Modification of a seller financed real estate note should be done only to salvage a deal from going bad. Let’s look at the case study of a note with Julie and John.
For example, if Julie loses her job, and her husband John does not make enough money to make payments on the note, then it is possible to make some changes that may allow them to continue paying — without dropping the value of the note. These modifications will also show your good faith as a lender.
Another reason for change might come when a balloon payment of the full amount is due, and Julie and John cannot come up with the total due or are unable to refinance. This opportunity again allows you to show mercy, while still exercising good business practices.
Other reasons to modify a note might include constant late payments, or some missed payments that need to be brought current.
Whatever the problem is, there are possibilities to fix it…
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So, what can be changed?
- Change the interest rate.
- Cross collateralize with other property for security.
- Allow a transfer of responsible party for payment, or co-signor.
- Lower payments for a short time, then return to original terms
- Change the payment due date, or lengthen the term on the contract.
- Eliminate or extend the balloon payment term.
- Or, any combination of the above.
Let’s apply a couple of the above modifications to Julie’s and John’s note:
Change the Term
The modification for Julie’s and John’s situation may be as simple as lengthening the term on the note. If they have 20 years left on their note, it could be changed to 30 years.
The longer amortization will lower the payment, and give them payments they can now handle, allowing them to keep up with their payments, and preserve your investment.
Eliminate the Balloon
The most obvious change for the balloon payment issue is to eliminate the balloon. Restructure the note to state that the term is a full 20 or 30 years. This will remove the stress for Julie and John to refinance, and also remove the hassle of a possible foreclosure for you.
If you still want to be cashed out of the note, you can typically sell it to an investor for a higher cash pay-out if the balloon is eliminated.