Want to maximize the value of your Note, then make sure your Note’s interest rate and terms are set up correctly on Day 1. Picking the correct Interest Rate for your Note is the first step in your future success! |
Inflation Fighter
Each year it seems the cost to buy the basics just keeps going up. It’s not your imagination; it’s inflation. So, what does inflation have to do with seller-financed notes? Well, a seller would need to at least charge an interest rate equivalent to the inflation rate just to break even!
Return on Investment
Rather than just breaking even, a seller desires a return on their investment. By accepting an IOU or payments from the buyer that money is tied up. Plus, once the property is sold the new owner will be the one to directly benefit from any increase in property value.
The seller is now acting as the bank and should expect a return at least equivalent to the interest rate a bank is charging for a similar loan. The seller does not have the protection of private mortgage insurance that many banks require, adding another level of risk that should be rewarded by an increased rate.
Since the buyer is saving the costs a traditional bank might charge for a loan (points, underwriting fees, origination fees, etc.) it is reasonable to expect them to pay an interest rate above what a bank would charge. On average, it is recommended that a seller financed note carry an interest rate of 2-4% higher than bank rates to compensate for these matters.
Improves Resale Value to Note Buyers
If a note holder ever desires to sell their future note payments for a lump sum of cash, they will quickly realize how important the note interest rate is to investors.
While investors look to a variety of factors to determine their pricing, all things being equal, a higher interest rate results in a higher purchase price from a note investor.
For example, a seller holds a note with a balance of $100,000 with monthly payments of $1,110.21. If the note rate is 6% and the investor wants a 9% yield then the offer would be $87,641. Now if the note rate were 4% the offer would decrease to $81,623, but if the note rate were 8% the offer would increase to $95,274.
For simplicity of comparison, these examples assume the monthly payment amount remains the same and there are acceptable credit, equity, and documentation. But you get the idea, the higher the interest rate the more valuable the note.
There Are No Take-Backs!
The time to give serious consideration to the note interest rate is at the time of creation. There are no take-backs or do-overs. The rate you agree to accept at closing stays the interest rate for the life of the note. The only way to change it later is to get the buyer to agree and execute a formal note modification. It’s highly unlikely a buyer or note payer is going to agree to have their interest rate increased at a later date (unless there is some advantage to them).
Be sure to give the amount of interest charged on a seller financed note serious thought. It will affect the value of your note not only today, but also far into the future.
Summary
Setting up your Note on day 1 with appropriate Interest Rates will maximize future value of your Note and get the most out of your investment. Remember, you are providing a service just like a bank, do not sell yourself short!
Connect with Peak NotesWhy not set up a meeting with a Peak Notes specialist to discuss the Note selling process. Meetings are brief, cost nothing and can give you more insight into how you can maximize your investment potential! If your property is located in Florida, please click on this link and set up a meeting with John Meeting with John If your property is located outside of Florida, please click on this link and set up a meeting with Karen. Meeting with Karen |