A Buyer’s Ideal Note
Promissory notes offer great investment potential for the sophisticated note buyer. There are buyers for all types of property notes, but there are certain traits with each note that seasoned buyers look for when evaluating a note as an investment opportunity. Notes with the following traits are considered an idea note in many buyers’ eyes.
- 10% (often regarded as a minimum) or higher down payment
- Good credit score (over 600)
- Interest rate higher than prime rate (ideally 7%-10%)
- Term of 10-20 years
Notes with these traits generally yield a higher offer from a note buyer because they offer a more secure investment.
Here’s why note buyers like these particular traits:
Equity and down payment
The amount of equity the payor has built in the property is very important to a note buyer. Equity is the amount the payor has invested in the property so far, and ultimately what is lost if payment defaults. The most common way to establish equity immediately is in the form of a down payment. Ideally, buyers want to see as much equity as possible and a higher down payment (at least 10% of the sales price) can make the note very attractive.
Credit score
Many seller financed notes are created without the home buyer’s credit score being pulled by the seller. For note buyers, though, a current payor credit score is a must! This figure represents the likelihood of the payor to repay debts on time. Ideally, a payor’s credit score should exceed 600, and some buyers even like to see it above 650.
Interest rate
When it comes to establishing an interest rate, the seller financing market does not rely upon an industry-established prime. The note holder sets the interest rate, usually higher than prime, to cover the risk of carrying the financing. Note buyers prefer to see an interest rate higher than the prime rate and 7%-10% is generally regarded as excellent. As an added bonus, having a higher interest rate written into a note typically means less of a discount in the buyer’s offer.
Term length
Note buyers like to see a shorter term written into a note as this means a faster turnaround on their investment. A term of 10 or 20 years is ideal.
The above factors are only guidelines and other factors, such as location and property type, are also considered by buyers when making an offer. However, structuring a note with a note buyer’s ideals in mind is key to getting the best offer.