|You're selling your real estate. You have a good offer from a buyer. However, your buyer doesn't qualify for more than a new 70% to 80% loan, and is short on the down payment. It's a common situation in today's real estate market. |
The usual scenario is for the buyer to offer you a second mortgage note to make up the difference. What should you do?
First, recognize the possible hazards of accepting such an offer. You should be alert for two potential problems: (1) the buyer may not be able to pay your second mortgage note; and (2) selling your note can be difficult or impossible at a reasonable cash price. You could end up with a worthless or frozen asset.
Second, realize there are ways to minimize the risks of accepting a second mortgage note and take reasonable steps to protect yourself. Here's what you can do:
Before you sign the final papers agreeing to sell your property, make sure the first lien lender knows about your second mortgage note. You want to guard against it being a "silent second" that the buyer is hiding from the lender.
If the lender would refuse to approve your second mortgage note, that may indicate your buyer is over-extended. Making sure the first lien lender knows about your second mortgage is an important way to protect yourself from default buy a buyer who cannot pay.
Not only must the lender know about your note's existence, but must also be aware of all its terms. You want to avoid a situation in which the lender might approve your second mortgage, but not realize that your buyer will be paying monthly payments on your note. All terms of your note must be disclosed to the first lien lender, and you need to assure yourself that full disclosure has been made.
Just as the first lien lender must know of your existence and the terms of your note, you must also know about the first lien lender and the terms of the first mortgage note. You want complete knowledge of all the terms and conditions of the first mortgage note because it tells you vital things that affect your second mortgage note.
For example, the interest rate on the first mortgage will tell you what the lender thinks of the creditworthiness of the buyer. A higher interest rate might indicate a higher credit risk, and you should know about it. You need all the information about monthly payments, problem clauses, balloon payments, and other snags because of the possibility of your buyer defaulting on the first lien mortgage. If that happens, in order to protect your interest in the second mortgage note, you will have to pay the first lien lender. Without full information, you cannot prepare yourself for that outcome.
You need to know the terms of the first lien mortgage for another reason. If you sell your second mortgage note, your notebuyer will want all this information in order to calculate their own risk.
The crucial point to remember is that you need written permission from your buyer in order to obtain all information from the first lien lender. This should include not only the terms and conditions, but also the credit and financial information on your buyer. Always make sure to obtain this written authorization before signing the final papers agreeing to sell your property. This authorization should last the full term of your second mortgage note.
Finally, you can reinforce your note by asking for additional security. One way to obtain this is to get a co-signer for your second mortgage note. Often, a parent, relative, or friend of the buyer will be willing to sign for a small second mortgage note. If you do get a co-signer be sure to obtain a financial and credit report on them to insure they have the means to pay if necessary.
If a co-signer cannot be found, you can accept security on other real estate, or personal property that the buyer owns such as vehicles, boats, a grand piano, collections, jewelry, or art. You should always obtain the opinion of a professional appraiser of the value of this security. You should also obtain all the proper legal instruments to perfect your security.
Once you have taken care of these basics, you should be able to sell your property and accept a small second mortgage note with the certainty that you have been both prudent and resourceful. You sold your real estate and you protected your assets using reasonable means.
|Lorelei Stevens is president of Wall Street Brokers, Inc. in Seattle, Washington. She has been a licensed real estate broker (Washington State Real Estate Brokers License WA-LL-SB-*275LD) and a discounted note buyer since the 1970s. She has worked her entire adult life with Wall Street Brokers negotiating millions of dollars of paper and is a nationally recognized expert. |
Lorelei has taught Legal Continuing Education seminars and has written numerous articles for legal, real estate and other professional publications on the subjects of seller-financing, managing, reinforcing and buying paper. She is the author of two books, one on seller-financing and another on note buying. She also writes a monthly column for Noteworthy Newsletter and is a frequent contributor to The Paper Source. Her web site is www.WallStreetBrokers.com.
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