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NINE NOTE TERMS FOR SELLER-FINANCED TRANSACTIONS.
by Bruce Kellogg
ost real estate promissory notes secured by deeds- of-trust or mortgages, whether institutional or private, have several terms in common. These include a late charge, an “acceleration clause” (i.e., balance falls due in event of a default), and a “due on sale or transfer” clause. Yet, in a seller-financed transaction, there are a number of “creative financ- ing” terms that can be negotiated into the note that are to the buyer’s advantage. Here are nine of them: NO. 1 "ASSUMPTION" If the parties desire for the note to be assumable, this can be included in the note. Usually, some criteria are included to protect the seller. Often, the note says that the seller’s approval ”cannot be unreasonably with-held” when there are protec- tions included. M NO. 2 “BALLOON PAYMENT” When a note is not “fully amor- tized” such that a balance remains at maturity, it is called “a balloon payment.” If this applies, the note should be written to clearly include this feature to protect both parties from misunderstandings later on. NO. 3 “OPTION TO EXTEND” If a “balloon payment” is in- volved, writing an “option to extend” into the note could prevent
a rough ending if refinancing or selling conditions are unfavorable. It could extend for a year or two, with a fee paid to the seller, a “par- tial pay down” made, or the interest rate increased. NO. 4 “INTEREST-ONLY” This is the arrangement where the payments consist only of inter- est, and a “balloon payment” occurs at maturity. NO. 5 “ZERO INTEREST” This occurs when payments are principal only, with no interest charged. A buyer’s dream! NO. 6 “DEFERRED INTEREST” This involves interest accruing to maturity, when both principal and interest are due. Although this helps cashflow, unlike zero interest, it is very risky. Rapid appreciation will be es- sential for this to succeed, and losing the property is a realistic possibility! NO. 7 “SKIP A PAYMENT” If the parties are relating well, it is possible to include a term allowing the borrower to skip a payment in the event of job loss, rental vacancy, or other misfortune. This can be made part of the note, or dealt with at the time. Including it ahead of time is preferable for a more stable transaction.
NO. 8 “SUBSTITUTION OF COLLATERAL”
Sometimes, an enterprising buyer will negotiate with the seller the right to move the note and secure it to a different property. This is usually done to sell, exchange, or refinance the property. There should be criteria stated to protect the note-holder, but approval “should not be unreasonably with-held” if the criteria are met. NO. 9 “RIGHT OF FIRST REFUSAL” An enterprising buyer may realize that the seller might decide to sell the note at a discount in the future to raise cash. Including this term gives the buyer first shot at buying their own debt back, effectively lowering the purchase price!
by Gary and Susan Harper
a meeting to discuss with the work- ers what had happened. Did the workers disable the alarm? Was the alarm broken? What happened to make the alarm stop sounding? One of the workers decided to let management know that they were sick of hearing the alarm. They came up with a solution: they installed a fan that would blow the empty box off the conveyor belt before it reached the scale, so they didn't have to hear the alarm every time an empty box arrived." We do not always have to spend a lot of money to make improve- ments. Sometimes it’s as simple as installing a fan to fix our process. What processes do you need fixed? Have you spent money and realized it didn't even fix the prob- lem? When you identify a problem in your process, consider first how you can simplify the process and change it without costing a fortune. •
W
e were recently working with a company and explaining why
we process map — to help us save money. But often, problems occur in the process and the go-to solution is to spend money to fix it. Many times, people forget that throwing money at a problem is not always the answer. One of the members of the team we were working with told us this story: "My dad worked for a toothpaste manufacturing company and one of the biggest problems the line had was shipping empty boxes. So, the guys in management got together and decided to invest in a scale with an alarm. When the box of tooth- paste landed on that scale, an alarm would sound if it didn't weigh the correct amount and then the work- ers would remove the box. After a while the workers were annoyed with the alarm and management began to realize they hadn't heard the alarm in a while, so they called
IMPLEMENTATION Most real estate law offices,
escrow offices, and title companies have what is commonly known as a “cookbook” of legal note clauses. After getting the contract negotiat- ed and signed, work with the person drawing the note until the terms are satisfactory to both parties. •
Bruce Kellogg has been a Realtor® and investor for 38 years. He has transacted about 800 properties in 12 California counties. These include 1-4 units, 5+ apartments, offices, mixed-use buildings,
Gary and Susan Harper are the owners of Sharper Business Solutions.
land, lots, mobile homes, cabins, and churches. Reach him at brucekellogg10@gmail.com or (408) 489-0131.
50 | think realty magazine :: january / february 2020
thinkrealty . com | 51
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