What is the current focus of NoteDocs?

Mike Wood: The current focus of NoteDocs is to offer two services to note brokers in the cash flow notes industry. First we strive to offer noteholder lead data that provides quality leads for those interested in doing direct mail campaigns.

Second, I personally strive to provide quality content to help teach those who are starting a new business.

We seek to provide an improved list over the norm by doing the following:

i. Removing duplicate names and addresses so you only pay once for a name

ii. We clean the list so that you only have leads for first position notes

iii. We only provide residential seller carry back notes

iv. All of our data is specifically “seller” carry and not created by local lenders

How did you get your start in the note business?

I started close to 10 years ago when I met Talmadge Bell. He taught me how to market and the potential of the industry and introduced me to several of the top people in the industry. I continued to grow my business to eventually create my own notes and then saw the need for a better list provider and took on the challenge of being that provider. My focus has slowly changed to mainly manage the list service so I can be sure to keep up a high quality service.

What unique benefits does NoteDocs provide?

In addition to the specialized list that so many need we also offer 2 for 1 lead replacement. We understand that this industry has “stagnant” data since the information comes from public record with no updating so there will be undeliverable returns on mailers. We feel that offering this lead replacement is a good service that can help lessen the pain of marketing and encourage marketers to keep up their efforts and find success.

What type of notes or transactions will your company consider funding? (Location, size, property type, credit, LTV, seasoning, etc.)

We are not a big buyer in the industry right now and I tend to lean to a conservative side on investments. I would only look at small notes under $20,000 face value and would likely only buy after talking to the payors.

What type of note deals would just waste your time?

Delinquent notes.

When I do look at investments I am interested in those that feel very comfortable and that means they must be up to date. You know the kind, the ones nobody wants to sell. Small notes of this type might interest me.

What do you consider the best methods for finding note deals?

I would say the ultimate best strategy for finding notes deals is to work with the seller to create it. Eddie Speed has helped me see the vision of this and the value in such a strategy especially in today’s market.

Aside from being there at the creation I would say the next best method for finding notes is to build a referral pipeline. Getting leads from a referral source with whom you have a good rapport will always be your best bet.

If you are going to do direct mail then you need to understand that it is a numbers game and requires a lot of mailing to many individuals over time. the best strategy there is to build a big list, continue building it and when mailing any item have something that identifies you so they become familiar with your “mark”.

How do you handle commissions to note brokers or consultants?

I have worked different ways with commissions on deals I have done over the years. Since I don’t do a lot of buying right now I would say simply that I would give my offer on any notes presented and let the broker determine their commission before making an offer to the seller. For our lead service I am willing to pay a 20% commission to anybody who sends regular referrals to our company. I just ask that a discussion be made ahead of time and that referred clients make it clear who referred them.

What advice would you give to new professionals just starting out in the industry?

Basic business advice. I currently coach individuals on starting their own business and have done this for many years. I think the advice I would give for this one is similar to any business. Treat it like a business. Know that you will have to work for many weeks or months before seeing a return and commit to it. If you are just “trying it out” you are not in business and you will fail. I don’t see any point in sugar coating it.

What is the most common business mistake you see people make?

Not giving it your all.

I guess it comes down to faith. if you do not truly believe in yourself and what you are doing then you are going to see more struggles and you will see each challenge as a road block. Accept that you are taking a different route than you have before, there are new things to learn. It will NOT be easy but if you are willing to truly give it your all you will be successful. I see too many people who want the different result but are not willing to really DO what is needed to get it.

Given the current economy, have you made any changes in the way you transact business?

Yes I have but perhaps not what you might think. I recognize that he current economy can only strengthen this industry. What I have done different is to get more involved and write more about the benefits and how to truly become successful. I figure if I can get the word out more then more people will listen and recognize the importance of moving on the opportunity now.

Where can someone contact you to obtain more information?

Through my website at www.NoteDocs.com

You can find my phone number and email there. The best option is to contact me through email, mike@notedocs.com since I do a lot of consulting and I spend much of my time on the phone and in meetings but if you leave me a message you will get a return call.

Is there anything else you would like to share with readers at Note Investor?

Simply that there are many opportunities for those who seek them. There is a lot to worry about in today’s world but there is much good as well and I feel very strongly that if you focus your efforts and believe you can make it happen you will see success.

I am personally a very religious person and feel strongly that we all should do what we can to serve others and while you may be looking for solutions for your own situation I would also encourage you to seek the benefits of serving others. Let’s take care of our fellow man as we work to build anything in this life.

Then you will want to know Ric Thom of Security Escrow, the feature of this month’s Note Buyer Interview.  Ric has been servicing and buying real estate contracts in New Mexico for over 25 years.

He’s also a true owner financing expert that has been actively involved in trying to “make sense” of the HUD Safe Act and Dodd Frank Act.

