Although this article in Forbes magazine is placing their case for seller financing in a second-lien position (not favorable amongst investors and brokers alike) they do provide some useful information about taking necessary precaution in creating a note.
Amongst their tips: verify income, ask for personal financial information, credit check, verify taxes and insurance on property.
Not bad. Unfortunately they did not include in the article that second-lien position notes are harder to sell and contracts with ridiculous clauses such as a $3,000 late payment penalty fee or payoff of $125k in 2 years, second position, will not only put you into hot water with your buyers, but might even rally a good laugh from your note broker as well.
“The seller’s contract, which was to be two years in length, spelled out that if the monthly payment of $1,500 was late, a penalty of $3,000 would be tacked on to the principal, and if a payment was missed, the seller could initiate foreclosure. Nonetheless, the buyers were consistently late with their payments. After 30 months the $125,000 10% note had become a $185,000 debt. The seller had neglected to include a clause in the contract to let him run a credit check on the buyers.”
If this is the advice from the pros, should we be surprised by the kind of paper presented to us?
