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
Delinquency rates climb on debt, pointing to downturn in $11 trillion market.
Defaults are rising in a key corner of the commercial real-estate debt market just as borrowing costs are set to jump, raising the likelihood of a slowdown of the $11 trillion U.S. commercial property sector in 2017.
A financial crisis-era regulation is about to take effect that is expected to make some commercial real-estate borrowing more expensive and complicated, analysts said.
At the same time, interest rates have increased since the election of Donald Trump as the nation’s 45th president last week and seem poised for a sustained rise from recent historic lows, which would further squeeze an industry built on borrowed money.
“I can paint a picture that it could be disastrous, with runaway inflation and high interest rates,” said Charlie Bendit, co-chief executive of Taconic Investment Partners LLC, at a New York industry luncheon last week.
The worries raise fresh concerns for the commercial property market as it enters its eighth year of expansion.
Already, landlords are battling a slowdown in sales and rising vacancy rates of multifamily housing units across the U.S. and of office space in Houston, Washington, D.C., and other big markets. Commercial property sales volume was down 8.6% in the first nine months of 2016 to $345.4 billion, according to Real Capital Analytics.
Now defaults are on the rise as well. More than 5.6% of some $390 billion worth of commercial property mortgages that have been packaged into securities was more than 60 days late in payment in September, according to Moody’s Investors Service. That was up from a 4.6% delinquency rate earlier this year.
The culprit: loose lending before the financial crisis. Ten-year loans issued in 2006 and 2007 are now coming due, and many borrowers aren’t able to pay them off despite rising property values.
In all, Morningstar Credit Ratings LLC predicts borrowers won’t be able to pay off roughly 40% of the commercial mortgage-backed securities loans coming due next year. Suburban office properties and shopping centers are being hit particularly hard, said Edward Dittmer, a Morningstar vice president.
“We’re seeing a lot of stress,” Mr. Dittmer said.https://capstonecapitalusa.com/financing-a-business-acquisition/
As Posted in mybudget360
“Definition of economic bubble: A market phenomenon characterized by surges in asset prices to levels significantly above the fundamental value of that asset.” We are definitely in another housing bubble. First, most Americans can’t afford to buy a home without utilizing artificially low interest rates and even then they are stretching their budgets like spandex. Second, home prices are surging in the face of stagnant household incomes. That is the biggest sign of a bubble. The underlying asset in housing is moving up even though incomes are not. So what is driving prices up? Speculation, flipping, investors, and what we would categorize as fickle money. This is the ultimate sign of a housing bubble. Homeownership is near a generational low because most households are living month to month unable to buy. If you want to see the housing bubble in one chart look no further.
The scariest chart in housing
Home prices are up a stunning 34 percent from 2012. That is an incredible increase but this is not being driven by families buying homes. It would also be different if household incomes were going up. They are not. Take a look at this chart:
This might even be scarier than the years before the last bubble. Why? Take a look at the chart. From 2002 to 2008 housing prices and incomes went up together (but of course home values were already on an upward trajectory). The bubble hit and both home values and incomes went down. All of this makes sense. In 2012 housing prices and incomes went up. But that jump in income only lasted a brief period. Now, you have home prices surging 34 percent yet incomes are stagnant. That is a big problem.
You can even see this problem between new home prices and new homes sold:
New home sales are in the dumps yet prices are moving up dramatically. Most of this is speculation and of course the financial sector in our economy is thriving on the backs of the middle class. But are we in a bubble?
“Bubbles are often hard to detect in real time because there is disagreement over the fundamental value of the asset.”
This is where we stand today. We are in the bubble. It is hard to assess value because people are disagreeing on whether this is a bubble or not. But take a look at commercial real estate values as well. This is definitely a bubble. You need to continue to have speculative money flowing in to keep values at their current levels.
Will the housing bubble pop this year? Bubbles can last longer than most people think. But there are already cracks in the system. You saw the market briefly correcting this year. Suddenly stocks are up on low volume and current prices are still overvalued. The same can be said for housing. Low supply, low demand, yet prices are going up. The Fed is completely afraid to raise rates knowing that it has no other option but to keep rates low. This policy move has made the middle class a minority.
Here is a good summary of where we are going:
“(The Sovereign Investor) I see one of two scenarios at play. Which one do you think will ring true?