Where do you focus your efforts as a Note Buyer?

The current focus of my note-buying company, Ric Thom Enterprises, is looking for additional investors. The hard part about this business used to be finding quality real estate contracts. Finding investors was the easy part, but with all the negative publicity about foreclosures and declining property values it has become a little harder to find investors. However, default rates on owner financed transactions (installment sales) are only running about 5% in New Mexico compared to 9 or 10% for conventional financing. The reason is buyers can simply pick up the phone and call their sellers to modify the contract.

How did you get started in the note business?

I started in the business of buying and selling real estate contracts in 1984 after becoming a real estate broker and taking a CCIM (Certified Commercial Investment Member) course. The CCIM Course dealt with financial calculators, time value of money, and discounting mortgages. The light bulb went on. I bought two small contracts for myself. Someone asked me what I was doing now and I told them about this great investment where you could get double digit returns secured by real property. They wanted in and I sold them one of my contracts netting a whooping $389! He told someone and they told someone and it just built from there.

I have purchased close to 2000 contracts during my career. Although I usually sold contracts to single private investors I have sold more than 100 to national note buying companies. I have only brokered about two dozen contracts. I have increased my profit margin since my first sale and have never lost money on a contract.

What unique benefits does your company provide?

One of the unique benefits my company provides is that I test drive the contract before I sell it. In other words after I negotiate a price with the note seller I do my due diligence and buy the contract with my own funds. I hold on to it for at least three months to make sure there was no fraud and the payments continue. Then, and only then, I sell it to an investor.

What type of notes or transactions will your company consider buying?

My company will consider buying only real estate contracts in New Mexico. I won’t purchase anything over $300,000, but I will try to broker it. Most contracts are a lot less than that. I’ll look at any property type, except restaurants, motels and churches. I don’t check credit. I am buying an asset. I do look at payment history. I prefer seasoned contracts of a year or more, but I will buy green contracts if they have at least 20% down. I try to stay under 80% investment to value.

What type of deals would just waste your time?

The type of deal that would be a waste of my time would be nonperforming contracts. People say, “hey why not just buy it at a deep discount, take the property back and resell it?”. I’m not in the property business; I’m in the cash flow business and so are my investors.

How do like finding notes and real estate contracts?

The best methods for finding deals are looking through public records, but with a twist. I would calculate what the present balance of a contract would be after payments had been made and actually make a discounted offer to the contract holder. This offer would be subject to a number of items that comprise my due diligence. Having a figure as to what they can actually get for their note is so much more effective than just saying, “Hey, I’ll pay cash for your note”.

Another method is to become an affiliate of several realtor boards and advertise that you will pay a referral fee to its members. Join a local real estate exchangers group. Realtors are a great resource.

Another method is to work with an escrow/servicing company of seller financed notes. Often, the owners of these companies don’t have the time, knowledge or desire to buy and sell notes. You can either offer them a flat fee to allow you to place a flyer with the payments that go out to the sellers or you can offer a percentage of your gross profit on any contracts/notes that are generated from you soliciting their sellers.

Or you can do what I finally did which was to start/buy an escrow company.

How do you handle commissions to note brokers or consultants?

Commissions to brokers or consultants are negotiable.

What advice would you give to new professionals just starting out in the note industry?

Advice I would give to new professionals just starting out in the industry is to keep your day job and get a line of credit. It took me more than three years before I could make a living buying and selling contracts. You need that time to build contacts, reputation, and learn from your mistakes. If it wasn’t for a line of credit, I would not have been able to make it in this business. There is nothing worse than spending three weeks putting together a package to send out to investors only for the seller to sell their contract to someone else for less money because that buyer could be “Johnny on the spot”. With a line of credit you can cherry pick the very best contracts to buy and broker the marginal ones. Your line of credit can come from a local bank, home equity or friends and family. If it is indeed a good contract the payments will more than pay the interest on the line while you are selling the contract.

What is the most common mistake you see people make in the note business?

The most common business mistake I see people make is trying to make something work that’s not going to work. When I first started I hated to walk away from any contract. The fact is some contracts/notes just can’t be sold either because of the terms, the property, or the seller. When I first started I wasted a lot of time trying to make everything work; so much so that my wife had a sign made for my office that said, “If it works, it works. If it doesn’t, it doesn’t”. From that day forward I was able to tell sellers in a very short period of time whether or not I was willing to buy their contract or not. Then I would go turn over another rock.

Have you made adjustments to the way you buy notes in the current economy?

The changes I have made given the current economy, is seeking deeper discounts and higher yields as a result of my investors requiring the same. I am also buying more partials, also known as fractionals, to minimize risk.

Where can someone contact you to obtain more information?

Email at ricthom51@yahoo.com or visit online at SecurityEscowNews.com

Is there anything else you would like to share with our readers?

