Should I Carry Back An Owner Financed Note?

If you are selling real estate, especially in this market, you might be approached by someone asking if you are willing to “Owner Finance” or consider a “Seller Carry-Back” note.

Here are a few guidelines to consider…

How Do You Make Money When Owner Financing?

The whole concept behind seller financing is that you are acting like the bank. While that carries risk of receiving payment, you can also get a great return on your money.

I tend to recommend that if you are going to carry back a note, the face rate (interest rate) should start at 10%.

Many potential buyers will tell you that banks will lend to them much lower – well, if that is the case, then they can get the loan at the bank – it needs to be worth your while to carry back a note (financially speaking).

If someone wants a lower rate, look for a larger down payment. This also helps lower your risk of taking back the property due to non-payment.

For example, the minimum down payment I like to see is 10%. That would get you a note written at 10% interest.

If someone were willing to put down 20%-25% then I would consider creating the note at a rate or 9% or even 8%. – More equity equals a safer note.

Selling Your Owner Financed Note Later

In addition to getting a good return on your note, you may have the flexibility to sell the note at a later date if your financial circumstances change. How you create the note in the beginning can go a long way towards better pricing. Here is the short list of items to consider.

1. The bigger the down payment the better. Buyers are much less likely to walk away from a property with real equity.

2. The “discount” in selling your note is caused by several variables. One such variable is the difference between the face rate of the note and what the investor wants to earn. The higher your interest rates the better.

3. The shorter the term of the note the better – but not too short. A 15 to 20 year note is great. A seven-year note with a big balloon is not. There is too high of a risk the buyer won’t be able to refinance and the balloon will not be paid.

4.  Check out the credit history and income of the buyer. Find out upfront if the buyer can afford the monthly payments or  has troubles making any payments on time.

5. Have the monthly payments go through a third-party servicing center. This will provide a potential investor with a great payment history.

6.  Get the documents prepared by an attorney or licensed closing agent. You want to be sure that you have a secured lien against the property and keep in compliance with any legal issues.

Although every deal is different (property, buyers, area, etc), the above will give you a good place to start and help you make a good financial decision for you and your family.

For more information on owner financed notes you might want to check out:

10 Advantages to Using the Seller Carry Back

Disadvantages to Seller Financing

21 Insider Secrets You Must Know Before Selling a Mortgage Note

Do Some Investors Pay Par Pricing When Buying Mortgage Notes?

Recently we received a question in the Finding Cash Flow Notes training course related to “par pricing” or “discount” when buying mortgage notes.

First off, here is the Note Broker Question…

Hello and thank you two for all your help. My question is why would a note investor pay par for a note?

I’ve been speaking with a person who helps their clients use OWC (Owner Will Carry). I was informed they are working with a note investor that is willing to buy a note for par.

I don’t understand why an investor would do that since they aren’t making any return. Do you have any insight into this?

And Now The Note Buyer Answer:

It is not impossible for a note investor to pay par, just very rare.

First off, there are some costs to close the deal (appraisal, title, recording fees, etc). So at the very least there is a discount to cover those expenses.

Let’s say it cost the note buyer $1,500 in closing costs. They are going to at least discount the note $1,500 to help cover those costs.

That said, the only reason an investor would pay par is that they are happy with the face rate of the promissory note as their return.

If they buy a note that has the face rate of 12%, they will earn 12% on their money (minus the closing costs).

Par Pricing Example When Buying Mortgage Notes

For example, let’s say someone has the following note (with an acceptable LTV and ITV):

• 200 payments remaining
• $525.00 monthly payment
• $40,576.92 – Current Balance
• 14% face rate

If an investor purchased the above note for par (100 cents on the dollar) they would pay $40,576.92.

Now, let’s assume the investor had $1,500 in closing cost (that they did not pass on to the seller of the note). The investor’s “real” return would look like this….

• 200 payments remaining
• $525.00 monthly payment
• $42,076.92 – Amount Invested ($40,576.92 Purchase Price + $1,500 Closing Costs)
• 13.33% Rate of Return

So, if an investor were to pay “par” for the 14% note, after paying closing costs, the investor would still realize a yield of over 13%. Not a bad return.

The reason you don’t see this often is threefold:

1. There are very few notes written at a rate private mortgage investors want to earn;
2. If the note pays off right away a note buyer wants to at least recoup their costs since they won’t be able to earn a return over time; and
3. Most sellers will accept some reasonable level of discount or pay costs.

There are many ways to get closer to par pricing that don’t involve a “full purchase.” Front-end partials, split partials, and even staged payouts are several options, but those are topics for another day (or check out the Mastering Partials Module in the Finding Cash Flow Notes Training)!

Additional Articles on Discounting Mortgage Notes

How Partials Reduce Note Discount When Selling Mortgages

Calculating Cash Flow Notes for LTV and ITV

What is the Face Rate of a Note?

What’s Your Discount?

 

Will 2012 Be The Year For Real Estate Notes?

