what you need to know to do seller financing

seller financing calculator.jpg

basic math

You do not have to be a math wizard in order to understand seller financing. The majority of transactions, even in complex real estate transactions, use simple arithmetic that everyone can do. 

To make it easy on you, we have broken down the top questions regarding Seller Financing math:

  1. How much interest income will you receive above the sales price?
  2. What is the monthly payment of an interest only Seller Financed Note?
  3. How much is the monthly payment of an amortized Seller Financed note?

2. What is the monthly payment of an interest only Seller Financed Note?

Interest-only Notes are the easiest to calculate, and anyone can do the math. If payments are being made monthly, then the math is simply the principal amount multiplied by the interest rate, and then divided by 12, the number of months in a year.

Example

$100,000 Note at 6% interest = $6,000 per year of interest income.

$6,000 / 12 months = $500 monthly payment.

1. How much interest income will you receive above the sales price?

The basic way to determine this is to figure out how much principal is owed and multiply it by the annual interest rate. 

Example 

$100,000 Note at 6% interest = $6,000 per year of interest income.

If it is a 5-year, interest only Note, then the Seller would receive an additional $30,000 ($6,000 x 5 years).


3. How much is the monthly payment of an amortized Seller Financed note?

Amortized Note payments include both interest and principal. Popular 30-year bank mortgages are typically amortized loans. The payments are most commonly fixed at a set monthly amount and the last payment effectively pays off the remaining balance.

It is helpful to use a calculator when determining monthly payments of an amortized loan. In the calculator below, input the principal amount in the Loan Amount, plug in the annual interest rate, and then select Month in the blue box to determine the monthly payment.

The calculator below will also tell you exactly how much interest income will be paid over the life of the Note.

 
portland real estate market.jpg
 

INTEREST RATES

Interest rates are an important part of seller financing and real estate in general. Macro trends show that real estate values rise when interest rates are low. That is because buyers of real estate have lower payments and can afford to pay more for a property. The opposite is also true, real estate values are pushed lower when interest rates are high, thereby making purchases less affordable for buyers.

Interest rates are market driven and manipulated by the Federal Reserve. The beauty of seller financed Notes is that the interest rate is not set by the bank, and is a negotiation point between the seller and the buyer.

Below is a chart of the latest market interest rates that borrowers can obtain via conventional financing. This information is helpful in order to gauge where market interest rates are at when the time comes to sell or buy. You'll notice that different loan products and durations have different interest rates.

 
portland real estate services.jpg
 

trust deed

promissory note

The Trust Deed is the instrument that is evidence of the loan and it secures the loan against real property. The Trust Deed must include certain information such as:

  • Who is the borrower (Grantor)
  • Who is the beneficiary
  • What is the legal description of the property pledged as security
  • What is the principal amount pledged in the Promissory Note

During the closing of the property the Trust Deed will be signed and notarized by the Grantor at the same time as the other closing paperwork, and will then be filed and recorded at the county courthouse by the title company.

A Promissory Note is essentially an I.O.U. It is a written document that the borrower and lender signs that outlines the terms of the loan. This includes things like:

  • Who is the borrower (Grantor)
  • Who is the lender (Grantee / Beneficiary)
  • Principal Amount
  • Interest Rate
  • Duration
  • Repayment terms

This is an extremely important document that will need to be finalized before the property sale closes. Do not make any loans or borrower any money without a Promissory Note that is signed by all parties. That is where things can get messy.

 

 

The Promissory Note and Trust Deed are the most important components in a Seller Financed transaction.

Want to receive templates and examples? We'll send you ones for free. 

Name *
Name