One of things that have pleasantly surprised me over the years is the number of people who genuinely thank me for helping them out of a bad financial situation by purchasing their contract/note.

If you would like to read more from Ric Thom of Security Escrow be sure to check out these articles:

Owner Financing, Seller Financing, Dodd Frank, Safe Act, and You!

Dodd-Frank Hijacks Owner Financing

How Congress Wants to Change Seller Financing!

What is the current focus of Americus Financial Group?

To maintain our reputation as the recognized leader in the purchasing of real estate notes nationwide. In addition, with our knowledge and experience we strive to assure that each transaction is fast, satisfying, and stress-free.

How did you get your start in the note business?

Buying and selling real estate in the mid 80’s. I was introduced to seller-financed real estate early in my real estate career and in 1988 was hired to purchase real estate receivables, structured settlements and lotteries for a multi-billion dollar financial services corporation until my departure in 2003 to start Americus Financial Group.

What unique benefits does your note buying company provide?

We do ALL our own underwriting, pay for ALL appraisals and we are the only investor to my knowledge that does not require the servicing to be released.

What type of notes or transactions will your company consider funding?

Each transaction (as long as it is secured by real estate) is reviewed based on the following criteria in order:

1. Equity
2. Seasoning
3. Collateral Type (SFR, Commercial, Land)
4. Credit

What type of note deals would just waste your time?

Simultaneous closings and “flips”

How do you handle commissions to note brokers or consultants?

They are paid at funding (when we close the transaction). Most fees are wired to our brokers.

What advice would you give to new professionals just starting out in the note industry?

This is a vocation/profession so treat as such – educate yourself and understand that you will ultimately be rewarded with the amount of time and effort you truly put into it.

What is the most common business mistake you see people make?

Requiring and gathering too much information from the note holder before they have the transaction even under contract.

Given the current economy, have you made any changes in the way you buy mortgage notes?

Yes we have –

• As noted above, we no longer purchase simultaneous closings or flips
• We require a minimum of 20% cash equity on most note purchases.

Where can someone contact you to obtain more information?

www.AmericusBuysNotes.com

Editor’s Note:  You can also view the Americus Financial Group listing in the current edition of the Note Buyers Directory for more details!  This updated directory is available for download in the Member’s area of the Finding Cash Flow Notes Training or can be found in the bookstore.

We Are Giving Away One Note Present Each Day For The Next 12 Days!

And there are TWO WAYS you can win…

Step One – Add your email below to gain one entry.

*Some browsers do not show the sign up box. If you can not see the entry box above this line you can also go here to sign up.

Double your chances of winning…

Step Two – Add a comment or question about the note business to the bottom of this page. Each day that you enter a comment or question, you gain an additional entry! Up to one entry per day.

List of Winners and Prizes…

December 1 – Michael Murray – 21 Insider Secrets / Note Buyer Directory

December 2 – Wayne Wright – 21 Insider Secrets / Note Buyer Directory

December 3 – Allen Robinson – 21 Insider Secrets / Note Buyer Directory

December 4 – Bankim Patel – Personal Profit Series: Notes

December 5 – Jay Martin – Personal Profit Series: Notes

December 6 – Richard Garcia – Personal Profit Series: Notes

December 7 – Howard Freeman – FULL ACCESS – Finding Cash Flow Notes Training

December 8 – Lisa Nesbit – FULL ACCESS – Finding Cash Flow Notes Training

December 9 – Tracy Day – FULL ACCESS – Finding Cash Flow Notes Training

December 10 – Mike Stoll – Complete Turnkey Note Business Website w/ 6 Months Hosting!

December 11 – Ken Lawrence – Complete Turnkey Note Business Website w/ 6 Months Hosting!

December 12 – Bill Cody – GRAND PRIZE (EVERYTHING!) 21 Secrets/Note Buyer Directory, Training Access, PPS: Notes, Complete Note Website w/ 6 Months Hosting!

Each day we will list the previous day’s winner! - Good Luck!

*Fine Print: Items will be awarded via random drawing. We reserve the right to substitute prizes in the event a winner has already purchased an item. Website winners will receive a completely built site (and 6 months of free hosting) – after which time they may either continue with hosting or cancel account. Winners of the Finding Cash Flow Notes Training will receive course access for a period of 12 months. Sorry, but these prizes can not be substituted for cash or refunds.

Thanks for making 2011 a great year for the note business!

We look forward to working with you in 2012!

The Noteworthy Convention Main Event is Friday-Sunday, November 11-13th

It offers three days of sessions focusing on building wealth and generating income with seller financing, distressed assets, creative real estate investing, private lending, and more. There will be expert panel discussions, Q&A sessions, introductions to key vendors, and networking events throughout.

