Selling your mortgage note is not all about or just about price. It is also about working wit a buyer who will follow through and actually close at the agreed price. If you have a note to sell and you are not sure who to call, who to trust or what to look for yo will want to watch this short 9 minute video
What’s My Note Worth?
A question all note sellers have and have a right to know.
Timing Your Mortgage Note Sale is everything.
So, when is the correct time to sell your mortgage note?
The following utube video with my friends Walter Wofford and Jim Ingersoll is so to the point as to the value of trusts in any form of a real estate transaction.
They discuss the ultra importance of transactional privacy and how that helps with asset protection.Under what circumstances would you want the general public to know the properties you own?
Trusts provide privacy and effectively separate all of your investment assets. They are not hard to use and provide tremendous privacy in your deals as a trustee is used to hold title and the trust agreement is not recorded at the courthouse.
Under what circumstances would you not like the public to know that you own a property?
What are the benefits of using trusts?
1. Privacy – Keep your name and LLC out of public records
2. Liens and judgments
3. Probate benefits
4. Sell the entity, not the property
5. Personal property trusts for IRAs, cars, boats, etc
Today I cam across this article title,” The Three Ds of Doom: Debt, Default, Depression”. Without sounding negative, it certainly makes one think about the current economy. Everything appears to be booming, at least here in the greater Phoenix Metroplex. But………..what is under the covers. What goes up always comes down. It is a fact of life. Now apply this to the niche business. It is the paper side of real estate.
In the very near future, Capstone will be launching a Utube note training series on buying Notes. One of the topics as part of the due diligence series will be a deep dive into Investment to Value and Loan to Value. In other words, what is the note buyers safety net in the event of a downturn. How to minimize the pain in your portfolio. The only way I know is to have an EQUITY SPREAD. For instance, if a note has a $100,000 unpaid loan balance (aka UPB), what is your risk tolerance. What safety net do you require? The Capstone safety net is an Investment to Value (ITV) not exceeding 65% and a Loan to Value not exceeding 70%. Some say this is too big a filter. I guess time will tell. Anyway–moving on to the article.
The Three Ds of Doom: Debt, Default, Depression
July 17, 2019
“Borrowing our way out of debt” generates the three Ds of Doom: debt leads to default which ushers in Depression.
Let’s start by defining Economic Depression: a Depression is a Recession that isn’t fixed by conventional fiscal and monetary stimulus. In other words, when a recession drags on despite massive fiscal and monetary stimulus being thrown into the economy, then the stimulus-resistant stagnation is called a Depression. Read more
The August 7th Note Investors Forum Meetup focus on:
TOPICS: Several New Case Studies
Where Does a New Note Investor Begin
Bring your questions, This will be an interactive meeting.
The Next Note Investors Forum Meeting will be
Wednesday, August 7th 11:30am-1:30pm
La Famiglia Restaurant, SE corner of Dobson & Guadalupe, Mesa
Proper and detailed due diligence is a must in purchasing a quality note. The note overview provided for each note in the note vault is a summary of what our underwriting has determined to be important points to consider when purchasing note. Let’s look at them line by line.
TYPE–means the type of security. It could be a land contract, mortgage or deed of trust
CFD — means Land Contract, Contract for Deed or Agreement for Deed all of which are synonymous.
VALUE–is the value we have determined usually by a BPO(broker price opinion), sometimes referred to as a CMA(Competitive Market Analysis)
CURRENT BALANCE–is the current loan balance some times referred to as UPB–unpaid principle balance
ORIGINAL BALANCE–is the original when the loan was originated
P & I–meant the amount of the monthly principle and interest payment
ORIGINAL TERM–reflects the # of months of amortization when the loan was originated.
REMAINING TERM–reflects the # of remaining months of amortization.
INVESTMENT TO VALUE–reflects the amount of money invested divided by the property value or BPO amount. We consider a good range to not exceed 65%.
LOAN TO VALUE–reflects the amount of the existing loan balance(UPB) divided by the property value or BPO amount. We feel the lower the better, definitely less than 60-65%. The lower the better. The lower the better the equity position in the event something goes wrong with the payments.
INTEREST RATE-is the amount of interest the payor(borrower) is paying.
EFFECTIVE YIELD-is what is your rate of return based upon how much one is paying for the loan compared to the actual remaining loan balance.
SEASONING-reflects how many months the borrower has been paying since the loan was originated.
