The State of the Note Industry

Around the country real estate markets have softened leaving a glut of inventory, decreasing values, and extended marketing times.  The result? More sellers are offering to finance a portion of the purchase price for the buyer in an effort to “Move that House”!

While sellers are motivated, lenders on the other hand are hunkering down or running scared.   In the face of the credit crunch and increasing foreclosures, lenders have tightened underwriting requirements.  Fewer loans are being originated and this also contributes to an increase of seller-financed private mortgages.

While the upside is increased private note inventory, the downside is fewer notes can be sold to investors.  While seller financing is an alternative to bank financing, note investors are not Read more

Using Retirement Accounts to Buy Notes and Real Estate

Tired of dismal stock returns and lack of control over your retirement funds? Many investors are accessing tax advantaged retirement funds to realize the security and returns offered through real estate and note investments. Through the power of self-directed retirement accounts, you can legally access IRA, 401(k), SEP or other retirement funds for alternatives to the traditional stocks, bonds, and mutual funds. 

While self-directed retirement accounts have been around for several decades, they are now catching the attention of Read more

Real Deal #140 – Retirement Account Purchases Texas Note

Welcome to Real Deals!  It’s always easier to learn from real life so here we share information from actual owner financed transactions.

Small balance notes are often passed over by larger institutional type investors. This provides high yielding investment opportunities for private investors and self-directed retirement accounts.  This well-seasoned transaction Read more

Real Deal #139 – Washington State Land Note

Welcome to Real Deals!  It’s always easier to learn from real life so here we share information from actual owner financed transactions.

A land developer sold 10 to 20 acre tracts of land in Northern Washington State.  Knowing land can be more difficult to finance Read more

Verify Taxes and Insurance

Worried the buyer won’t make payments?   Understandably, this is a common concern by sellers using owner financing.  After all, an owner financed note is one of the seller’s most valuable assets.  Unfortunately so many sellers fail to protect their asset when it comes to verifying current property insurance and taxes. Read more

Outside Closings Protect Sellers!

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 and sign the assignment package.  The investor will want these original documents before the funds are released to the seller.

A note seller will understandably wonder “How do I know I will ever receive my money once I turn over the documents establishing ownership?” 

So the investor wants the documents before the money is released and the seller wants the money before the documents are released. 

This impasse is easily solved by using an outside closing through a title company, attorney, or escrow company.  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 investor 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 note sellers and the note investors.

Moneymaking Opportunities with Notes!

Whether a seller, investor, or note broker, there are many opportunities to make money with owner financed or seller carry back notes.  There is a lucrative secondary market for seller financed notes also known as the paper business. Here are a few of the most common ways people make money in the note business.

Maximize Selling Profits

A seller often takes back financing for a buyer to appeal to a larger group of buyers and maximize the sale price. A property seller may also elect to take back a portion of the sale price for long term interest income.  Why should the banks make all the money?

Did you realize that a bank earns back almost 2.5 times the loan amount on an average $100,000 loan at 7.5% that runs for a full term of 30 years? The payment would be $699.21 based on a 360 month amortization which means the buyer will pay back over $251,715.60 after 30 years on the $100,000 loan.  All due to the power of interest! 

Referral Fees

A note broker or note consultant earns a referral fee by acting as a financial middleman between a note seller and a note investor.  A note broker markets to note holders offering to help them liquidate their note payments for cash today.  The note broker then connects the note seller with a note investor, earning a fee at closing.  This fee can range from hundreds to several thousands of dollars depending on the size of the note and their relationship with the investor.    

Interest Income

Investors purchase notes for the interest income.  First an investor can earn the interest rate or face rate charged on the note.  An investor can further increase their return by buying the note at a discount.  For example if a note has a balance of $25,000 at 8% interest the investor can offer less than $25,000 to purchase the note for a return of 10% or more.  The greater the discount the more the return is increased!

Rather than holding for long term interest income, an investor might also purchase a note at a discount and then resell at a later date for a profit.  This is often accomplished by combining several notes together in a group or portfolio selling at a higher price to a larger bulk investor.

Visit the Bookstore for Your Complete Moneymaking System for Buying, Brokering, Creating, and Hold Real Estate Notes!

What is a Partial Note Purchase?

When a seller allows a buyer to purchase property on installment the terms of repayment are usually spelled out in a Promissory Note or Real Estate Contact. Sellers may also elect to sell and assign their rights to future payments.

When an investor purchases all the remaining payments it is considered a full purchase.

When an investor purchases just a portion of the remaining payments it is considered a partial purchase.

For example, a note has a balance of  $90,000 at 9.0% interest payable in monthly installments of $1,140.08 with 120 months (or ten years) of payments remaining.  When the seller sells all 120 remaining payments of $1,140.48 to an investor it would be considered a full purchase.

If the investor only purchased the next 48 monthly payments of $1,140.48 each then it would be considered a straight partial purchase.  Once the investor received the next 4 years of payments, the note would be reassigned to the seller and the seller would collect the remaining 72 payments (120 total payments less investors partial purchase of 48 payments leaves 72 payments remaining to the seller).

A partial purchase can also involve splitting the monthly payments received from the buyer between the investor and the seller, also known as a split partial.  Using the same example of 120 payments of $1,140.08 each, an investor might agree to purchase $600 of each remaining payment leaving a remaining residual of $540.08 to the seller for the next 120 months.

The terms of a partial purchase are spelled out in the Partial Purchase Agreement.  This important document outlines the servicing arrangement along with what happens in the event of an early payoff or default by the buyer.  Competent legal counsel should review the partial purchase agreement to protect the rights of all parties.

Note Investor Registry Changes

Bayview First Funding, a subsidiary of Bayview Financial, will no longer be accepting new submissions for seller financed mortgage purchases through its Texas based note buying division, effective Friday August 1, 2008.   

Formerly known as Interbay Funding, this company was introduced to the note buying community in 2001.  With competitive pricing and access to securitization funds, Bayview quickly became a preferred national institutional note buyer for full private mortgage purchases.

Unfortunately, the seller financed private mortgage business has not been immune to the effects of the credit crunch resulting from the sub prime mortgage crisis.  We are seeing a move towards private investors, portfolio lenders, and pension funds.  These types of companies tend to hold their notes for long-term interest income rather than relying on a quick resale to the secondary securitization markets.

Real Deal #138 – Partial on Oregon Home

Welcome to Real Deals!  It’s always easier to learn from real life so here we share information from actual owner financed transactions. 

A husband and wife decided to sell a rental home to their tenant using seller financing. Read more