They are currently offering Early Bird Registration for $399 until October 16th with several “Early Bird” Bonus Items:

1) The NoteWorthy Pre-Convention Workshop on Thursday, November 10th

A half-day workshop that runs from 1-5 pm will be taught by Note industry veterans. This ‘Making Money with Notes 101′ workshop is geared towards new note brokers or investors wanting a refresher course in the economic fundamentals of note buying.

 2) $477 in proprietary software for your note business

 3)  Discounts on additional spouse or partner tickets

The convention will focus on turning a down real estate market into a viable note business by harnessing the power of seller financing and private mortgage notes. We all know real estate investing in most markets is pretty tough right now. Here are just a few of the challenges:

• You can’t count on property appreciation anymore. In fact, most investors LOST equity in their properties over the past 3-5  years.

•  You can’t count on you (or your buyers) getting financed by the banks.

• Short sales flips are pretty much DOA.

• It’s tough to get private money for your deals.

We could go on and on, but we all know the challenges already, right?  After all, they are the reasons we are seeing seller financing making a huge comeback.

You can view the full NoteWorthy Convention Video here.

(Spoiler alert…..the secret niche is….the note business!)

(Editor’s Note: Information on the Dalbey Bankruptcy Chapter 7 Filing can be found in the update posted at the bottom of this article.)

Imagine feeling misled by an infomercial, attempting to get some money back, and losing even more hard earned dollars paid to a company claiming they could get you a refund.

Sadly, this is how the story unfolded.

Earlier this year the Federal Trade Commission and Colorado Attorney General filed a lawsuit charging Dalbey with defrauding consumers.  Feeling misled, some buyers of the “Find ‘Em, List ‘Em, and Make Money” system went in search of a refund.

Just take a look at the heartfelt comments left under the original article entitled Russ Dalbey’s Winning in the Cash Flow Business In FTC Lawsuit to see how angry and hurt many felt.

Next enters a company, RMI Associates, claiming they can help people get refunds from the Dalbey Eduction group, but first they need hundreds of dollars upfront.

This led the FTC to recently update their page on the Dalbey lawsuit with the following:

“A company named RMI Associates has been claiming it can help people get refunds from Dalbey, but first the company wants a fee of several hundred dollars. The FTC believes that this company is attempting to defraud you. Neither the FTC nor the Colorado Attorney General is working with any company. A Court has ordered RMI Associates to stop making claims that it is working with the FTC or that it has a track record of having obtained refunds for consumers.”  Source: FTC Website Update On Dalbey Lawsuit

The Colorado Attorney General also issued their own cash flow business scam alert:

PRESS RELEASE
Colorado Department of Law
Attorney General John W. Suthers

FOR IMMEDIATE RELEASE
September 21, 2011

CONTACT
Mike Saccone, Communications Director
303-866-5632

ATTORNEY GENERAL ANNOUNCES ORDER BARRING DENVER COMPANY FROM CONTINUING CONSUMER-RESTITUTION SCAM

DENVER — Colorado Attorney General John Suthers announced today that his office has obtained an order barring Denver-based RMI Associates from providing consumers with assistance in filing a consumer complaint with the state for a fee. The court order also requires that RMI Associates refund any fees it has accepted from consumers to assist them in filing a complaint with the Office of the Attorney General or the Federal Trade Commission.

The order follows an August lawsuit the state filed against RMI Associates alleging that the company claimed that in exchange for an upfront fee it could help victims recover their losses related to a federal consumer-protection lawsuit against Westminster-based Dalbey Education Institute, formerly known as American’s Note Network.

“This order underlines that consumers should never pay for a service they can obtain for free from the state,” Suthers said. “Any private business that claims a ‘special relationship’ with my office or any other state or federal consumer protection agency is misleading you. You should never pay a fee to file a consumer complaint with the state of Colorado.”

Consumers can file a complaint for free via the Office of the Attorney General’s Web site at www.coloradoattorneygeneral.gov/complaint. Consumer also can file complaints via 1-800-222-4444 or stop.fraud@state.co.us.

The Office of the Attorney General warned consumers about RMI Associates’ fraudulent services in early August after consumers began filing complaints against the company. Consumers should never contract with a company or pay any fees in order to get their complaint submitted to state or federal authorities.  Source: Colorado Attorney General Press Release

At the time of publishing this article there has not been a Court decision on the government’s lawsuit against Russ Dalbey and Winning in the Cash Flow Business. As additional information becomes available we will post updates for our readers and subscribers.

Update 12/1/11 – Dalbey Education Group Has Filed Bankruptcy

According to an article published November 16, 2011, by CBS Denver News the company owned by Russ Dalbey, Promoter of Winning in the Cash Flow Business, has filed for Chapter 7 Bankruptcy.  Here are a couple of key points from the report:

• 308 People have filed complaints with the Colorado Attorney Generals office claiming the Dalbey cash flow business was a scam.
• Gross income for Dalbey Education Institute was around $62 million in 2009, $50 million in 2010, and $21 million this year (2011).
• Assets are normally sold to pay creditors in a Chapter 7 bankruptcy after which a company basically disappears.
• The State of Colorado in conjunction with the FTC continues to pursue restitution along with fines and fees feeling these claims are not dischargable.
• Complaints were still being accepted.

