Holding a mortgage note. Pros and Cons

[Sig]

If you are in California or another state with anti deficiency laws and the FED jacks interest rates you could be taking a property back worth than what you could sell it for today and you would probably not be able to recover anything else from the buyer. You might a property which has been neglected or "harvested".

This is why I believe buyers should pay a premium when sellers do the financing. Buyers in anti deficiency situations are getting a call option on rising real estate prices for the amount of the downpayment money and whatever premium they pay in interest.

At the same time though, if it's structured as a "rent to buy" the buyer is exposed to huge counterparty risk on the part of the "seller". If anyone senior to them, including the county in the case of property tax, forecloses on the house they end up with nothing but an unsecured claim even if they're 2 months from paying the entire amount.
Even if it is a real recorded mortgage, the seller is getting significantly above market interest on what they deem to be a low risk, so their risk adjusted return is pretty high. This is like being able to sell a call option on the S&P 500 for 50% more than the going rate.

 

[Arnie]

https://www.nolo.com/legal-encyclopedia/the-basics-land-contracts.html

 

[maximumpossiblesuffering]

Anyone with experience holding a note for the buyer?

One of my tenants would like to buy the property he rents but he most likely won’t qualify for a mortgage from a bank.
He works as a bartender/manager off the books completely cash in a hot seasonal beach bar, and in the slower winter months Bartends and picks up side work.

He can put down 20% and wouldn’t haggle over a higher interest rate (a full point maybe two above bank rates).

I bought the house in cash so there is no mortgage on it. Cash flow is solid ($2400/month rent) so I don’t need to sell.

Any thoughts/experience would be appreciated

Thanks.

Sold a California non-residental property for a significant gain. The buyer requested seller financing. After realizing I could get tax benefits using the installment method, I was eager to do the financing. Was not looking to reinvest proceeds so no 1031 tax deferred exchange for me.