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
If a person wants to become a homeowner but lacks the qualifications to qualify for a traditional mortgage, signing a land contract is another option for purchasing property.
A land contract is a written agreement between the seller of the property and a potential buyer. Instead of taking out a mortgage and making payments to a bank, the buyer makes payments to the seller. But the seller retains ownership of the property until the buyer pays the entire purchase price. The land contract is essentially a type of rent-to-own agreement.
When a land contract is convenient
People can use land contracts to buy or sell any type of property, including personal residences, commercial buildings and land. There are several common situations where a buyer and a seller might use a land contract instead of going through the conventional mortgage process:
- The buyer lacks the credit, down payment or income that traditional lenders require.
- The seller needs to sell a property as quickly as possible.
- The seller prefers to accept payments in return for a higher sale price.
A land contract provides quite a bit of leeway when it comes to the conditions of the sale. Some of the items that the buyer and seller have to agree on include:
- The down payment.
- Length of the contract.
- The interest rate.
- The final sale price of the property.
Sellers may allow buyers to make regular payments on property over a certain period of time, or they can demand a balloon payment after a specified amount of time. For example, the contract might state that the buyer has to pay off the entire sale price within five years. During the five years, the buyer could take steps to improve his credit and secure approval for a conventional mortgage.
On average, it takes 65 days for a home to sell. If the seller doesn’t want to wait this long or fears that a bank may turn down a mortgage for the property, the seller can opt to sell it with a land contract. Lenders may not agree to a mortgage for a property that requires extensive repairs or doesn’t meet other criteria. The seller has the option of selling it through a land contract instead of making the improvements or repairs.
Real estate markets constantly fluctuate; in a down market, the seller can often get more money for the property by offering a land contract. Buyers are typically willing to pay a higher overall price in exchange for seller financing.
Risks of buying or selling property with a land contract
A land contract has disadvantages for both the buyer and the seller.
A buyer who purchases a home with a traditional mortgage accumulates equity as he makes payments. He also gets to take advantage of gains in the housing market that raise the value of the house. Should the buyer decide to sell the property before the mortgage is paid off, the buyer still gets to realize the equity in the home.
However, if the buyer uses a land contract and decides he doesn’t want to remain in the home, he has no equity, even though he has made payments, a down payment and the home has risen in value.
It’s important to note that the courts consider the buyer an equitable titleholder to the property. This means that the buyer has an interest in the property, which prevents the seller from completing any actions that disrupt the buyer’s potential claim to the property.
A seller in a land contract has to assume the risk of a mortgage lender. There’s always the possibility that the buyer may not make the agreed-upon monthly payments. This is one reason that buyers usually pay more for property bought with a land contract.
The seller can file a land contract forfeiture in court that basically evicts the buyer and terminates the buyer’s interest in the property, but this option takes time. However, the seller gets to keep all payments made by the buyer and retains ownership of the property.
by Jason Oliva
Never a stranger to controversy, the Consumer Financial Protection Bureau has been making headlines lately, perhaps less for its enforcement actions and rule-makings, and more for debates regarding its constitutionality.
As high profile court proceedings continue to unfold in the nation’s capital, there is a chance that changes may finally arrive to the CFPB’s structure and authority, suggests one recent editorial from The Wall Street Journal.
“In its short, unhappy life, the Consumer Financial Protection Bureau has compiled a record of abuse rivaling that of Washington’s most entrenched bureaucracies,” WSJ writes. “But there’s new reason to hope that this misanthropic creation of Dodd-Frank may not reach adulthood.”
The editorial points to the ongoing litigation between the CFPB and PHH Corporation (NYSE: PHH), a Mount Laurel, N.J.-based mortgage services provider, who the CFPB alleges broke the law when it referred customers to mortgage insurers that brought reinsurance from PHH.
The WSJ notes that the “unaccountable” CFPB overturned longstanding interpretations of law and specific guidance from the Department of Housing and Urban Development in its claims against PHH.
PHH is currently challenging the CFPB’s $109 million fine levied against it—roughly 18 times the amount determined by the Bureau’s own administrative-law judge.
For this “egregious” behavior, the Washington, D.C. Circuit Court of Appeals, as well as the WSJ, are wondering whether any of the CFPB’s actions are constitutional. More specifically, does this rogue agency have the authority to conduct such raids on American businesses?
“Judges on the D.C. Circuit asked because the consumer bureau is truly something new in Washington: a powerful independent regulatory agency run by a single federal official who cannot be removed from office at the will of the President,” WSJ writes.”The President can only fire the bureau’s director for cause.”
However, the editorial notes that the Constitution’s Article II gives the President authority to run the executive branch, and that includes the ability to fire top officers.
The CFPB’s single-director structure, along with the fact that the Bureau is not subject to Congressional appropriations, like other federal agencies, has long been a source of contention amongst agency opposition.
But while other federal agencies, such as the Social Security Administration, are also run by “one man exercising so much power,” according to the WSJ, the SSA “cannot tell business how to generate the cash to fund payroll taxes or tell beneficiaries how to spend them.”
“The consumer bureau, on the other hand, roams the financial landscape enforcing 18 statutes and bringing actions that can cost hundreds of millions of dollars,” WSJ writes. “It writes rules governing a wide swath of American business, has the power to define what is ‘unfair’ or ‘abusive’ in financial services, investigates companies and imposes penalties.”
Article II of the Constitution gives the President “not some of the executive power, but all of it,” noted Judge Brett Kavanaugh, one of the judges who is hearing the case between CFPB and PHH.
“For the sake of liberty and the integrity of the separation of powers, they should strike down this offense to constitutional governance,” WSJ writes
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.
When a seller allows a buyer to make payments over time for the purchase of property, it is known as owner financing or seller financing.
This private financing by the seller can take the place of a bank loan or be in addition to a conventional mortgage.
The payment amount, interest rate, and other terms are agreed upon between the buyer and seller. The amount financed by the seller will depend upon the buyer’s down payment and whether there are any bank loans.
Here’s an example of how seller financing works…
- A property owner advertises his or her house for sale, either on her own or through an agent.
- A buyer makes an offer, and they agree upon a sales price of $175,000 with a 10 percent down payment of $17,500.
- Rather than requiring the buyer to obtain a bank loan, the seller carries back the balance of $157,500 in the form of a note and mortgage. It could also be a note and deed of trust or a real estate contract, depending on the customary documents for that state.
- The note spells out the terms of repayment. In this case they agree upon 8.5 percent interest at $1,211.04 per month based on a 360-month amortization. The seller doesn’t really want to wait a full 30 years for payments, so the note requires payment in full, known as a balloon payment, within seven years.
- A title company or real estate attorney is used for the closing to be sure all parties are protected and the documents are in compliance with and state laws.
Bank Loan Vs Seller Financed Mortgage Notes
Because the buyer is making payments to the seller rather than an institutional lender, the legal arrangement is called a private mortgage, seller carry-back, installment sale, or owner financing.
The seller has the same mortgage rights as a bank, so if the buyer does not make payments, the seller can foreclose and take the property back.
When the seller prefers cash today rather than payments over time, the rights to future payments can be sold or assigned to a note investor on the secondary market.