The full article entitled  Company That Promised to Help People Get Rich is Broker by CBS Denver News can be found here: Dalbey Bankruptcy Filing

Eddie Speed of Colonial Funding Group has been buying and selling notes for over 30 years and has transacted more than 30,000 deals.

To know Eddie is to know a few of his “Eddie-isms”.

I still remember hearing one of his trademark sayings when first introduced back in the late 1980′s.  You see I was helping place funds for a large institutional investor on the West Coast and we’d just expanded into buying Notes in Texas. Unfamiliar with regional differences, our underwriters and legal team were requiring something unreasonable to get a deal funded.

Eddie was understandably perplexed and contacted me to help find a solution.  As I explained the position of the company, Eddie put me at ease right away by saying…

“Now Tracy… it’s not my first rodeo.”

(Of course I later found out that before buying notes he was literally a rodeo champion so it wasn’t just some quaint saying.)

We went on to close that deal and many others with some creative thinking.  Later when starting my own company I also had the pleasure of working together on a variety of joint ventures over the years.  So to borrow an “Eddie-ism”  just let me say… “He’s the real deal!”

We recently asked Eddie to tell us about the non-performing note business including the much discussed7 Figure Note Investor training.

Note Investor: What is the current focus of your company Colonial Funding Group?

Eddie Speed: One half of our energy is directed or focused towards the purchase of owner financed notes and one half of our energy is directed toward the purchase of non-performing notes from institutions. Our deliverable is like no one else. I’ve bought notes and run a large operation buying work out assets.

How did you get your start in the note business? 

By Accident. While dating a young lady, now my wife of 29 years, her Dad offered me the right to work for free in exchange for sharing his knowledge of the business with me. That was 30 years ago and it was the best choice I ever made.

What unique benefits does your company provide?  

The most unique benefit is that our training is backed by time-tested techniques. It’s something we practice every day, and we constantly adjust what we teach based on the relevancy in the market in 2011 and beyond.

What type of notes will your company consider buying? (Location, size, property type, credit, LTV, seasoning, etc.)

We have no specific limitations in regard to what we can buy in regard to geographic locations and size on performing or non-performing notes.

What type of real estate notes would just waste your time?  

A waste of time is a deal with insufficient redeeming factors. For example, a note secured by a mobile home and land, the Buyer has severely injured credit with an insufficient down payment and poor payment history.

What do you consider the best methods for finding cash flow notes?

The best method to find quality notes to buy is direct mail.

How do you handle commissions to note brokers or consultants?

You determine the commission you want to make. We will quote you on what we can pay for the transaction and you adjust for your commission.

What advice would you give to new professionals just starting out in the note industry?

The best advice starting out in the industry is to work smart.

What is the most common business mistake you see people make?

The most common business mistake I see people make is not anticipating barriers.

Can you share one of the high points in your note buying career?

I was very privileged to have developed the “seller-financing system” for HomeVestors, the “Ugly house” guys.

What is one lesson you had to “learn the hard way”?

I learned the hard way that no one else cares about your business more than you.

Given the current economy, have you made any changes in the way you look at deals?

Absolutely, over 30 years you have to reinvent yourself in regard to how you do business and this economy is no different.

Where do you see the greatest opportunity right now in the note businesses?

I believe the greatest opportunity right now are notes on higher quality properties with more qualified buyers.

Can you give us a sneak peek preview of your new training course on buying non-performing notes?

In the new training course for buying non-performing notes, it not only teaches you about pricing notes but where to find likely candidates that sale non-performing notes. Not all lending institutions can sell notes at deep discounts.

Note Investor Update: Eddie has currently filled the openings in his upcoming training and removed the free videos but you are welcome to visit his site and request email updates at NoteSchool.com for the 7 Figure Note Investor.

Should you decide to buy the course please know that our company does receive a commission on purchases generated through our referral.  This does NOT result in any additional cost to you. Like all deals I’ve done with Eddie Speed, he makes sure everyone gets their fair share.  Even if you don’t decide to purchase the upcoming training, you will still want to take advantage of the free info on delinquent non-performing notes!

We share your pain.

First the Safe Act had a say on Seller Financing and then the Dodd Frank Act.

Why the government would want to slow the housing rebound further by putting stringent restrictions on seller financing – one of the few alternatives to bank financing available in today’s struggling economy- is beyond us.

And it’s not over yet.

Government agencies are still sorting through how to implement portions of the laws affecting both seller financing and lenders in general. The outcome will affect sellers that want to owner finance and when they want to “sell my note!”

