Seller Carry Back Notes

1. Not Recording the Contract at the County Recorder's Office:
What happens here by not recording the contract is that a property lien is not accessed against the property. If legal action were filed for any reason, the note holder's attorney or the judge may say that the document is not legal or enforceable.

2. Not Enforcing or Forgiving Late Payments:
Does the contract have a penalty clause for late payments? Enforce the Penalty Clause. This is extra money in the Note Holder's pocket. It tells the payer that the Note Holder means business. If the payment is not received within the grace period, the Note Holder can send a certified letter, return receipt requested, notifying them that if this contract is not current within ____ days that you will start legal action, (possibly foreclosure) or whatever action necessary as stated under the default section of the contract. If this doesn't produce results, they can turn it over to an attorney experienced in the law of foreclosure in your state.

3. Record Keeping:
Note Holders should keep close track of the day they receive their monthly or scheduled payment. (They can photocopy the check and the bank deposit receipt or keep a separate bank account). This record provides proof that the payments have been paid, and paid on time. If there is a dispute with the buyer of the property, or if the Note Holder decides to Sell his/her contract to another buyer, they will need to see this proof of payment. (The Note Holders should always deposit funds received as soon as possible after they receive them). If the payments are collected by a bank or escrow company, the information needed may be requested, and they will furnish the Note Holder with a payment ledger and account balance.

4. Documents:
Can the Note Holder locate all the documents? Remember: the documents may be needed at anytime - that is, the Note Holder may want to sell the contract for cash, they may pay-off the contract early, or the property that the contract is on may be sold or transferred to a new owner (is it assumable)? The Note Holder should put the documents in a safe place away from fire or theft, as they may be needed tomarrow, a year from now or even 10, 15 or 25 years in the future.

5. Taxes and Insurance:
There is the possibility of default. Who is responsible if the taxes and insurance are not paid? THE NOTE HOLDER of the Contract. The title of the property does not change hands until the Note is paid off in full and a satisfaction of lien is recorded. If the Note Holder does not make a follow-up call to the County or City Tax assessors office or obtain a copy of the paid tax bill from your purchaser, they may find that property is being sold for back taxes. They can call the Insurance Company to see that Hazard Insurance is still enforced and that they are named beneficiary as a lien holder for the full amount of the contract, and make sure that any copies of renewal notices are sent to both parties of the contract. If the policy has not been paid, and if the house or building doesn't have coverage and has a fire or other natural disaster, the results could be a total loss of their debt receivable.

6. Inspection:
When was the last time the note holder saw the property? It's a good idea for the Note Holder to drive by the property from time to time to see if the building and grounds are well maintained. If the yard and building are in good condition or show improvements since it was sold, chances are the inside is the same. The Buyer must protect and keep up the value of the property in case of non-payment of contract or foreclosure. If the property looks run down, the Buyer can check the contract for a clause for keeping the premises and buildings thereon in as good condition as they were at date of sale. The Note Holder can send a certified letter, return receipt requested, notifying them of the defauld of their contract and follow though with the recommendations as stated in the contract.

7. Subordination Clauses:
If the Buyer requests a subordination clause, a Note Holder SHOULD NOT DO IT. A subordination clause gives the Buyer the ability to put a Senior Lien or Loan on the Contract. This will move their lien to a Second Position and will damage the cash value if they decide to sell the contract or any partial payments of the contract.

8. Failure to Enforce:
Actions always speak the loudest. A Note Holder should make sure that they stick to the terms and clauses. If they don't, it will be hard to enforce in a Court of Law.

9. Income Taxes:
The interest information is important for Two reasons:
a) You must declare earned interest on your Income Taxes.
b) You need to provide the total interest figure to the property buyer, so that they can file it with their income taxes.

10. Understanding the Value of Your Contracts:
That means if I wanted to sell the contract for cash, how much money would I get, who will pay me, and how fast can I obtain the funds?

WINNING AS A PROPERTY SELLER:

First Example:
You have a Free and Clear property For Sale, and you get this offer:

* $75,000.00 - Full Price,
* $15,000.00 - Cash Down,
* $60,000.00 - Seller Carry Back Note at 12% interest for 30 Years.
*$     617.17 - Monthly Payment

'The Time Value of Money' and you have in mind a personal 'Rate of Return' of 20% per year, (what I mean by this is that everybody has their own discount rate. If the 'Rate of Return' is less than 20% you would likely say - "I would rather have the Cash Now because I can put it somewhere else aqnd earn 20% or more," right?

Assuming your personal Discount Rate of Return is 20% per annum, this means that you know, without a doubt, that you can get 20% per year on your money, we want to determine what the present value of that $60,000.00 Seller Carry Back option will be.

The Present Value is $36,933.61, which is the value of that Note in Today's dollars at your discount rate. (What did you really get for the house? Based on this analysis, you got $36,933.61 - the Present Value of the Note - Plus the $15,000.00 Cash Down Payment - Essentially, you would get $51,933.61 from this arrangement.