PAYMENT HISTORY-is a record–a spreadsheet of the payments which include due date, paid date, late fees, taxes and insurance payments and multiple other items. As long as the borrower is current 11 out of 12 months, it is considered to be a good history. As long as the borrower pays within 30 days of the due date even though there may be a late fee charged, we consider that to be on time payments.
ACH-means the payments are automatic bank drafts from the borrowers account. As lenders we really like that typo of borrower.
PAYOR—another word for borrower
DODD-FRANK FRIENDLY–refers to the Dodd-Frank Act which was effective January 10, 2014. Any loans originated after that date require underwriting by a loan originator.
PROJECTED RENT–reflects what that typo home rents for in the area. We use that as a benchmark for the payor–meaning we like to see their total payments to be less than a typical area rental. They have to live somewhere. If rents in the area are much more than their monthly PITI, it is less likely the payor will default.
For additional information on due diligence go to this posting.
Go to our NOTE VAULT for our current performing note inventory.
Recently I meet a new real estate investor at AZREIA (Phoenix Real Estate Investors Club). She shared with me how seller financing literally saved her from a poorly performing duplex in Kingman, AZ. What follows is her narrative – with my comments.
I currently hold a note on a Duplex in Kingman AZ. This note came about as an accidental solution to a really bad problem property. It is a very short term note with 5% interest(VERY LOW INTEREST RATE) and a balloon. The note has been extended once, and there is an option to extend it again.
I originally acquired the property in August 2014. My investor and I paid cash for the duplex. It was in very bad repair and needed a full rehab. We had originally intended to rehab it and rent it out. We had a lot of issues with the property, many problems with contractors, problems within the partnership, and tons of money issues. We couldn’t get it finished, and it was just sitting vacant and getting vandalized. It was a huge headache for me, a source of serious stress, and a huge money pit. I drove back and forth to Kingman many times to deal with the property, contractors, solve problems, etc. My partner and I fought about it all the time for two years. After a year I wanted to sell it and get out, but he did not. It was a good property. We just could not agree on any aspect of the property. We both had completely different rules for our investing and very different ways of doing things. After almost two years of butting heads and losing money I’d had enough and was desperate to find a way out.
We owned one other property together that I also wanted out of. Both were good properties but it was technically the partnership that I wanted out of. He did not want to sell the other property either. With the help of a local note investor in structuring a buyout contract, I acquired the duplex solely as part of my partner’s buyout of my share of the other property.
I immediately put the duplex up for sale. I was a very motivated seller, but I did not want to discount the price very much because it was a very good property in a good location in downtown Kingman. We had already put 15K into the rehab so one side was really close to being rent ready. The other side still needed full rehab, but it could have cash flowed or at least broken even with just the one side rented.
Very quickly my real estate agent found me an investor buyer who wanted to live in the finished side and slowly rehab the other side until she could rent it out. She was willing to pay full asking price but wanted seller financing and was going to refi within a short period of time. She was willing to put down the amount I asked for (about 40%) which took care of my partner’s buyout of the other property and the small private money loan on the duplex for rehab costs. In September I wrote a $37K note for 6 months at 5% with a balloon due in March of 2017. The sale of this property as a seller finance turned this disaster of a property into an easy, stress free cash-flowing asset.
In March, my buyer was not able to refi and cash me out. Rather than foreclose, I extended her loan. I charged her a fee to extend her loan. She could not pay the fee up front so I added it to her monthly payment. The property now cash flows at a net of $435.50 every month and I do nothing except get a deposit into my bank account. (AKA – Mail Box Money) Taking a note on this property not only turned a disastrous and extremely stressful negative cash flow property into a stress-free income-producing asset, but the new owner is happy because she lives there and works on the property. Eventually her renters will pay her more than she needs to cover her payment to me, or she can sell it. The work she has done so far has increased the property value by quite a bit, so if she sells it she can cash me out and still have a profit.
This is an incredible story with a heart warming solution.
- The Seller got her price for the property.
- The Seller dissolved was able to disolve a negative partnership due to a very hefty 40% down payment.
- The Seller turned a negative cash flow into a positive cash flow
- The Seller reduced stress in her life. As she put it so well, ” It was a huge headache for me, a source of serious stress, and a huge money pit.”
- The Seller no longer has to commute from Phoenix to Kingman to handle landlord issues.
- The Buyer is fixing up the house for the seller. In the event of a foreclosure, the Seller is way ahead
- The buyer was able to occupy one side of the duplex and rent out the other half which is paying her mortgage and…she still has a profit.
- The real estate agent received a full commission and…………..got a quick sale.
