Any risks can be minimized, and the strategy can prove to be win-win for buyer and seller alike: The seller gets to unload a property and obtain a higher rate of interest than with most other options, while the buyer avoids the hassle and uncertainty of borrowing from a conventional lender.
As Rockville lawyer Harvey S. Jacobs has pointed out in the Washington Post, it is essential for the seller to insist on a substantial down payment of at least 30 percent.
Another issue is whether the interest rate that the seller charges will prove to be enough over the life of the loan, or too much. If you worry that rates will fall, Jacobs adds in his column, consider imposing a prepayment penalty in your promissory note.
If you think interest rates will rise, you may want to offer an adjustable rate mortgage (ARM) instead of a fix-rate instrument.
Because there is a market for notes that are current and at least six months old, it’s a good idea to be sure that yours is fully negotiable–that is, transferable to another party.
With a recorded deed as a lien against the property, you’ll have the option of foreclosing so that the property is yours once again. Although the foreclosure process is long and costly, having ownership returned is incalculably better than nothing.
Finally, Jacobs recommends an automatic debiting feature so that monthly payments are taken from the buyer’s checking account and deposited into your separate “My Old House Note Account.” That way, you can go online every month and monitor the payments.
Jacobs’ column goes into additional detail, and you’ll want to read it if you are a seller willing to take a creative approach to marketing your property.
Licensed Associate Real Estate Broker
Senior Vice President
Charles Rutenberg Realty
127 E. 56th Street
New York, NY 10022