Second Example:

* $75,000.00 - Full Price (-minus $5,000.00 Cash Reduction = $70,000.00),
* $15,000.00 - Cash Down,
* $60,000.00 - Seller Carry Back Note at 12% interest for 30 Years.
*$     617.17 - Monthly Payment

Let's assume you give the potential buyer a $5,000.00 Cash Reduction, reducing the price to $70,000.00. Now the buyer needs to get a $55,000.00 from the new investors loan, and you don't care about the terms because the buyer will make the payment to the investor. With the $15,000.00 down payment the buyer gives you, you get $70,000 all cash when the transaction closes.

Compare the Two options. We have $51,933.61. Let's change signs (+/-) , enter, and $70,000.00 plus. Looking at the difference, you've got $18,066.39 more proceeds in terms of Today's dollars by reducing your price by just $5,000.00, and not continuing to carry the paper. Don't get hung up on Price and Today's Value of Seller Carry Back Paper!

If you are interested in Selling you 'Carry Back Note' give us your Seller Carry Back scenario.
First Example:
You have a Free and Clear property For Sale, and you get this offer:

* $75,000.00 - Full Price,
* $15,000.00 - Cash Down,
* $60,000.00 - Seller Carry Back Note at 12% interest for 30 Years.
*$     617.17 - Monthly Payment

'The Time Value of Money' and you have in mind a personal 'Rate of Return' of 20% per year, (what I mean by this is that everybody has their own discount rate. If the 'Rate of Return' is less than 20% you would likely say - "I would rather have the Cash Now because I can put it somewhere else aqnd earn 20% or more," right?

Assuming your personal Discount Rate of Return is 20% per annum, this means that you know, without a doubt, that you can get 20% per year on your money, we want to determine what the present value of that $60,000.00 Seller Carry Back option will be.

The Present Value is $36,933.61, which is the value of that Note in Today's dollars at your discount rate. (What did you really get for the house? Based on this analysis, you got $36,933.61 - the Present Value of the Note - Plus the $15,000.00 Cash Down Payment - Essentially, you would get $51,933.61 from this arrangement.

Second Example:

* $75,000.00 - Full Price (-minus $5,000.00 Cash Reduction = $70,000.00),
* $15,000.00 - Cash Down,
* $60,000.00 - Seller Carry Back Note at 12% interest for 30 Years.
*$     617.17 - Monthly Payment

Let's assume you give the potential buyer a $5,000.00 Cash Reduction, reducing the price to $70,000.00. Now the buyer needs to get a $55,000.00 from the new investors loan, and you don't care about the terms because the buyer will make the payment to the investor. With the $15,000.00 down payment the buyer gives you, you get $70,000 all cash when the transaction closes.

Compare the Two options. We have $51,933.61. Let's change signs (+/-) , enter, and $70,000.00 plus. Looking at the difference, you've got $18,066.39 more proceeds in terms of Today's dollars by reducing your price by just $5,000.00, and not continuing to carry the paper. Don't get hung up on Price and Today's Value of Seller Carry Back Paper!

If you are interested in Selling you 'Carry Back Note' give us your Seller Carry Back scenario.
First Example:
You have a Free and Clear property For Sale, and you get this offer:

* $75,000.00 - Full Price,
* $15,000.00 - Cash Down,
* $60,000.00 - Seller Carry Back Note at 12% interest for 30 Years.
*$     617.17 - Monthly Payment

'The Time Value of Money' and you have in mind a personal 'Rate of Return' of 20% per year, (what I mean by this is that everybody has their own discount rate. If the 'Rate of Return' is less than 20% you would likely say - "I would rather have the Cash Now because I can put it somewhere else aqnd earn 20% or more," right?

Assuming your personal Discount Rate of Return is 20% per annum, this means that you know, without a doubt, that you can get 20% per year on your money, we want to determine what the present value of that $60,000.00 Seller Carry Back option will be.

The Present Value is $36,933.61, which is the value of that Note in Today's dollars at your discount rate. (What did you really get for the house? Based on this analysis, you got $36,933.61 - the Present Value of the Note - Plus the $15,000.00 Cash Down Payment - Essentially, you would get $51,933.61 from this arrangement.

Second Example:

* $75,000.00 - Full Price (-minus $5,000.00 Cash Reduction = $70,000.00),
* $15,000.00 - Cash Down,
* $60,000.00 - Seller Carry Back Note at 12% interest for 30 Years.
*$     617.17 - Monthly Payment

Let's assume you give the potential buyer a $5,000.00 Cash Reduction, reducing the price to $70,000.00. Now the buyer needs to get a $55,000.00 from the new investors loan, and you don't care about the terms because the buyer will make the payment to the investor. With the $15,000.00 down payment the buyer gives you, you get $70,000 all cash when the transaction closes.

Compare the Two options. We have $51,933.61. Let's change signs (+/-) , enter, and $70,000.00 plus. Looking at the difference, you've got $18,066.39 more proceeds in terms of Today's dollars by reducing your price by just $5,000.00, and not continuing to carry the paper. Don't get hung up on Price and Today's Value of Seller Carry Back Paper!

If you are interested in Selling you 'Carry Back Note' give us your Seller Carry Back scenario.