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AUGUST 1st- -NOTE INVESTORS FORUM MEETUP

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The August Note Investors Forum Meeting

will be Wednesday, August 1st 11:30am-1:30pm
La Famiglia Restaurant, SE corner of Dobson & Guadalupe, Mesa

Topic:

Note Due Diligence 201
buying
selling
seller carry
partials
one offs or a pool of assets.

Expect standing room only. The room is maxed out @ 50 attendees.

Buffet lunch served.

Click on the link below to reserve your spot.
$16.83 includes networking, information, food, tax and tip.
$20 at the door.

 

 

Land Contracts Explained

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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.

For more information visit

Seller Financing – A Solution to a Bad Partnership & a Negative Cash Flowing Property

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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 Power of A Cognovit Promissory Note

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The Second of the Twin Dangers

By on Apr 11, 2017 in Real Estate Investing |

           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.

http://watsoninvested.com/the-second-of-the-twin-dangers/

 

Editors Note: This is a well written article by Attorney Jeff Watson.

Which Is Better? ITV vs. LTV vs. Yield?

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Which is the best approach to analyze a note for the amount of the discount; collateral or yield? While both are important, there are three factors to consider when purchasing a note:

  1. LTV (Note balance-to-Value)
  2. ITV (Investment-to-Value)
  3. Yield.

LTV is the ratio of the note balance to the value of the property. For example, a $100,000 property that sells with 5% down and a $95,000 note balance has an LTV of 95%. The higher the LTV, the higher the risk of the note. Why? Because a high LTV at the initiation of a mortgage indicates how much “skin in the game” the mortgagor has put at risk. To put it in perspective, if a property buyer puts only 5% down on the purchase of a property and borrows the remainder, who is taking the bigger risk; the buyer who has only $5,000 at risk, or the note holder who has $95,000 at risk, with collateral of only $100,000?

Let’s take this scenario into the future ten years where the note has been paid down to $83,000. What is the LTV? 83%, right? Now who has the more at risk, the mortgagor or note holder? Since the mortgagor now has $17,000 equity, as opposed to the original $5,000, the probability the mortgagor will just walk away is reduced.

More importantly, since there is ten years of seasoning, the mortgagor has accumulated what is called “emotional equity” or “psychological attachment”; meaning the mortgagor has established roots in the community, in schools and employment. The chances of the mortgager just packing up and leaving are much less.

An offer based on yield will differ from an offer based on ITV.

Which one should you make?

           In other words, even though the property buyer put only 5% down, as time went on, he or she accumulated equity, as well as demonstrating to a note buyer that they are a safer risk now than ten years earlier when they had virtually no risk because of the small down payment, no equity and no roots in the community.

Contrast this to a buyer who puts $20,000 or 20% down on a $100,000 house, with an $80,000 note balance. The LTV is now 80%. The buyer has $20,000 invested in the property. Not only do they have “skin in the game”, but should they get into trouble, they will have more of an opportunity to sell the property to get some, if not all of their investment back. Add to this that the note holder’s collateral is higher with an 80% LTV, than a 95% LTV. In other words, the note holder taking less of risk, and the buyer is taking more of the risk.

Why LTV Matters To A Note Investor

           For a note investor, the LTV indicates the amount of “skin in the game” a property buyer put at risk at the origination. As time moves on, the LTV reflects the monetary equity the buyer has accumulated, as well as emotional attachment they have in the property.

With this in mind, let’s examine ITV, or investment-to-value. ITV is the amount a note buyer invested in the note divided by the “as is” value of the property.

To minimize the note investor’s risk, ITV is often tied to the credit score, down payment and property value.

Remember, the only real protection a note investor has is the collateral, or value of the property in the event of default. Since we know the collateral can be devalued by market conditions( the 2008 melt down) and/or deterioration of the property, ITV is very important to the amount of the discount a note buyer requires.

In the above case study, let’s assume the house sold for $100,000 with 5% down, and a $95,000 mortgage at 8% for 30 years, with payments of $697.08. Let’s further assume the mortgagor’s credit scores are in the low 600s. Because of the low credit scores and low down payments, a note investor requires a 65% ITV and at least an 11% yield. What will the investor offer?

For a 65% ITV he would pay $65,000 (65% of $100,000).

To receive an 11% yield a note investor would pay $73,197.

Since the offers are quite different, which one will the note buyer favor?

The note buyer will favor the $65,000 offer.

Rule Of Thumb

An investor should make the offer that gives the note investor the acceptable ITV or yield, WHICHEVER IS LOWER.