The Second of the Twin Dangers
In a previous post, I gave some cautionary advice and questions relative to a borrower signing a personal guaranty. That personal guaranty allows the creditor to pursue any other assets then owned or acquired in the future by the guarantor should the note go into default and a judgment be obtained. These personal guaranties are frequently required in commercial lending environments wherein the main borrower is an entity such as a corporation or an LLC.
The second of the twin dangers is a cognovit promissory note. I realize that not all states recognize and permit cognovit promissory notes. Those states that do only allow them to be used in a business context; however, I have often seen real estate investors who are borrowing money for their business, or for a rehab or flip, willingly sign a cognovit promissory note without fully understanding what can occur.
A properly formatted cognovit promissory note includes the warning language and agreement that the borrower will, in the event of default, allow for the lender to immediately sue and obtain judgment against them. In other words, the lender/creditor can sue on Monday and, with the filing of the lawsuit, file an answer with the court confessing or admitting to judgment requested in the lawsuit. This means that by Tuesday, the lender/creditor can have a court order signed by a judge granting them judgment in the full amount of the unpaid balance with no opportunity for the borrower to challenge, defend or question the allegations that have just been filed by the lender/creditor. It’s an open and shut case; borrower loses!! That cognovit judgment then becomes a very powerful collection tool to be used in conjunction with a personal guaranty to place liens on any other assets owned by the debtor or guarantor.
I have also seen instances wherein bank attachments and garnishes were filed immediately thereafter based upon the filing of the lawsuit and the confession of judgment according to the terms of the cognovit note, which means it is possible for the borrower/guarantor to not even know they have been sued until after their bank account has been frozen or cleaned out. I don’t think I have to describe to you how paralyzing that can be to a borrower who is in default to have all their money taken from them and have no ability then to retain counsel to fight this situation and try to mitigate the damage.
If you think I’m exaggerating, allow me to share with you one instance in which` I watched a lender holding a cognovit note with a personal guaranty craftily lure the borrower into default by promising a refi that he then delayed. At the closing of the refi, the lender insisted on an extra $15,000 in late fees, penalties and accrued interest, leaving the borrower with the choice of paying that extra money at the refi closing or risk having judgment immediately obtained against him for the full amount of the note he thought was going to be refinanced 60 days earlier.
By now I trust you can understand how powerful these tools are in the hands of a lender or debt collector, particularly one who lacks morals and ethics. That’s why many states no longer permit them to be used. In those situations in which they still can be used, you, the borrower, must be informed and prepared when your lender asks for that type of note or instrument to be signed.
In case you’re wondering, when I represent lenders in commercial transactions, I do my best to get strong personal guaranties and cognovit notes signed by the borrowers. After all, I’m doing everything I can to protect and secure my lending client’s position.
I hope this helps you be better informed for the next time you have to make a borrowing decision.
Editors Note: This is a well written article by Attorney Jeff Watson.
In January 2017, an estimated 29,000 homeowners received permanent loan modifications from mortgage servicers during the month according to HOPE NOW, a non-profit alliance of mortgage servicers, investors, counselors, and other mortgage market participants. This total includes modifications completed under both proprietary programs and the government’s Home Affordable Modification Program (HAMP). Of the permanent loan modifications performed that month, approximately 20,000 were through proprietary programs while 9,521 were through HAMP. The HAMP program ended officially in December 2016, though servicers will continue to review homeowners who applied before December 31.
Loan modifications increased by 3 percent from December 2016 to January 2017. Total non-foreclosure solutions, such as total loan modifications, short sales, deed in lieu, and workout plans, for January 2017 approximated 102,000, compared to 26,000 foreclosure sales.
Additionally, foreclosure starts and sales saw an increase in those two months. Foreclosure starts jumped from 49,000 in December to 55,000 in January, while foreclosure sales jumped from 20,000 to 26,000 in that same time. HOPE NOW notes that increases in foreclosure starts and sales are typical with their historical data. Although sales and starts are up month-over-month, the year-over-year data saw decreases. Starts are down 4 percent from January 2016, and sales are down 22 percent.
Other non-foreclosure options decreased in January. Short sales dropped from 4,200 in December to 3,700 in January, while the number deed in-lieu stayed at 1,200 in that time. Serious delinquencies are down month-over-month in January, from 1.50 million in December to 1.46 million in January.
“The HOPE NOW Alliance continues to work with homeowners in need and emphasizes on assisting those that are having difficulties with their mortgage,” said HOPE NOW Executive Director Eric Selk. “Our monthly collection of data indicates that the housing market is improving and setting new norms in the post-crisis environment.”