Something that often gets overlooked when land investors create new loans is the concept of originating each loan in a way that makes it easy to sell and underwrite it to sell at the highest possible value.

Why Is This Important?

There are several reasons, but the most important one is liquidity.

When you sell a property with owner financing, one of the most significant drawbacks is that you won't receive all your money from the deal very quickly. You'll usually have to wait for years before you're paid off.

What if, due to unforeseen circumstances, you need to get your money back more quickly? What if you change your mind and want to get paid off so you can put your money into the next deal?

If you follow the proper steps to originate your loan correctly, it will be easy to do, and you'll be able to sell your loan for the highest value.

If you don't originate your loan correctly, it will be significantly more difficult (and possibly impossible) to sell your loan and cash out.

Not to mention, even if you don't sell your note in the future, going through these steps will still ensure you are creating a good loan with a good borrower, who will be much more likely to pay you as agreed, so you can avoid any unforeseen issues with a default.

Step 1: Sell Your Property at a Market Value (Don't Over-Inflate the Sale Price)

Sometimes, you'll find that if you offer owner financing, you can sell your property at a higher price, sometimes even above market value.

In other cases, you may be able to jack up your sale price in return for charging 0% interest. In other words, you are just baking the interest into the purchase price of the property.

In either case, this maneuver can create problems in the future because, regardless of your sale price, it doesn't change the objective market value of the property in relation to your loan amount.

Investment-to-Value is a very important metric that all lenders and note investors will look at when making a lending decision, so don't go too crazy with how high you choose to sell your property for. Most note buyers won't pay more than 65% of the land's value (regardless of the outstanding loan balance).

Another metric to be aware of is the Percentage of UPB (Unpaid Principal Balance). Most land note buyers would pay around 70–75% of the UPB if the loan were originated correctly. The UPB percentage is similar to the Loan-to-Value Ratio (LTV).

Step 2: Get a Copy of the Borrower Personal Credit Report

There are billion-dollar businesses that revolve entirely around the borrower's credit score. Although this number is oversimplified in some ways, it remains very important information for your file.

There are several ways to obtain the borrower's credit report. One way is to ask them to pull their own from freecreditreport.com and send it to you. You could also use a service like SmartMove, which requires a small fee from the borrower.

If you find the score too low (especially if the reasons for their low score aren't acceptable to you), you can counter this risk by requiring a higher down payment from the borrower to help offset that risk.

Eric has a credit matrix he uses to determine the down payment required based on the borrower's credit score.

Also, don't forget to obtain the borrower's phone number, email address, and primary residence address. This is the information you'll need to communicate with them in the future, should there be a default or any other reason to contact them.

Many title companies and closing attorneys will request the same information when handling the closing. This document will also provide a brief yet helpful overview of who your borrower is, which is valuable information to have if you want to understand the person you're working with.

If you want a Google Forms version of this ID Statement, this video will explain how.

Click here to make a copy of this Google Form for yourself

Another way to handle this is to use an e-signature platform like Stride CRM or PandaDoc, where the borrower can answer these questions AND e-sign it simultaneously.

Step 3: Charge Sufficient Interest (10% Standard)

While some borrowers will expect a lower interest rate, like what they can get from a bank with a 30-year fixed rate mortgage… but this is a very different type of loan product, lending relationship, and property type.

For a vacant lot, which oftentimes cannot get financed by a traditional bank (hence the need for seller financing), 10% is a reasonable starting point. Mainly because we aren't doing nearly as much underwriting of the borrower, and the closing process is significantly faster and easier than it would be when working with a bank.

You can also remind the borrower that there are no prepayment penalties (assuming none are written into your loan documents), and they're welcome to pay off the loan faster if they wish to do so.

Step 4: Keep the Loan Term As Short As Possible (96 Months Max)

Another factor in the likelihood of defaulting on any loan is how long the amortization schedule stretches on. The longer it takes a borrower to repay their loan, the higher the likelihood that there will be reasons for late or missed payments along the way.

A shorter term and a higher interest rate will be the two most important factors in getting you the highest possible resale price if or when you decide to sell your note to another investor.

A 96-month loan term is usually a reasonable limit, but there may be cases where it can be extended further. A 120-month term (10 years) could make sense if the interest rate were higher (assuming it's allowed by state usury laws), but the main takeaway is that we aren't in the long-term finance business like banks are. Our objective is to be paid back in full as quickly as possible.

