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One of the most valuable tools an agent or broker can use is seller financing. You can either know about seller financing, do it right and close more deals or you can watch potential commissions go down the tubes. In most cases, agents participate in setting up seller financing without structuring things properly or protecting their clients.

There are basically two types of human motivation. One is to gain pleasure and the other is to avoid pain. Would you agree with me that making more money would fit under the category of pleasure? Would avoiding a lawsuit or a loss of money be a way to avoid pain? If you agree, then you should have some good motivation to read this article, because we will talk about ways to do both. Whether you are an agent or private investor, there is a great deal of liability in the field of real estate. In particular, right now agents all over the country are being sued for the results of their negligence. A large number of these lawsuits have to do with the "paper" involved in the transaction.

The courts are saying effectively, an agent has a liability to structure any carry-back financing to avoid problems and to best fit the needs of both buyer and seller. Many lawsuits have to do with the agent not disclosing dangers and risks with certain types of financing. In the case of investors, they are paying prices now for the decisions they have made in the past few years. The use of seller financing sounds easy and wonderful as it is preached over the podium, yet there are risks - AVOIDABLE ONES! I am in no way saying that there is anything wrong with seller financing. What I am saying is that for it to be used responsibly there are certain areas, options and alternatives that need to be known.

How the terms of a note are structured can make a big difference in the value of the note, the salability of the property and the ability of the buyer to meet his obligations. A good example to look at would be the "balloon payment". Is an agent being responsible to the client by putting the buyer of a property at the mercy of future money market conditions? Many of the foreclosures the last few years were due to buyers being unable to meet their balloon payment obligations. Why not explore other alternatives?

A good option to a balloon payment note is to structure a gradual yearly increase in the amount of the monthly payment. (Understand that this could complicate the note and make it a little less saleable ). This could totally eliminate the need for a balloon payment. Other options might be a shorter amortization on the loan or various clauses to provide flexibility if there is a balloon payment.

By a gradual yearly increase in the payment on a note, the amortization length can be greatly reduced and can eliminate the need for a balloon payment. This structure can be a very attractive opportunity whether a person is paying on the note or receiving payments. If a person is paying on a note, the security and peace of mind of not having to worry about the balloon payment is well worth the gradual payment increase and may make a property more saleable.If a person is receiving payments on a note, eliminating the balloon payment may make the note more valuable and more saleable.

This would also raise the present value of the note from $6,344.84 to $6,909.91, based on a 24% yield. If the payment graduated just $40.00 per year, the note would amortize in just over five years and would be worth $7,198.79, (for a complete breakdown see the chart). The increase in the payment in the first year is a 34% increase. This may not look too attractive, but it may look much more attractive than a $9,657.21 balloon.

The concept does not need to have equal or even steady increases to work. Unless you program a computer to do the work, you will just have to experiment and play around with the numbers to find out what will work The example below shows how to determine how long a $30.00 per year increase in payment will take to amortize the loan. The first step is to figure the amount of the principle balance after the first year of payments. The new balance is brought down to the next line, the interest rate stays the same, the payment is increased and the calculator solves for how long the loan would now take to amortize. The balance after one year's worth of payments is then calculated and brought down to the next line, the payment increased and etc.

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