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Seller Financing:  How to Create a Secure, Saleable Note.


Seller Financing is a topic I am always asked about.  Questions like, "How do I create a secure carry-back note or mortgage that will provide the return I need, perform as written and is saleable at a high dollar if I want to sell it?"


First, why carry back part of the sale price of my real estate or business sale?  Here are some reasons:

  1. The buyer of your real estate or business can't or won't deal with a lender for the purchase financing.
  2. You have figured out that you can sell your property or business for more if you carry-back some of the sales price.
  3. You don't need the cash right now and you want the long-term income, in the form of payments with interest.
  4. The only way you can sell your property or business is if you carry-back some of the sales price.
  5. Banks usually won't lend on the purchase of a business.


Here are some statistics:

  1. About a third of all real estate transactions in the US involve seller financing.
  2. About 80% of all small to medium sized business sales involve seller financing.


Following are the basics, in outline form, of the most secure, saleable (at the lowest discount) seller financed mortgages and notes:

First a Real Estate Sale with seller financing:

  1. Sell the property to a buyer who will occupy it (called owner occupied).
  2. Sell the property to a buyer whose mid credit score is at least 625.  The higher the better.  It's your federal legal right to know all three of their credit scores.
  3. Sell the property to a buyer who you don't know and isn't related to you. (Called an arm's length transaction).
  4. Sell the property using a third party processor like an escrow or title company.
  5. Make sure to buy and receive a valid Title Policy with insurance in the amount of the sales price.
  6. Take back a mortgage in the first position (the most senior lien) for no more than 85% of the sales price.
  7. Secure the mortgage or note with a valid Mortgage Deed or Trust Deed on the property.
  8. Accept no less than 15% cash down payment.
  9. If the buyer doesn't have 15-20% cash down payment and the sales price is more than you expected, you can carry-back two notes.  One in the 1st position for 80% of the sales price and another one, a 2nd position note for no more than 10% of the sales price.  These deals are called 80-10-10 (80% 1st position note, 10% 2nd position note and 10% cash).  Now you can sell the 1st position note (the most valuable one) and keep the 2nd position note.
  10. The terms of the 1st position note should include: an interest rate of at least Prime (currently 8.25%);  Amortized equally, monthly for up to 30 years;  Pre-payment penalty for the first five years;  Significant and detailed late and default payment stipulations.
  11. Keep detailed records, like a Note Owner's Manual, of the note and each payment (preferably a copy of the front and back of the payment check showing the bank cancellation stamp).  Preferably a separate checking or savings account for the note.


Next, a Business Sale with seller financing:

  1. Sell the business to someone experienced in and who will operate it.
  2. Sell the business to a buyer whose mid credit score is at least 675.
  3. Sell the business to a buyer you don't know and isn't related to you.
  4. Sell the business as an 'Asset Sale' instead of a Corp Stock or Equity sale if possible.
  5. Always use legal professionals (business attorney, escrow, Title company, etc.) to construct and execute the sale and documents.
  6. File and record a UCC-1 following the close of sale.
  7. Sell to a buyer with at least 30% cash down payment.
  8. Make sure the business can afford to support (pay) the note payments from its cash flow because you will be depending on the business to perform on the note.
  9. Carry-back only a 1st position promissory note.
  10. If real estate is involved in the sale, create two notes.  One on the business and one on the real estate.  (A business note is far more valuable without real estate).
  11. Receive a Personal Guarantee from the buyer even if the buyer is a corporation.  It is added value if the Personal Guarantee is secured with defined, tangible collateral outside the business and equal to the amount of the note.
  12. Receive a Security Agreement.
  13. Receive proof of exactly the cash down payment paid.
  14. Make sure you have a signed Bill of Sale.
  15. The terms of the carry-back note should include:  Interest Rate of Prime plus 1%;  Balance Amortized equally and monthly for no more than 72 months; Significant and detailed late and default payment stipulations including reversion of the business and assets to you; Non-assignment clause;  Full Balance payoff at time of and in case of business subsequent sale.
  16. Keep detailed records on the business sale transaction;  keep your last two years of signed business tax returns;  demand that the buyer, now your note payor, provide you periodic (quarterly) Profit and Loss business statements (it's your legal right);  keep detailed note payment records (a separate checking account is best).


There you have it.  The basics of How to Create a Secure and Saleable Seller Financed Note or Mortgage.  Now that you own the note you have two comfortable choices.  One, keep it and enjoy the return on investment or two, sell it.  How to sell your note is the topic of another article and available at Sell Note .