For loans in the $20,000 to $50,000 range, a 60-month term is usually the most suitable. When loan amounts exceed $ 50,000, the term can be extended to 96 months.

Step 5: Get a 20% Down Payment (Minimum)

At the very least, making a 20% down payment is a good idea, not only because it gives the lender a better equity position in the property and demonstrates the borrower's financial commitment to the deal, but also because it shows that the borrower has the financial capability to make a substantial payment.

When lending money to someone, you want to know that they have sufficient financial strength to make their payments for years to come. If they have enough cash to put down a larger down payment, this is a good sign that points in the right direction.

The bigger the down payment, the better. If the borrower is willing to put down 30%, 40%, or 50%, let them do so, because the larger the down payment, the less likely the borrower is to default on their loan.

Step 6: Don't Handle the Paperwork Yourself; Use a Title Company

When closing a “normal” vacant transaction without a title company, there are plenty of opportunities to make errors. It can certainly be done, but it requires some knowledge and attention to detail.

When you're closing a vacant land transaction involving seller financing, there are MANY more opportunities to make mistakes because more documents, more numbers, more details, and more signatures are needed (among other things).

The easiest way to handle this, by far, is to find a local title company or closing attorney who can use the right state-specific documents to facilitate the closing of the deal for you.

In most cases, you'll want to make sure your closing agent includes any specific language that ought to be included in those documents (that's where your attorney's input will be important), but either way, you'll be much better off paying for this help than trying to cobble together the right documents on your own.

Step 7: Get a Lender's Policy

When you're closing with a title company, they can also provide a Lender's Policy. This type of title insurance will verify the title is clear and protect the lender (that's you) if any title issues come to light that should have been caught before the closing.

A Lender's Policy will also give any future note buyer more confidence that they are acquiring a loan collateralized by a property with no known title defects.

It's also worth noting that the buyer/borrower will pay for the Lender's Policy as part of their closing costs, so it doesn't even cost you anything extra!

Step 8: Use a Licensed Loan Servicing Company

When you set up a new loan, you'll also need to figure out when and how the borrower will make their monthly loan payments to you.

The easiest way to do this, BY FAR, is to use a loan servicing company. In this blog post, you can find loan servicing companies in all 50 states.

Using a loan servicer does require an ongoing monthly cost, but it's not difficult to set up your loan so that the borrower pays this fee each month. The additional cost is simply added to their monthly payment, so it doesn't cost you a dime!

The additional cost of a loan servicer is worth it because it will remove a significant amount of ongoing maintenance from your plate.

Step 9: Keep Electronic Copies of All Closing Documents and the Loan Payment History

When it comes time to sell your note, any note buyer will want to review all of your original closing documentation, the borrower's information, and the entire payment history of the loan.

In most states, you'll also need to keep a copy of the original, signed note with its wet signature (a digital copy may not always suffice). If there's any single document you don't want to shred, it's this one!

Step 10:  Use a Mortgage or Deed of Trust (depending on judicial or non-judicial foreclosure state), NOT a land contract.

Generally, non-judicial foreclosure states use a Deed of Trust, while judicial foreclosure states typically employ a mortgage. It's an easy way to remember the concept, but not true 100% of the time. For example, Michigan is one exception; it's a non-judicial state that uses a mortgage.

RELATED: The Full List of All Judicial and Non-Judicial Foreclosure States in the U.S.

Charge a Loan Fee to Help Cover Your Closing Costs

As you might imagine, some costs will be associated with all the steps listed above. One way to help offset these costs is to charge the borrower a $500 “documentation fee” or “loan fee” at closing.

You could charge a higher amount than $500 if you prefer, but the higher you go, the more likely you are to encounter pushback from the borrower. In most cases, $500 is a sensible, friendly number that borrowers will understand and accept.

It's normal for the seller to pay some of the closing costs, but you can help minimize the damage by collecting this fee.

Other Notes

Some other things to keep in mind when closing a seller-financed deal:

Charge the prepaid interest from the closing date to the date of the first payment.

The moment you close a loan, interest starts accruing at that point in time. By the time the first payment is due, a small amount of interest will already be due. Alternatively, you can ask the title company to charge that interest amount at closing rather than waiting until the first payment date.

Why do this? Because you can use this additional amount to help offset some of your closing costs. Most banks include this in their loan closings, and you can do the same.