- Homebuyers continue to fork over more dollars to buy properties while we sit with stagnant wage growth, stagnant economic growth and low-wage jobs being about all that’s created.
- We are on the edge of a bubble larger than the one we experienced less than a decade ago as housing prices race back down to where it is affordable and sees demand from new buyers.
The Federal Reserve is held accountable for this fiasco. If it goes forward with a rate increase in the near future, it will be us who pay the price of another bubble.
There’s only one action to take if you ask me — lower your exposure to the industry.
In stocks, that’s homebuilders and mortgage originators. Avoid them at all costs. In your personal investments, that’s being prepared for another real estate shock.
These prices are unsustainable and due for a correction.
Once that happens, opportunity awaits you to pick up houses and housing-related stocks on the cheap.”
You have been warned.
If the above is true, and we believe it is, seller financed notes should be purchase at no greater that a 70% Loan to value or no greater than 65% investment to value
Capstone Capital USA
When a note buyer begins their due diligence, there are 6 factors that are considered when a note is underwritten. They are determining and trying to mitigate their risk. The note seller took the promise of the house buyer that they would pay per the terms of the note. We as the buyer are being asked to assume that promise—that risk. Sometimes cart blanch. Therefore, it is our job to trust but verify. In the event the note is not perfectly structured, we’ll mitigate our risk with a discounted offer.
This is also the first thing an investor checks when going through the due diligence process. The buyer affects many other factor’s in the value on a note such as the collateral’s upkeep, the down payment, the seasoning, etc. Whenever you are valuating a note, making a buyer profile should be top priority. Included in the profile:
- Type of buyer, rehabber or “mom and pop” (sold personal residence)?
- Did you happen to review the buyer’s tax returns?
- Did you verify their credit?
- Income (ratio or proof)
- Job / Employment
- Another words, since you were lending them $$$$, you would want to make sure they’d pay you back?
The credit on a buyer is not just their FICO score, but the 5 C’s of credit and how each factor complements or redeems another.
- Capacity to repay is the most critical of the five factors, it is the primary source of repayment – cash. The prospective lender will want to know exactly how you intend to repay the loan. The lender will consider the cash flow from the business, the timing of the repayment, and the probability of successful repayment of the loan. Payment history on existing credit relationships – personal or commercial- is considered an indicator of future payment performance. Potential lenders also will want to know about other possible sources of repayment.
- Capital is the money you personally have invested in the business and is an indication of how much you have at risk should the business fail. Interested lenders and investors will expect you to have contributed from your own assets and to have undertaken personal financial risk to establish the business before asking them to commit any funding.
- Collateral, or guarantees, are additional forms of security you can provide the lender. Giving a lender collateral means that you pledge an asset you own, such as your home, to the lender with the agreement that it will be the repayment source in case you can’t repay the loan. A guarantee, on the other hand, is just that – someone else signs a guarantee document promising to repay the loan if you can’t. Some lenders may require such a guarantee in addition to collateral as security for a loan.
- Conditions — the intended purpose of the loan. Will the money be used for working capital, additional equipment or inventory? The lender will also consider local economic conditions and the overall climate, both within your industry and in other industries that could affect your business.
- Character is the general impression you make on the prospective lender or investor. The lender will form a subjective opinion as to whether or not you are sufficiently trustworthy to repay the loan or generate a return on funds invested in your company. Your educational background and experience in business and in your industry will be considered. The quality of your references and the background and experience levels of your employees will also be reviewed
Kinda like car dealer, they typically wants to get some down payment. You want to have a safety net.
Things to consider on collateral:
◆ Owner occupied or rental?
◆ Commercial or single family residence?
◆ Rehabbed home or prior residence of seller?
A home (single family residence) sold by the previous owners would be more appealing to an investors than a rehabbed home or one secured by mobile home and land. Previously, most collateral using seller financing were “unique” properties such as mobile home & land, land only or homes that bank’s wouldn’t finance. Due to the current economy however, seller financing is being placed on properties from single family residences to commercial property, giving their notes better value on the secondary market.
- Equity –in the home as it related to the down payment and loan amount. Typically our underwriters are looking for 25-30% Equity in a single family. 50% on a mobile home or land. Otherwise known as “skin in the game”, the down payment on a note is important for two reasons.
- The amount of down payment determines the Loan To Value(LTV) on a note (the lower the better), which investors look at when considering purchasing, and
- It shows the buyer’s commitment to the property. The more they’ve personally invested, the greater chance they will continue to not only maintain the property, but stay current on payments.