In conclusion; LTV tells a note buyer how much “skin in the game” the mortgagor has, or how much monetary or emotional attachment they have in the property.

ITV, on the other hand, tells the note investor how much he or she will invest in the note in relation to the value of the property. Yield is determined by the best and safest use of the note buyer’s money.

The amount of the mortgagor has invested, along with the value of the collateral and their credit score, will determine the ITV of the note buyer. Yield is the rate of return a note buyer demands when considering mortgagors’ credit, property value, and mortgagor’s equity and other risks. When applying LTV, ITV and yield to the purchase of a note, all three are important and should be tied to one another. In other words, the down payment, credit score, value of the property, equity in property should be tied to the ITV and yield a note investor demands.

The more risk an investor incurs because of high LTV, the lower must be the ITV, and the yield must be higher. The note buyer will offer the lesser of the ITV vs. yield.

So, which is most important, LTV, ITV or yield?

The answer is that all are important and interrelate to one another.

Yield is determined by the best and safest

use of the note investor’s money. BUT….

        YIELD IS NOT REALIZED UNTIL THE NOTE IS PAID OFF.

 

The above article was reprinted  with permission from The Paper Source newsletter—January, 2017 edition. Tom Henderson, the author, has been buying notes and real estate since the 1980s.  He is president of H&P Capital Investments, LLC, which buys, sells and trades owner financed notes.  

Trump Already Moving To Dismantle Dodd-Frank

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WASHINGTON, Nov. 11, 2016 — Donald Trump has taken the first step to fulfill his campaign promise to “dismantle” Dodd-Frank and the Consumer Financial Protection Bureau.  He is considering one of the leading critics of Ddodd frankodd-Frank on Capitol Hill, Rep. Jeb Hensarling, as Treasury Secretary.

Mr. Hensarling last year laid out a blueprint for replacing Dodd-Frank that many observers view as a starting point. In an interview Thursday, he said the Trump team’s statement “is music to my ears,” and that he planned to make the bill, dubbed the Financial CHOICE Act, his top priority next year.

He said he had spoken with Mr. Trump’s team about the matter in the past, adding: “I think they like the thrust of the legislation and many major components of it.”

As for the prospect of him taking the Treasury slot, the Texas lawmaker said he would “certainly have the discussion” if the Trump administration comes calling, “but I’m not anticipating the telephone call.”

The transition team’s blueprint on the president-elect’s website states that the Trump team “will be working to dismantle the Dodd-Frank Act and replace it with new policies to encourage economic growth and job creation.”

The president-elect has tapped Paul Atkins, a former Republican member of the Securities and Exchange Commission and longtime Dodd-Frank critic, to recommend policies on financial regulation. An aide to Mr. Atkins, who heads a financial regulation consulting firm, referred requests for comment to the Trump transition team, which couldn’t be reached.

Mr. Hensarling’s bill is built around a trade-off: Banks can free themselves from various regulations, such as tough stress testing, as long as they maintain capital equal to at least 10% of total assets and high ratings from their regulator.

That would immediately help many small locally focused banks that tend to be better capitalized, but not necessarily megabanks with sprawling international operations that generally have capital levels below that level.

In the interview, Mr. Hensarling said he would try to convince Mr. Trump’s team to support his approach instead of their campaign-trail promise to reinstate the Depression-era Glass-Steagall law separating traditional lending from investment banking.

Mr. Hensarling’s bill also would make other significant changes, such as requiring that many financial regulations be subject to cost-benefit analysis for the first time and tying the budgets of regulatory agencies, including the CFPB, to congressional appropriations.

The CFPB has enjoyed a high level of independence by getting its funds from revenues insulated from the legislative process.

It is possible Senate Democrats could seek to block GOP efforts they view as overreach, but lobbyists and congressional aides are optimistic that some moderate Democrats up for re-election in 2018 in states that voted for Mr. Trump will be inclined to compromise. Republicans also may come under pressure to change the Senate rules to ease passage of controversial legislation, but it is far from clear they would make that move.

 

Our take:

The proposed  Seller Finance Enhancement Act – HR 5301…, an amendment to the Dodd/Frank legistation is way over due

This bill rolls back some of the excessive regulations of Dodd/Frank by allowing Seller Financed transactions to expand from 3 in a rolling 12 month period to 24 in a year.

While this is not a massive change, it will provide significant relief for the vast number of real estate investors who choose to seller finance property.

