Cash Flow Notes Explained

A note, which can also be referred to as private mortgage, cash flow note, land contract and other names is simply a mortgage. When a buyer does not qualify for a loan a seller may be willing to finance the sale of their own property. The buyer obtains a mortgage from the seller so instead of making payments to the bank he makes the payments to the seller. The seller may carry back a note for a portion of the sale price if the buyer qualifies for a loan from the bank but does not have enough cash for a down payment, or the entire sale price if he or she does not qualify for a loan at all.

Example 1: Carrying back a note for a portion of the sale price. This typically occurs when the buyer is approved for a loan from the bank but cannot come up with the required down payment. If a home sells for $100,000 and the bank approves the loan and requires a 20% down payment the buyer needs to come up with $20,000 in cash to pay the bank. If the buyer has less than the $20,000 he or she can ask the seller to finance the down payment. So the buyer can have $5,000 which is paid to the bank for the down payment and also borrow $15,000 from the seller which is also paid to the bank to complete the down payment. The bank lends $80,000 to the buyer ($100,000 selling price minus $20,000 down payment). The bank holds the first mortgage and the seller holds the second mortgage for $15,000.

The buyer will now pay the bank monthly payments on the $80,000 loan and monthly payments to the seller on the $15,000 loan. This scenario creates a private mortgage note worth $15,000. The seller now has to collect payments on this note which is for a portion of the sale price.

Example 2: Carrying back a note for the entire sale price. This is simpler than the above example because there is no bank involved. The house is sold for $100,000. A private mortgage is carried back for the sales price minus any down payment if any. So if the seller required a down payment of $5,000 the private mortgage or note will be in the amount of $95,000.

As you can now see, notes are created in order to make the sale of a property when the seller doesn’t have enough cash to satisfy bank requirements or simply does not qualify for a loan at all.