buyer asked me to hold the note...how does this work?

Question

my brother and i purchased a property last year for 40k.  we have a church interested and we named our price, 69k.  they asked me if i could hold the note and they would pay 1500/month over the next 48 months.  that would pay a total of 72k.  my brother and i would like to move foward with this.  ideally we would like one check as a traditional transaction, but the idea of 1500 month cash flow doesnt turn us off.

how does this work?  in this set up, myself and my brother would be the "bank" im guessing, does that mean we have to sign the deed over before we collect payments, similar how buyers receive deed to property after settlement?!  what id they default after two years?  what if they pay on time, after the 48/month we just shake hands and walk away?! we really want to do this but not sure how to structure the deal to protect us.  i know most will recommend an attorney (which we plan on doing) but i wanted to do some research from the BP forum first so im not completely ignorant when we take this project to the next step.  any help would be appreciated.

Bill Gulley · Answer

Interest is NOT what ever you can get, it is to reflect the risk with the type of property and the borrower, actually, lending isn't a greed play.

Churches are a different animal and there are specialty lenders for them. You need to look at the members, the size, weekly offerings, pledges and look to those who made them. Are they willing to personally guarantee a note. They have certified financial statements, get them and verify with bank deposits.

You need a note and deed of trust, the attorney will provide that.

As a church, you might be better off getting creative, you can sell with a donation to reduce taxes, ask your attorney.

The note can simply be in both of your names, you can work it out between you.

I've been in the non-profit sector as well, as a note holder, how they get along is rather irrelevant to you, you won't know how they get along either, they either pay as agreed or they don't.

Foreclosing on a church can be pretty bad press, but it's done everyday....or almost everyday.

If they start talking religion, hold on to your wallet! Keep it business like.

I'd say their net operating income after all other expenses should be over  200% of the payment, at 1,500 that's 3,000 monthly or more they need to clear consistently.

Do not use a reversion deed that requires the property to be used for church purposes, if you had to foreclose you can't change it as a lender and you'd need to sell to another church. You do need to know the intended use of the property and real estate taxes might be waived. They need an insurance policy showing you as a loss payee.

:)  (:

Gavin Welch · Answer

@neal collins  I've had bad experiences doing business with churches.. I don't want to sounds bitter (maybe I am) but I'd look VERY closely into the board of directors.

Typically non-profits and churches have 2 types of boards:

1.  "Yes" men or family members that will follow the leader right off a cliff.. Without questioning a thing.

2.  "combat" board.. They question everything so the leader can't do anything...

Just so I don't sound too crazy.. They are not all like this.  I started and ran a non-profit for 20 years and we had a great board.

I have also been on the board of other organizations that didn't want to pay rent, because of the "God" card.. My point this they signed a contract and should honor that contract no matter what.. I reigned after the first meeting..

So, do your homework and look at the board and the people on the board very closely.

Steve Vaughan · Answer

A church getting creative on the purchase side, eh?  Sounds interesting!

I have 'held the note' on sales before, but never to a church. I know little to nothing about how they are structured or what kind of recourse one would have in case of default.

If you hold a mortgage/deed of trust, you would give them a deed and have a lien on the property.  If they defualt, you will need to foreclose.  With a  Land Contract or Contract for Deed, you would hold title until they pay you off.  Obviously this has more security from the sellers standpoint.  Not sure if those are common in your area?

I would get more information on how their ownership is structured and talk to a competent, qualified, quality  RE attorney who does this for a living @Robert Hastings.  Sounds like a nice find that could benefit all!

Neal Collins · Answer

@Gavin Welch Great post!

@Robert Hastings This is a good one for the story book. I wonder if they'll pull the church card on you if you ask for a higher interest rate and a downpayment.

Gavin Welch · Answer

Robert, you have the concept and a real estate attorney can draw up the paperwork.  If they don't pay you'd have to foreclose on them just like a bank would.

Are they paying insurance and taxes?  How much down payment?  I'd ask for as much as you think you might be able to get.. 5, 10, 15%?

Here is the numbers

69,000 with no deposit at $1,500 per month for four years is about 2.75% interest.. Which seems low.

How long has the church been around?  How do their books look?  I'd ask to see them.  If they can't get bank financing there might be a cash flow issue there.  Who is on the board of directors?  Will they co-sign or guarantee the loan?? Things to think about.  Churches can be tricky.

Since you are the bank you can state your terms.

Good Luck..

buyer asked me to hold the note...how does this work?

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