Dave Franecki

 

An Alternative to Tenants, Toilets, Trash and Termites

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Acquiring income producing property is one of the best ways to create wealth and achieve one’s long dirty-tenantsterm financial objectives. However, at some point, many investors tire of managing their properties. If you are an absentee landlord, this may experience this soone r than later. Of course the natural question is…. if owning real estate is not as glamorous or as easy as is promoted, what else does one do to create wealth?  The stock market? Well maybe not—this year’s average returns are roughly 2% with a lot of risk like playing in a casino.

For example two seasoned investor friends bought several lower price band rental properties in Birmingham, Chicago, Indianapolis and Milwaukee. They were convinced their target 20% cap rate was very a reasonable. Now after 2 years, multiple property managers, handymen, evictions, code violations, phantom tenants etc, they saw their very easy projected cap rate drop to more like 6-7%.   The stress, worry and frustration really began to take their toll.

Friend #1, Jason, decided to just bail and sell. He is putting his money into group foster homes. If professionally operated he will generate a serious return and satisfy his passion-to help kids, get his wife out of work, not to mention the serious cash flow. Friend #2, Dan, has decided to sell his properties and be the bank with seller financing. He decided to turn all the tenant worries into mail box money.   He doesn’t want a job, just the cash flow.

Dan and I discussed the variables. As a seasoned note guy and seller carry consultant I made several Controlrecommendations to Dan on how to structure the transactions. We discussed the pros and cons. How to structure the transaction– to make a long term play with minimal risk. I was able to utilize my years of real estate experience and note structuring basics to demonstrate  to him how, if structured properly he could generate a safe and reliable 10%+ return on his investment.  A quantifiable and  predictable rate of return.

When structuring a seller carry back, Dan is taking a very proactive approach—focusing on six primary underwriting areas.  While his goal is to quickly sell his rentals, above market pricing, he wants to mitigate risk and maximize his return and still keep his options open in the event he wants to sell his banker-2seller carry back note in the future and avoid a deep discount(haircut) on the note resale.  He is not just selling to anyone with a pulse thus minimizing risk and no stress .

Dan is implementing  the following  underwriting  criteria.

  • The Borrower –pulling credit and making sure the borrower is putting down at least 15-20%, thus the buyer will be a bankable risk and has real skin in the game.
  • The asset value—sell the asset at no more than 10% over market value
  • Interest rate—charge at least 8% if not 10%, but still within the guidelines of Dodd-Frank
  • Term—keeping it as short as possible-10-20 years
  • Paperwork—use a title company to draft the note, deed of trust/mortgage and provide a closing statement proving the down payment. Utilizing a MLO to qualify the buyer and work within the current guidelines of the Dodd-Frank Act. FYI–buyer pays for this service.
  • Escrow— Require escrows for taxes and insurance
  • Proof of monthly payments—setting up a loan servicing company to collect the monthly PITI and disburse monthly as instructed. The buyer pays the servicing fee.

The net result is:

  • Never worry about dealing with tenants or property maintenance
  • Maximize the sales price
  • Defer capital gains
  • Keep your equity working for you usually at rates 35x higher than with a bank CD and significantly safer than the stock market
  • Collect a predictable passive income stream
  • Secured by a property you understand and whose value you know
  • If you or your heirs need Cash, sell all or part of the note

Buyer defaulted?  Take it back and sell again.

When it is all said and done, which is better a rental or a note?

Seller financing is an under utilized tool and is here to stay.

 

Dave Franecki is the Fund Manager of Capstone Capital USA.

Capstone Capital USA focuses on acquiring Performing and Re-performing 1st position notes and structuring seller financed transactions.

 

 

Income Taxation of Note Investments

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tax image

Suppose I buy a note for $5,000 that has a balance of $10,000.

The interest rate is 12%. I collect interest for the year of $1,200 and principal of $1,000 in the first year. How do I report the $1,000 principal collected on the tax return? — Bruce Moeller

At first glance, this might seem to be a complicated tax question, but fortunately for note investors there are two simple solutions. I’ll show the commonly used method first.

In your example, the note, which is an asset, was purchased at a 50% discount. As the payor makes the contractual payments, half of each principal dollar paid is your investment coming back and half is profit. So on your income tax return, with $1,000 of annual principal paid, you would show $500 of “discount earned” and $1,200 of “interest,” both of which are taxable as income. The other $500 of the cash flow is your investment coming back, termed “return of capital,” and is not taxable.

If you look at a typical two column amortization schedule for your example, principal and interest, imagine the principal column being split into two more columns, 50% of which is “discount earned” with the other 50% being “return of capital.”

