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How Much of a Down Payment Should I Ask for When I Carry a Note?

The quick answer to this question is “As much as possible.”  The more money someone puts down, the more protective equity you have, and the less likely they are to default.  It’s called, “Having some skin in the game.”

There are good buyers out there who do not have 20% or more for a cash down payment.  Does that mean that you shouldn’t do the deal?  Maybe, maybe not.  It all depends.

There are many factors that are unique to each individual situation.  That’s why people pay me to go over their particular situation and look at it from all sides, understanding both the risks and rewards and best ways to mitigate risk.

If someone doesn’t have a 20% down payment, you can reduce your exposure by using the land trust transfer.  That way, you don’t have to foreclose to regain possession of the property if the buyer defaults.  It also allows you to defer any capital gains.

FYI, here are some typical Loan-To-Value (LTV) Ranges required by note buyers (which is also why many note holders end up selling a partial):

  • Owner-occupied single family home: 70% to 80%
  • Non-owner-occupied single family house: 60% to 70%
  • Owner -occupied condominium: 50% to 70%
  • Multi-family apartments: 50% to 70%
  • Commercial property: 60%
  • Urban land with utilities (to the property): 50%
  • Rural land (non farm): 50% or less

Two things may be learned from this list:

1.  The type of notes preferred by note buyers: Owner-occupied homes are the most desirable in general. History has proven them the most stable. Notes secured by land usually have the greatest risk.

2.  Real estate values fluctuate both up and down over time, even in good areas. A note holder’s best protection against loss is protective equity established at the time he acquires a note. An owner with a substantial equity who is paying on a note will be motivated to protect his/her equity position.

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