How to Get More Than The Asking Price For Your Property

Part 3 of 4

How Does Down Payment Affect Note Value?

For many Note Buyers the amount of the initial down payment at the time of sale can make or break a note deal. The down payment is applied directly toward principal, creating instant equity in the property. Accordingly, most Note Buyers want to confirm the amount of the down payment up front.
With no down payment, it would take many years to build a meaningful amount of equity in the property. Take a look at the following example that illustrates this point.
House #1: valued at $100,000, with a down payment of $20,000 made at the time of sale.
House #2: also valued at $100,000, but with zero down payment made at the time of sale.
The note on House #1 has $20,000 in equity. No down payment made on House #2 means that there is no equity in the property before the first monthly payment is made.

Consider how much “upfront” money there is
Assuming that House #2 was sold for $100,000 with a 30-year note amortized at 8 percent interest, it could take years to build $20,000 in equity.
Because the Note Holder’s purchase is protected by the equity in the property, the amount of the down payment is an important consideration. With the zero down note on House #2, the Note Buyer would need to apply a larger discount in order to make it a fair deal for him. On the other hand, while the note on House #1 is secured by a $20,000 down payment and has substantial protective equity even before the first monthly payment, it would cost the Note Buyer a lot more.
Almost any note deal can be a good deal… for everyone involved
A strong down payment lends a side benefit related to having protective equity. When a large down payment is made at the time of sale, that person is more likely to be committed to owning the house and keeping up with the note payments. Seller-financed deals with zero down payments are very attractive to first-time home buyers or others without a large nest egg saved – but it can be riskier for the Note Buyer. So the educated Note Buyers can offset this risk by increasing the discount on low or zero down payment notes.
Remember, even a note created without a down payment can be a sound purchase. The key is to look at each situation individually and to establish a fair price based on the specific note.
Even when liquidating private mortgages at a discount, Note Sellers still get to receive a lump sum of cash immediately instead of waiting years – decades, even – before the debt owed to them is paid.
The bottom line is that a qualified professional Note Finder can bring a benefit to both parties – the Note Holder and the buyer. In the end, when a deal is struck, everyone wins and ends up in a stronger financial position.

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Sincerely,
Sydney Griecci
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