be as large as possible.  A larger down payment means the purchaser has more equity and owes less, both of which make the contract more secure and thus more salable.  A good thing to remember is that the larger the down payment, the more your loan is worth.  Make sure that the down payment is paid out of the borrower's pocket -- not his or her parent's pockets.  Politely but firmly inquire where the money for the down payment is coming from and make your selling decision accordingly.


The Interest Rate

The interest rate on your loan should be close to interest rates currently being charged on mortgages by banks and savings and loan associations.  There are legal maximums in most states.  See your attorney for details.


The monthly Payment

The amount of the monthly payment is determined by the amount of the loan, the interest rate, and the term in years (5, 10, 15 years, 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 also be structured as Interest-Only loans with a balloon feature, or for a longer term of years with a balloon.  This keeps the buyer's payment manageable, and ensures that the seller will be 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, the lending institution then has the money on hand to pay the taxes and insurance.  This is also the wisest thing for you 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 own a piece of property, you do not necessarily have to pay off your present land contract or mortgage when you sell the property.  Instead, you can sometimes continue to make monthly payments in the required amount just as before (the original obligation is referred to as an "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 it has a "Due on Sale" clause, requiring you to pay off the debt if you sell the property.


Term of the Loan

How long a loan is scheduled to run is referred to as its "term." The length of this period depends on the amount of the loan, the interest rate, and the size of the monthly payment.

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 terms are common and are preferred to contracts with 30 year terms.

You may also consider including a "Balloon Payment" due in five to ten years.  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 to both you and the borrower, do not 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 whether the borrower has an adequate source of income to pay his or her obligation.  Get references, find out where they work, their 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.


Selling All or Part of Your Mortgage, Trust Deed, or Land Contract for Cash

We specialize in purchasing mortgages, trust deeds, and land contracts.  There are many ways of getting cash from your contract.  You can sell the whole mortgage now, or if you just need some short-term cash, you can sell some payments now and collect monthly payments again in the future.  Many of these plans will give you as much as 95% of what is due on the loan.  We charge no fees, no points, and no commissions.

Why would I want to sell my loan for immediate cash now?

How can I find out how much my mortgage is worth?

For More Information, Contact:

Innovative Solutions

2272 El Paso Street

Lancaster, CA 93535

(805) 946-2289


Why would I want to sell my loan for immediate cash now?

When you convert part or all of your loan to cash, you gain several advantages in addition to immediate cash:

1.  You don't have to worry about the monthly payments you receive slipping away on life's little expenses.

2.  You receive a substantial sum of cash right now -- enough to accomplish some major goals.

3.  You don't have to worry about collecting monthly payments or servicing your contract; we handle all of that.

4.  You don't have to worry about whether the taxes and insurance premiums are being paid each year to protect your investment; we handle all of that.

5.  You don't have to worry about whether your borrower will continue to make his or her payments.


How can I find out how much my mortgage is worth?

All you need to do is call.  One brief consultation with one of us, and we will answer all your questions, discuss your options, and help you decide for yourself whether turning your loan into immediate cash makes the most sense for you.  The choice is yours.


Disclaimer:

The materials herein are provided with the understanding that the author, company and/or publisher are NOT engaged in rendering accounting, legal, investment and/or tax advice or services.  Questions regarding your specific accounting, legal, investment, and/or tax needs should be addressed by your own professional advisers.