Ric Thom, a long time note buyer and servicing agent, shares our concerns.  He recently wrote in to urge NoteInvestor.com readers to take action by commenting on proposed rules before an upcoming deadline. He’s spent considerable time researching the issues and you are sure to find his following thoughts insightful.

Owner Financing Laws – From the Desk of Ric Thom

The Federal Reserve is requesting comments on the proposed rule of the ability-to-repay.  NAR refers to it as Qualified Mortgage which appears on page 10 of the proposed rule.

This standard would be applied to seller financing.  It’s the same underwriting standards that banks are required to perform.  The bottom line is that the only people who will be able to use seller financing are the same people who would be able to qualify for conventional financing.

This rule also allows the buyer a three year right of rescission if the seller did not properly qualify them.  This right to rescission also applies to anyone who has bought the note.

Comments are due before or on July 22, 2011.  I have attached my comments.  Please get the word out.

I have also given a link to the National Association of Realtors (NAR) website which summarizes the final SAFE Act rule as it pertains to seller financing and a brief update on Dodd-Frank.

My Comments on the Dodd-Frank Act and Seller Financing

Submitted by Ric Thom President of Security Escrow Corporation

The Dodd-Frank Act does not exempt property owners who wish to use seller financing (installment sale) even though no money is lent, there is no table funding, and under the Truth and Lending Act they are not considered creditors.

The Dodd-Frank Act (ACT) does exempt property owners who offer seller financing from having to become Mortgage Loan Originators (MLO) provided they only sell 3 properties or less in a 12 month period and they follow the restrictions below. Yet, the Act subjects the property owner to the same liability as an MLO.

Title XIV Section 1401 (2) (E)

1. The seller did not construct the home to which the financing is being applied.

2. The loan is fully amortizing (no balloon mortgages allowed).

3. The seller determines in good faith and documents the buyer has a reasonable ability to repay the loan.

4. The loan has a fixed rate or is adjustable after 5 or more years, subject to reasonable annual and lifetime caps.

5. The loan meets other criteria set by the Federal Reserve Board.

Under this Act the only buyers who will be able to use seller financing are the buyers who can already qualify for conventional financing with perhaps the exception of how much of a down payment they need. Seller financing has always been the alternative to government regulated financing. It is a meeting of the minds between two private individuals who negotiate an arm’s length contract to purchase property using an installment sale.

The following is a breakdown of these restrictions. I listed them in order of greatest impact on property owners, buyers and the economy.

3. The seller determines in good faith and documents the buyer has a reasonable ability to repay the loan

The implication is that the seller must use the ability-to-repay underwriting requirements when offering seller financing consistent with the Dodd-Frank Act which amends the Truth in Lending Act. This new, proposed rule is 169 pages long. http://www.gpo.gov/fdsys/pkg/FR-2011-05-11/html/2011-9766.htm

The Consumer Financial Protection Bureau has spent a lot of energy developing a new, easy to read, two page mortgage disclosure form. It is unreasonable to expect sellers and buyers to fully understand and apply this 169 page rule. If buyer’s and seller’s negotiations deviate in the least the buyer has up to three years to rescind the sale and demand back all money paid to the seller, or anyone that the seller might have assigned rights and interest to, or any bank who takes the note as a collateral assignment.

This could be financially devastating to the seller. Let’s not forget that today’s buyer will be tomorrow’s seller. These sellers are a diverse group. They come from all walks of life: low income, high income, non-English speaking, seniors, widows, minorities but this requirement places the same standards on individuals as banks and mortgage lenders, only with more risk – the banker is in the business of mortgage loan origination and factors that risk into his business plan, whereas the individual seller does not have capital reserves and doesn’t do this as a business. Also, unlike a bank, they do not carry errors and omission insurance.

Unlike banks and mortgage lenders, both the buyer and seller are consumers. They should both be equally protected. The buyer is purchasing real property and the seller is investing in/creating a financial product where they receive their equity over time. The seller is relying on the buyer to make monthly payments and maintain and protect the property. Terms are not dictated to either party, but rather they are negotiated between the parties.

Requiring the buyer to turn over all their financial information to a stranger opens the door for Identification theft and fraud. Furthermore, why should the buyer be required to divulge their income and assets to the very person with whom they are negotiating the terms of a sale? This is not required when there is a 3rd party lender.

This also creates the opportunity for predatory borrowing. This is where an unscrupulous buyer knowledgeable about the Dodd-Frank Act leads an uninformed seller (and this will be the majority of sellers) into negotiations not in compliance with the ability-to-repay requirements. (An example of that could be a balloon, an interest rate greater than 1.49% above a standard mortgage, or the seller did not know how to calculate the income to debit ratio correctly, or know what residual income means). That buyer lives in the property trying to resell it for a profit and if they are not successful within three years they rescind the sale and get all their money back.