Ensure your documents include provisions that grant you control and clarity.

There are several things you'll want your loan documents to include. This is the list of items Eric provides to his title companies when they compile his documents for closing.

• Specify that the property is vacant land with no improvements.
• The property is an investment purchase for the buyer.
• The buyer has another property as their primary residence.
• Require a personal guarantee from the borrower, whether they're buying it in the name of their LLC or their personal name.
• Include the Power of Sale clause in the loan documents.
• Include a default interest rate (i.e., if the buyer defaults, you can increase the interest rate until the default is cured or until the property is sold at foreclosure).
• Include a late fee, but don't exceed 10% of the monthly payment amount (5% in Texas).
• Notices can be sent electronically (so you can email the borrower any default notices if needed).
• No prepayment penalty.
• If the buyer fails to pay taxes, you have the right to add an escrow, and the buyer will be required to pay for any increase in servicing fees.

What Does the Perfect Loan Package Look Like?

To summarize the points above, if you want to take your completed loan and sell it, this is what the “perfect package” should include:

• The correct, complete, fully executed loan documents containing all the correct language.
• Borrower’s credit report and contact info (phone, email, and primary residence address).
• Full loan file, including copies of all loan docs, which contain state-specific, attorney-approved language.
• Full payment history on the loan, so the note buyer can see the original sale price and the LTV of the note they’re buying.
• All due diligence on the subject property so that the note buyer can get a comprehensive understanding of the collateral value.
• Copy of the lender’s policy.
• You can expect to receive approximately 70% of the current loan balance.

How Does the Note Selling Process Work?

You'll have to ship all the documents to the note buyer along with an Assignment of Mortgage (or an Assignment of Deed of Trust), which transfers the security instrument from you to the note buyer. This document will need to be recorded, and you can coordinate with the note buyer to determine which party will be responsible for recording.

You'll also provide an “Allonge” to the note buyer, which assigns the Note to them.

Then you'll communicate with the loan servicing company to transfer the loan from you to the new note buyer. This will effectively send those monthly payments to the new note buyer instead of you.

Interested in Selling Your Loan?

Eric offers an 80% full-service program, where he can guide you through each step of the process. Whether you're selling your loan immediately after the closing or several months later, he's a great person to work with as you become educated on this process.

Contact Eric Scharaga at:

• [email protected]
• 847-222-8888
• https://www.ericscharaga.com

Before You Sell a Property With Seller Financing… Read This

Most people jump into seller financing without fully understanding what they're getting into.

And on the surface, it might seem simple enough:

Just sell your land, get some payments, and enjoy the passive income. Right?

Wrong.

When you don't structure seller-financed deals correctly from the outset, you expose yourself to significant financial risk.

• You might create a note that no serious investor will ever want to buy.
• You might attract the wrong borrowers, those most likely to default.
• You might accidentally break state or federal laws.
• You might lock yourself into a deal that becomes a legal and logistical nightmare.

The truth is, just one bad loan can cost you thousands in lost income, months of stress, and even legal consequences if you don’t understand the ground rules.

The Solution: The Seller Financing Masterclass

If you're serious about building a real estate business that’s scalable, profitable, and protected from avoidable disasters, the Seller Financing Masterclass was built for you.

This isn’t a high-level overview or vague theory. It’s a step-by-step, detailed roadmap that teaches you exactly how to:

• Originate your loans the right way so they are easy to sell later
• Use the correct legal documents for your state and avoid costly mistakes
• Qualify your borrowers and steer clear of future defaults
• Set up your loan terms to maximize cash flow and control
• Collect payments automatically without chasing people down
• Know when and how to sell your notes for top dollar

And much more.

You’ll also get real-world templates, examples, and calculators to help you apply everything immediately, without having to figure it all out alone.

One Bad Deal Can Cost Far More Than This Course!

The Seller Financing Masterclass is a low-cost investment compared to the money you'll save and earn by doing this the right way.

The strategies inside can easily help you:

• Avoid five-figure mistakes
• Boost your ROI on every seller-financed deal
• Protect your business from unnecessary risk
• Create predictable, recurring income that lasts

Ready to Master Seller Financing?

This course has already helped countless real estate investors stop guessing and start profiting.

If you plan to use seller financing or are already doing so, you can’t afford to learn by trial and error.

Start the Seller Financing Masterclass Now!

One payment. Lifetime access. Immediate impact.