- Terms of note–The interest rate, amortization and balloon (if applicable) weigh on a note’s value in the following ways:
- Interest: If a note has no interest it is a nail in the coffin of any possible note deal. If the interest rate is low, it will also take a hit on the discount. The higher the interest rate, the less of a discount the seller will have.
- Amortization: The longer the note is amortized, the larger the discount. To combat this, most brokers present clients with a partial purchase offer alongside the full purchase offer.
- Balloon: A note with a balloon has less of a discount because the money is closer to the payout. However, in certain cases a balloon that is too short can play a negative role in evaluating a note. The likelihood of refinancing to pay off a balloon must be logical and practical when cast against the buyer’s credit and current economy.
- Seasoning—pay history. Paying not just their monthly payments, but are the taxes and insurance paid on time.
Depending on the credit of the buyer and the collateral (rehabber or not) the seasoning for note’s is typically as follows:
- 3-12 months: Best credit, not a rehabbed property
- 12 months or more: Sub 625 credit, rehabbed property
- Paperwork –is there a lenders title policy? How is the note Serviced? Who pays the taxes & insurance
A well written note is typically serviced by an outside servicier, which is paid for by the buyer. We always use an outside servicier, therefore that is another cost we’ll incur.
Finally you have the last factor in a note’s evaluation, the paperwork. What investors verify are the following:
- Note, Deed of Trust, Land contract, etc.
- Federal Disclosures—is the note Dodd-Frank compliant?
- Loan Application Verifications: includes income, employment and down payment.
If any of the variables are off on the above, the note will trade at a greater discount. But we can do some really creative stuff.
Call us to discuss your options.
Ready to sell mortgage notes?
Protect yourself with outside closings!
When an investor has performed their research and is ready to purchase a private mortgage note they will ask the seller to deliver original documents (note, recorded mortgage, etc.) and sign the transfer package.
The Note Buyer
The note buyer will want these original documents before the funds are released to the seller.
The Mortgage Note Seller
A note seller may understandably wonder,
“How do I know I will ever receive my money once I turn over the documents establishing ownership?”
The Note Buying Challenge
So the note buyer wants the documents before the money is released and the seller wants the money before the documents are released.
Using an outside closing through a title company, attorney, or escrow company easily solves this impasse. The outside closer will act as an independent third party (or fiduciary) protecting the interests of both parties.
An outside closing is basically an exchange of money for documents. The outside closer will receive the proceeds from the investor into their trust account and also receive the documents from the seller. It is not necessary for either the investor or the seller to physically be present for the note closing with the use of overnight delivery and wire transfers.
The fee for outside closings average $200 – $400 and can be paid by either party or split equally. Any legitimate note buyer should be willing to participate in an outside closing through a licensed and bonded closing agent.
Outside closings offer protection and peace of mind to both sellers and investors when selling mortgage notes.
When a property isn’t selling most real estate agents are quick to suggest a reduction to the sales price. It is common to see the tag line “Price Reduced” added to for sale signs, listings and ads.
Rather than just reducing price…
consider offering owner financing to sell a property quickly!
In today’s real estate market obtaining a mortgage can be a large stumbling block to home ownership. In the midst of this sub prime mortgage meltdown it is difficult to obtain a loan, especially for anyone with less than A+ credit and a 20% down payment.
While there are many reduced priced properties for sale few are offering a solution to the financing challenges. By offering owner financing the seller can reduce marketing time and maximize price while providing the buyer an economical alternative to bank loans.
The buyer makes a down payment and the seller accepts payments over time from the buyer. In essence the seller becomes the bank and is able to collect interest on the balance financed at the agreed upon rate.
Rather than collect payments for 20 to 30 years most sellers will prefer a balloon payment provision that requires the buyer to refinance and payoff the seller in 3 to 5 years. The seller also has the option of selling all or part of the payments to a note investor for cash now.
Back in the 1980’s the use of owner financing increased when interest rates were in the teens and borrowers had troubles qualifying based on the high monthly payments. Seller financing is now offering a similar solution to the financing challenges caused by the mortgage crisis.
Offering owner financing can be a very effective way to reduce marketing times, provided a property is priced at fair market value using comparable sales. Simply add the words “Owner Will Finance” to the advertising and watch the inquiries increase.