Always Check The Buyer's Credit!

The above title seems like a very logical step for a seller to do when taking back an owner financed note... right?

Well, our experience as real estate note investors shows that very few sellers run even a cursory credit check on their buyers, and hardly any do any kind of employment or background check.

Now, that's all well and good if your buyer makes his payments on time and you have no intention of selling your note any time in the future. But, when a seller comes to us to sell his or her note, not knowing the buyer's credit becomes a real problem.

Typically, when we ask what the buyer's credit is, the seller will say it's “good”. When we ask for the buyer's FICO score, they have absolutely no idea what it is. So, how do they know the buyer's credit is “good”? We further ask them when they last ran a credit check on the buyer, and they say that they never did run one! Amazing!

So, how does this affect the purchase value of the seller's note? Well, we can only issue a preliminary quote based on the information the seller gives us. At some point in our due diligence, we must run a credit check on the buyer.  Almost 60% of the time, we find that the buyer's credit is not “good”... sometimes below 620 or even lower.

At that point we have to either lower our full purchase quotation considerably or only buy a portion of the note. The seller of course is offended, and blames us for the note's lower value.

The bottom line here is... if you're offering a buyer owner financing by being the lender, you have every right to get their information up front on a credit application, and to check their credit, employment and payment history.

Never sign a purchase agreement or promissory note until you know the buyer's creditworthiness.

Additionally, you should periodically run a new credit check to make certain that the buyer's credit is still good... you do not want to go through a foreclosure.

Remember, as the seller, you're the one giving up your cash and equity for several years by offering the buyer financing they could not obtain conventionally.