This guide is for anyone collecting payments after selling real estate with seller financing. I mention this upfront because selling real estate contracts means different things to different people.
This guide isn’t for you if you are a real estate “wholesaler” who places properties under a purchase contract and then assigns (sells) the agreement to another investor. You also sell contracts, but learning how to wholesale for profit requires a lot more than a single article.
Here’s what you will learn:
- The types of seller-financed contracts
- What it means to sell a contract
- Who buys seller-financed contracts
- The contract selling process
- How to sell for the highest price
Okay, let’s get started.
Types of Seller Financed Real Estate Contracts
When someone sells real estate and seller finances, they exchange property for paper. If I sell you a home, and you give me a written promise to pay over several months or years, I end up with paper, and you end up with a house. But if you stop making payments, you probably won’t have the house much longer. The paper (aka contract) serves as a promise to pay with specific terms such as an interest rate, payment schedule, etc.
Depending on where you live, and the agreement is structured, seller-financed real estate contracts are referred to by many names:
- Promissory Note
- Contract For Deed
- Land Contract
- Installment Contract
- Installment Sale Agreement
- Real Estate Contract
- Real Estate Installment Note
- Bond For Deed
No matter what your contract is called, it always includes a promise to pay and payment terms.
What Happens When Selling A Real Estate Contract?
Let’s say you sold a property for $120,000. The buyer gave you a $20,000 down payment, and you agreed to accept the rest at 120 monthly payments with 7% interest.
After collecting 30 payments, you decide to sell the remainder of the contract. You’ll be selling the right for someone else to receive the remaining loan balance per the contract’s terms.
If the property buyer continues making payments as scheduled, whoever buys the contract will receive 70 monthly payments. If they pay off early, the contract buyer will receive whatever balance is due at that time. And if the buyer defaults, the new contract holder will have the right to enforce their contract through foreclosure, forfeiture, or possibly other means.
For the property buyer, the only change following the sale will be where they make payments. The contract terms and outstanding balance remain the same.
Who Will Buy My Real Estate Contract?
Real estate contracts are traded in the secondary market. Major financial institutions do it daily, and it’s more common than people realize in the seller-financed world. Why? Life changes, financial needs, estates, divorce, etc.
Note Buyers (such as Porch Swing Funding), independent note investors, a few banks, and specialized hedge funds buy seller-financed contracts.
The banks and hedge funds tend to work directly with industry insiders. Independent investors mostly fly below the radar.
However, professional Note Buyers spend a great deal of effort using direct mail and online ads to connect with “mom and pop” contract holders. They also develop relationships with CPAs, Attorneys, and title companies in their regular course of business.
The best place to start is to seek referrals from those in your network. If that doesn’t work, try searching online.
The Contract Selling Process
Selling real estate contracts involves four main steps:
- Obtain a quote
- Sign an option agreement
- Due diligence performed by the buyer
Obtain A Quote
Let’s say someone called offering to sell you a used car. And let’s also say you don’t know the person or anything about the vehicle. What would you need to know? Make? Model? Miles? Condition? Has it ever been in an accident?
No two used cars are the same. The same is true for real estate contracts.
A Note Buyer will need to know about:
- The sale of the real estate
- The condition and estimated value of the real estate
- The contract terms and payment history
- The type of contract
- The borrowers
They will also ask you to forward copies of the final settlement statement created by the title company, the signed real estate contract, and the recorded security document.
Later I’ll give some insight into note pricing.
Sign An Option Agreement
Should you decide to sell, you and your Note Buyer will sign an agreement giving the right to purchase your contract for the agreed-upon terms subject to due diligence (see below).
Having this agreement in place gives your Note Buyer the ability to begin ordering services and reports that cost money.
** Hint: Not all Note Buyers will pay for due diligence and closing costs, but it’s something you can negotiate. **
Due Diligence When Selling Real Estate Contracts
You’ll also hear due diligence referred to as “underwriting.” Either way, expect your contract buyer to review:
- The Loan Documents
- A Title Report
- A Property Report (often a BPO – Broker’s Price Opinion)
- Payment History
- Proof of Property Hazard Insurance
- Proof of Down Payment
- Confirm that you or your title company has possession of the original ink signed contract you are selling
If there are title or other issues, your Note Buyer will work to resolve those during this phase.
Closing involves signing the final purchase agreement and other documents to assign ownership of your contract to the buyer.
As Sellers, you either sign at a local title company or with a mobile notary. In addition to signing documents, you will hand the original seller-financed real estate contract (promissory note, etc.) to whoever you are signing with.
Generally, purchasing contracts secured by residential real estate takes about 30 days. Additional time may be needed when commercial properties or title issues are involved.
You may receive funds at closing, but more typically within 24 hours of closing via wire transfer to your bank account.
Bonus: How To Sell For The Highest Price
There may be a used car for every customer, but the most valuable vehicles are popular models babied from the minute they left the showroom floor. (Yes, I’m using the car analogy again)
Here are some “insider tips.”
- The ideal seller-financed note has an interest rate at least 4% higher than what banks offer, at least 10% equity, and no more than 10 years of payments remaining.
- Underwrite your borrowers. A loan is only as good as the borrower’s ability to pay. Verify earnings history and their credit report. Also check for prior bankruptcies, foreclosures, or evictions. Finally, if they currently rent, verify they’ve been making rent payments on time.
- Keep impecible records. Verifiable payment histories are critical. Recommendation: use a licensed 3rd party loan servicer or title/escrow company to collect and track payments.
- Safeguard the original contract. Think of your real estate seller-financed contract as a check someone wrote you. Keep it in a secure place. At closing, it will be given to the closing agent who will then forward it to your Note Buyer.
- Train your borrower early on. If your contract says you’ll charge a late fee for late payments, charge it. Poor habits repeat if you allow them to.
- Keep track of insurance and taxes. You or your loan servicer should confirm every six months that property taxes are being paid, and at each insurance renewal interval that the policy is current.
- Check on the property. While it’s technically in the borrower’s hands (you may not enter inside), they still have a responsibility to maintain what serves as collateral for your loan. Look for tarps on the roof, broken windows, missing siding or shingles, or other serious issues which could reduce the home’s value.
Summary and Highlights
- No matter what your contract is called, it always includes a promise to pay and payment terms.
- While several types of real estate contract buyers exist, Note Buyers will cater most to mom-and-pop noteholders.
- Selling real estate contracts involves 4 steps: Quote, Option, Diligence, and Closing.
- Creating the best note possible, and looking after your investment while you hold it are the best ways to receive top pricing.