To clarify with a slightly different example, assume you bought the $10,000 note at a $3000 discount, for a purchase price of $7000. As each principal dollar was collected, 30% would be taxable “discount earned” and the remaining 70% is your untaxed “return of capital.” Interest is still interest.

There is another method referenced by the IRS which is less frequently used. You did not quote a yield or a length of term in your example, so let’s just say it was priced to yield 18%. You can print an amortization schedule showing your $5000 investment at 18%. The principal column, although it won’t match the payor’s schedule, is your money coming back and the “interest” column, which also does not match the payor’s, is really your total taxable yield. The reason this is not selected often by investors — although the IRS unsurprisingly is happy for you to use it — is that more taxable income appears in the early years with more untaxable “return of capital” in the later years.

Article from The Paper Source, INC courtesy of  John Moren who is the author of the NoteSmith family of loan servicing software that tracks mortgage notes, discounted notes, leases, rent, and other cash flows. www.NoteSmith.com.

6 Factors That Influence a Note’s Value — Mitigating Risk

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When a note buyer be6 factors 1_6gins 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.

 

  1. Borrower –are they bankable?note value factor Picture1 The #1 influence on a note’s value is the person making the payments.

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
  1. Collateral—down payment and the Condition of assetnote value factor Picture2

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.

  1. Equity –in the home as it related to the down payment and loan amount. Typically our note value factor Picture3underwriters 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.
  1. Terms of note–The interest rate, amortization and balloon (if applicable) weigh on a note’s value in the following ways:note value factor Picture4
  • 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.
  1. Seasoning—pay history. Paying not just their monthly payments, but are the taxes and insurancenote value factor Picture5 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
  1. Paperwork –is there a lenders title policy? How is the note Serviced? Who note value factor Picture6pays 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 dowthe ideal noten 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.

Dodd-Frank Discussions Heat Up

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March 17, 2016 @ 1:25 pm In Daily Dose

Republicans have always been critical of the controversial Dodd-Frank Wall Street Reform anConsumer Protection Act of 2010, but lately they have turwall stned up the heat with their criticism as the Obama Administration winds down.

On Tuesday, March 15 [1], in an address at the American Bankers Association Conference, Rep. Jeb Hensarling, (R-Texas), Chairman of the House Financial Services Committee, called Dodd-Frank the “Obama Financial Control Law” and asserted that it “stands as a monument to the arrogance and hubris of man in that its answer to incomprehensible complexity and government control is yet more incomprehensible complexity and more government control.”

On Wednesday, March 16, Rep. Blaine Luetkemeyer (R-Missouri), a senior member of the House Financial Services Committee, told the group of bankers that they need to “find a way to neuter” Sen. Elizabeth Warren (D-Massachusetts), according to multiple media sources.

Warren has been one of Dodd-Frank’s staunchest defenders and was the architect of the equally controversial Consumer Financial Protection Bureau (CFPB) which was created out of the Dodd-Frank legislation. On Wednesday, Luetkemeyer compared Warren to an iconic movie villain in his address, calling her “the Darth Vader of the financial world.”

Wednesday night, when asked by the news media to respond to Leutkemeyer’s comments, Warren said, “Look, if Wall Street and their buddies in the Republican party want to launch an assault on financial regulations and they want to try to roll back Dodd-Frank, all I can say is, let’s have that fight. I’m ready. You can make it with words or anything else you want, but I am not backing down.”

Republicans have criticized what they see as Dodd-Frank’s “one size fits all” approach to regulation and have lamented that the legislation was intended to reform Wall Street, but instead has hit main street and made it more difficult for smaller business and financial institutions to survive. They have amped up their criticism of Dodd-Frank in recent months, with Hensarling proposing a “bold and better” alternative to the law that will be pro-growth and pro-consumer.

In January 2015, soon after the Republicans gained a majority of in the House of Representatives, the House passed a bill [2] that would delay the implementation of part of the “Volcker Rule,” a key piece of the Dodd-Frank Act that limits risky trading by financial institutions, for another two years until 2019. The bill passed by a vote of 271 to 154, with 29 Democrats voting in favor of it. The White House threatened to veto the bill.

Warren has intensified her criticism of Republicans as of late, in particular their moves to block the Senate’s confirmation of Merrick Garland to fill the vacancy left on the Supreme Court bench when Antonin Scalia.

http://www.dsnews.com/news/03-17-2016/war-of-words-over-dodd-frank-heats-up