To understand the current market for real estate notes it helps to go back in time.

Years ago the country was in a financial crisis. Gas was expensive. There were numerous political battles in Washington, DC. Houses were not selling. Interest rates were high.

Wait…what? Read more

Five Tips To Keep Your Note Business Professional

Certainly the most popular question among note brokers (experienced and otherwise) is, “How can I find more notes?”

What many people don’t ask is, “How can I have a professional note business?”

The reason I think this is important is that one can impact the other. Keep you business professional and, surprisingly enough, some deals will actually find you.

So, how do you make sure you have a “professional” image in the marketplace? Make sure you are following these…

5 Tips for a Professional Note Business

1. Do What You Say

It seems like such a simple thing. If you say you are going to call someone at 3:00pm, you call at 3:00pm. If you can’t make that time, you call them and let them know (in advance). The same goes for meeting someone in person. Not to overstate the obvious, but you will be judged on what you said you would do more than what you didn’t address at all. – Be a person known for keeping their word.

2. Follow-up In Writing

Sure, most note deals will be made on the phone. The initial info gathering all the way to an offer. But…even if the note seller turns you down on the phone, you should ALWAYS follow-up your offer in writing. It makes it real. I have had many sellers say “no” and stuff that written offer in a desk…only to sell to me at a later date.

3. Avoid the “Freebees”

I think it is great you can jump on to VistaPrint.com and print up some business cards. Just pony up the extra couple bucks and lose the “Printed by VistaPrint” on the back of your card. It just looks cheesy. And while I am on the subject, avoid printing your cards on your own printer. That card stock is just too thin to be impressive. The same is true for free websites (if you are looking for great note site ideas, check out NoteBuyerSites.com).

4. Muzzle the Dog*

Too many times I have heard someone on a phone call and heard a dog barking in the background, kids yelling, or the television on. Really? This is how you want to present yourself? Make sure you are in a quiet place when you either accept or return a call.

*When I think about getting rid of all background noise, I call it “Muzzle the Dog.” Saying “Muzzle the Kids” would just get me in trouble with someone I am sure.

5. Dress The Part

Ok, I get that you can do this business in a pair of pajamas in front of your computer. That does not make it the right thing to do. Put on some big boy pants and start dressing the part, even at home. No, you don’t have to put on that three-piece suit, but at least make an effort. I know it sounds stupid, but I swear to this day sellers can “hear” what you are wearing in your voice. Furthermore, if you are meeting someone in person; never be the least dressed – business casual for the minimum is always a good call (especially for your first meeting).

There you have it. Five tips or rules that will elevate you above 80% of all the  so-called “professionals” out there – in any industry.

Should I Use a Full or Partial When Selling Mortgage Notes?

There are many options when selling owner-financed mortgage notes. How many options will be largely dictated by a note buyer’s underwriting components, such as seasoning on the note, down payment, equity, and the payer’s credit.

You can usually sell the entire note, but perhaps just selling a specific number of payments is your best option.

Deciding on whether to sell the full balance of the mortgage note or to consider a partial really comes down to three things.

3 Questions When Selling Mortgage Notes

1. How much do you need?

If you have a $50,000 note balance (amount owed to you) and you only need $10,000 – don’t sell the whole note. The “discount” will be disproportionate to the amount of money that you need.

If the amount of money you need is close to the overall balance of the note you are selling, consider the full option.

2. Can you invest at a better return than the amount of the note discount?

Many people sell a note to pay off a bill or take care of a financial emergency. In other cases, people sell because they want to start a business or invest elsewhere.

If you are selling your note at 12% than you just need to invest the lump sum money in something that earns better than 12%. This may sound harder than it is, but if you are using some of the money to pay off a credit card or other high-interest debt, you will most likely come out way ahead.

3. Do you just “want out” of the Mortgage Note?

Some people just want to be done with the hassles of collecting payments on mortgage notes. You may not need all of the money, but you may not want to deal with holding a remainder interest in a note (ie: waiting for more money later). Sometimes peace of mind comes with a price. You may take a bigger discount selling the whole note, but you wont ever have to worry about if the buyers pays on time, keeps the property insured, and keeps the real estate taxes current.

This is certainly separate from a “financial decision.” Those are easy. They fit into a calculator and the numbers don’t lie. But humans are not built like machines (thankfully). So sometimes you just have to let your gut intuition be your guide.

The choice is yours…

The nice part is that, you typically have options when selling a note. Sometimes you may sell a partial only because, due to the underwriting, you would be just giving away the (full) note for the same price.

If you are selling a mortgage note always ask the Note Buyer or Consultant for more than one option. If you are a Funder or Note Broker – always present more than one option when offering to buy mortgage notes.

More Information on Selling Mortgage Notes

Top 5 Way to Buy Mortgage Notes

How Falling Home Prices Hurt When Selling Mortgages

Full or Partial Mortgage Sale? It’s All Dollars and “Sense”

Note Buyer Directory and 21 Insider Secrets You Must Know Before Selling Notes

 

 

Calculating Cash Flow Notes and a Contest!

