Maximizing cash value in seller financing
Seller Financing is a valuable tool that will put more money in your pocket when you sell a property and help you sell faster especially as banks tighten lending. Plus, you are able to sell that loan at any time you want to raise cash. Last month we discussed tips on how to create seller loan documents as part of your property sale contract.
A seller finance loan given to your buyer becomes an asset. The larger the down payment you obtain from your buyer, the more valuable your loan asset becomes. Often your buyer cannot afford a large down payment yet is happy with higher monthly payments. If you divide your loan to buyer into two loans—first position and second position, then the value of the first position loan will be higher.
For example, you sell a property for $100,000 and take $7,500 as down payment, which is less than the recommended minimum of 20-30 percent. You can give seller financing as a $60,000 first position loan and a $32,500 second position loan. The first position loan value will be much closer the balance owed on this loan. You can sell it separately at much better price and keep the second position loan. And the value of both loans sold together would still be very similar to the value of a single $92,500 loan.
When you own a seller finance loan, it is a valuable asset and there are several key things to maintain the maximum value.
- Insurance—be listed as lienholder on borrower’s homeowner policy so you will be notified of any lapse or of a claim. Your borrower must maintain adequate insurance to cover the amount owed you, which will be a key requirement of the loan documents. If the insurance lapses you can force place insurance to cover your loan interest and collect this expense from borrower.
- Taxes Paid when due—another requirement of the loan documents. Generally, you should check that taxes are paid with the county once a year. As lienholder, you are normally notified of impending tax sale due to unpaid taxes. You can advance taxes to protect your interest and collect this expense from borrower.
- Monthly payments—deposit payments and keep good records. Don’t let your borrower get behind. A few days or weeks behind the due date does not significantly affect the value of your asset, but 30 days or more late during the past 12 months will decrease the amount an investor will pay for the loan.
A competent licensed servicer can collect the payments on your loan, keep all records and manage these activities for a small fee. You can contact Nationwide Secured Capital for recommendations.
Seller financing offers an added exit strategy for real estate investors and businesses. Nationwide Secured Capital is happy to provide current appraisal of your asset, and make no-obligation offers to buy part or all of your seller finance loans allowing you to convert it to lump sum cash quickly.