The SAFE Act does not put in place the ability to repay requirements, or any other requirements, unless the individual habitually and repeatedly uses seller financing in a commercial context. So there is some consistency between the two laws the Dodd-Frank Act should not require sellers to use the standard of the ability-to-repay unless they use seller financing more than three times in a 12 month period. It is HUD’s feeling that Congress never intended under the SAFE Act to restrict private property owners from using seller financing, unless they did it as a business.

2. The loan is fully amortizing (no balloon mortgages allowed).

There is a good chance that a seller 55 years or older will die before receiving all their equity by not allowing them to negotiate a balloon payment. A lot of seniors have invested in real property with the intent of selling it using seller financing (an installment sale) in order to supplement their income in retirement, but also with the hope that they would not be stuck with a 30 year investment. The Dodd-Frank Act does the same thing insurance companies do who sell 30 year annuities to seniors. Our government has criticized this deplorable practice because seniors will die before they receive all their investment.

The restriction of no balloon doesn’t affect just seniors, it has financial consequences for anyone using seller financing. Under the Dodd-Frank Act community banks are allowed to originate fully amortizing loans with a five year balloon. The rationale is that they hold these loans in their own portfolios and the government recognizes their need to hedge against inflation and rising interest rates. Yet, the Act refuses to recognize that private property owners who have 100% skin in the game need the same protection. Obviously the Act does not feel that a five year balloon is predatory lending. This restriction should not be placed on seller financing until a property owner sells more than three properties in a 12 month period. If there has to be a restriction it should at the very least be the same allowance given to community banks of a balloon in 5 years.

4. The loan has a fixed rate or is adjustable after 5 or more years, subject to reasonable annual and lifetime caps.

This restriction is reasonable, but it will eliminate the ability for any buyer to wrap an existing obligation that has an adjustable rate even if they feel they can afford any rate increase. Again, for consistency with the SAFE Act there should not be any restrictions on any property owner that uses seller financing 3 or fewer times in a 12 month period. If the seller does not know about the ability-to-repay requirements and that they are not able to have a balloon, they certainly will not know that you have to have a fixed interest rate for the first five years.

1. The seller did not construct the home to which the financing is being applied.

There are a lot of small builders that have a spec house or two that they can’t sell unless they offer great terms using seller financing. Otherwise they have to let these properties go back to the bank which does not help housing or the economy. There is also that group of out of work construction workers who built their own homes when times were good and now need to sell. This takes away their ability to use seller financing. Builders should not be subject to any restrictions unless they sell more than three properties in a 12 month period using seller financing. Builders are in the business of building; not of originating loans.

Using a mortgage loan originator to facilitate a seller financed transaction creates additional risk and expense for both the buyer and the seller.

It has been said that a seller financing the sale of his or her own property would completely avoid the issue of licensing by retaining the services of a licensed loan originator. If a mortgage loan originator (MLO) fails to properly follow the ability-to-repay guidelines the buyer still has three years in which to rescind the sale which leaves the seller at risk and will most likely bankrupt them. Furthermore, there is no provision in a MLO’s errors and omission insurance that covers seller financing. None of the continuing education classes or the exams that an MLO must complete has a single chapter or question regarding seller financing.

Who is supposed to pay the MLO? MLOs can charge a flat fee or up to 3% of the transaction. The only advertisements I have seen so far advertise a flat nonrefundable fee of $450. This fee has to be paid in advance, which makes sense because why would a MLO spend hours and hours on an installment sale transaction which might not close? If the buyer pays the fee, then this is a forced origination fee never before imposed on buyers seeking seller financing. Why should the buyer have to pay money just to have an offer presented to the seller? A lot of buyers use seller financing because they are low income and seller financing, up to now, has been an inexpensive way to purchase property. If the seller pays they will have to pay money for the simple act of the MLO forwarding them the installment sale offer. If the seller receives multiple offers this could easily run into thousands of dollars in MLO fees just to sell their property. A lot of sellers are also low income individuals. The MLO will have to be a part of every offer and counteroffer because the sale and terms of an installment sale are one and the same and cannot be separated. For instance, the buyer might be willing to pay a higher interest rate if the seller is willing to come down on the price and down payment. A lot of seller financing takes place in rural areas that are underserved by mortgage lenders and banks. It is going to be very difficult to find a MLO in those areas who are also willing to take the risk facilitating a seller financed transaction. This has the potential of pushing seller financing underground – not a desired result.