I have written before about how note buyers accelerate payments on cash flow notes. One such strategy was the Double Your Payment/Cut The Interest Rate in Half.

Another method is to simply go for an Early Payment With Incentive.

To this day, the following situation is still my favorite example of this method.

It was late December and we were looking at a small note with a $10,000 balance. The payment was only $132.15 per month with a 10% interest rate and 120 payments left.

The note had been purchased at a discount for $6,000, which made for a 24% anticipated return.

Not bad…but we could do better! Read more

How Note Buyers Can Accelerate Return

Holding or buying mortgage notes and want a quick way to accelerate your return?

Sure, you can’t go back to your payer/buyer and tell them to mail more money or even increase their interest rate.

Matter of fact, you purchased the note “subject to” all the terms and conditions already in place and can’t change a thing…unless the payer wants to change them!

Try this…

Offer the payer to cut the interest rate in half (face rate of the note)

if they double their payment!

Let’s say the original note is: Read more

The BIGGEST Mistake Investors Make When Buying Cash Flows

In 1996 I was in the room with some of the brightest investors of our time.

They batted around terms and strategies that left my head spinning and my hand sore from writing down as many notes as possible.

I distinctly remember, just before ending the day, someone (not me) made a comment that brought everything to an abrupt halt.

“If I buy a note that pays for 10 years at 12%, I don’t have to worry about investing again for another 10 years.”

What got me was the number of people that agreed. Read more

Finding Cash Flow Notes – Does It Help To Get Social?

It seems you can’t make a move today without being reminded of the surge of “social media” outlets. But do these outlets actually help anyone do business?

What about finding cash flow notes?

First off, let’s look at some of the top social media sites in 2010 (in no particular order).

YouTube  -  Twitter  -  Flickr  -  Digg  -  Facebook  -  Del.icio.us  -  Propeller

Reddit  -  Metacafe  -  Technorati  -  StumbleUpon  -  LinkedIn  -  Mixx  -  Slashdot

My Space -  Class Mates  -  LiveJournal  -  Yahoo 360  -  Scribd

Blogger  -  WordPress  -  MSN Groups

Wow, where do you start?

There are really over 100 social media sites that have “significant traffic.” But you certainly don’t have the time to check them all out. Here are a couple that we think deserve your attention.

1.     LinkedIn – Touted as the “business” option for social media, you can connect with colleagues, clients, and prospects. You can send and receive emails as well as create and join groups.  Think business networking groups in an online environment.

2.     YouTube – Great venue for sharing videos and a low price (how is free for low?). Be sure to allow people to re-post your video on their site if they want to share.

3.     Facebook  – Ever since the addition of Fan Pages and Groups, Facebook has become a potential melting pot of information. If you use the “group” function you can also email people (within Facebook) directly. A great way to let them know what you are doing.

4.     Twitter – Short messages to a group of “followers.” This venue gives the user and opportunity to add a personal touch. Just don’t go too far – no one cares what you had for lunch. Send out more than 4-6 updates per day and you will probably find your followers start to ditch you – especially if you are doing nothing but selling them.

Although the jury is still out on how many actual deals you can get from social media, there is no question that it will be here for awhile and millions of people are interacting in this venue.

In all cases, you want to be sure that you are delivering useful content, not just a sales pitch (some sites will even have rules against you doing just that). Contribute solid information and you just may find yourself sought out when it comes to buying owner financed notes!

Buying and Selling Notes – What is the Current Property Value?

One of the considerations when buying and selling mortgage notes is knowing the current value of the home. After all, the property is the collateral and knowing its true value will greatly affect how much an investor will pay for a note.

Historically this process was a bit easier, when everything was in an “up” market.  But with property values still on the downside or just recovering, it is often difficult to put a (safe) number on it. At least one that everyone agrees on.

Although there are excellent programs on the Internet that help the average consumer to get an idea of value, they are not always accurate. The actual value of a property can be determined in a couple of credible ways.

Often, note investors get what they call a “drive by” appraisal or valuation.

Usually performed by a licensed appraiser, the report will  include other sales or comps in the area. The main difference is a “drive- by” evaluation does not require the appraiser to have access to the interior of the property. The appraiser actually drives by and takes pictures from the street for the report.

Some investors are using what is called a Broker Price Opinion (BPO) – an evaluation based on the advice of a real estate agent or broker. They are often very similar comparable to a “drive by” and at a lower cost but do not follow the strict guidelines of a certified appraiser.

The note buyer may even require a full interior appraisal to get comfortable with the value. This might be the case when there are substantial improvements to verify or there’s concern over the property condition.

The actual approved or preferred method will be up to the individual investor.  While they are buying the mortgage note and not the property itself, the value is still important in deciding risk, investment to value (ITV), and the price they will pay to purchase the remaining payments.

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