The Dodd-Frank Act allows a property owner to use seller financing without having to become a mortgage loan originator as long as they don’t use it more than three times in a 12 month period and comply with the above restrictions. In the SAFE Act there are no restrictions to the number of times seller financing can be used as long as you are not in the business of being a mortgage loan originator. The coauthor of the Dodd-Frank Act, Representative Barney Frank, sent a letter to HUD on July 22, 2010 urging them to place the maximum amount of seller transactions that an individual could do before becoming a MLO, or having other restrictions on them, at five in a 12 month period. I would propose that the Dodd-Frank Act adopt that same number and place no restrictions on seller financing until 5 is surpassed. The only restrictions that should apply to 5 or less are those restrictions that the States already impose either through state statute or case law.

Under The Act loan officers at community banks do not have to become a Mortgage Loan Originator if they originate 5 or less transactions in a 12 month period. The rationale is that this is burdensome, costly and there is not enough volume to create a systemic risk. Ma and Pa on Main Street should be granted those same allowances. The Act puts more restrictions and risk on Ma and Pa than it does on financial institutions.

In watching the debates in Congress last summer it was repeatedly said that the Wall Street Reform and Consumer Financial Protection Act would not negatively affect or over regulate Ma and Pa on Main Street. If this doesn’t negatively affect and regulate seniors, minorities, and lower income individuals on Main Street I don’t know what does. These restrictions will all but do away with seller financing which will have a negative impact on housing, existing property owners, those desiring to be property owners and the economy.

Related Articles on Owner Financing Laws From NoteInvestor.com

Dodd-Frank Hijacks Seller Financing

Safe Act and HR 4173 Update – Is it Good News for Seller Financing?

How HUD Safe Act Will Hurt Seller Financing

The claims were backed by testimonials from students that are also being questioned.  The courts are seeking an order to stop any misleading claims and obtain money for refunds.

The Truth About the Cash Flow Note Business

The cash flow business is like any other business.  It takes hard work, commitment, time, knowledge and a strong marketing plan to make money buying or referring notes.  For real answers and straight talk about the note business check out these articles:

Note Brokers: Guru Rhymes With Screw You
Note Brokers: How Much Money Will I Make in the Cash Flow Business?

Reading the recent FTC filings will likely make one think…“If it sounds too good to be true then it probably is!”

Excerpt from FTC Press Release on May 31, 2011 entitled:

FTC Charges Promissory Note Pitchman with Deceiving Consumers

…“‘Winning in the Cash Flow Business’ was a real loser for hundreds of thousands of consumers nationwide,” said David Vladeck, Director of the FTC’s Bureau of Consumer Protection. “When someone is selling a program designed to help people make money, they have to accurately describe how much consumers can expect to make and be truthful about how quickly they will be able to do so. None of that happened in this case, and people who bought the program paid the price.”

Millions of consumers nationwide saw infomercials for the “Winning in the Cash Flow Business” program, which were hosted by TV personality Gary Collins. The program supposedly teaches consumers how to find, broker, and earn commissions on seller-financed promissory notes – privately held mortgages or notes that are often secured by the home or land that is the subject of the loan.

The FTC complaint alleges that consumers spent approximately $40 to $160 on the initial program, and were later encouraged to spend hundreds or thousands of dollars more on additional products or services, such as multi-day seminars, coaching sessions, and promissory note holder lead lists. Few of these consumers made the money that Dalbey promised them. The FTC and the State of Colorado seek a court order to stop Dalbey, his wife, and the corporate entities they control from making the allegedly misleading claims, and to obtain money for consumer refunds.

According to the complaint, since at least 1996, Dalbey has used various corporate entities to market his program. Beginning as early as 2002, he has done so mainly through a 30-minute infomercial. Along with pitches on the Internet and through direct mail, the infomercial claimed that consumers could successfully earn substantial income brokering promissory notes in three easy steps – “Find ‘Em,” “List ‘Em,” and “Make Money.”

“You’ll be amazed at just how easy it is to generate a stream of extra income every month. Build financial freedom and a better quality of life in just minutes a day. Or even retire earlier than you ever dreamed possible. Order now and you’ll be ready to profit in minutes,” an infomercial allegedly claimed.

These claims allegedly were supported by “testimonials” from consumers who claimed to have made “$1.2 million in 30 days,” “$79,000 in a few hours,” and “$262,216 part time,” for example. “In less than 30 days, I closed two transactions and I netted 1 point – a little bit over $1.2 million,” a testimonial by “Don B.” from New York stated.

Unfortunately, according to the FTC and Colorado Attorney General, this was far from the typical consumer experience. The complaint charges that Dalbey and the other defendants violated the FTC Act and Colorado law by making false and unsubstantiated claims that consumers are likely to quickly and easily find, list, and broker promissory notes and earn substantial amounts of money; and that defendants’ additional products and services, such as coaching programs, workshops, seminars, note holder leads, and other resources, will meaningfully increase the likelihood that consumers will succeed in the note business.

The complaint also alleges that while Dalbey claimed he has earned substantial money finding, listing, and brokering promissory notes himself, most of his note-related income for the past two decades has come from marketing and selling products and services supposedly to teach consumers how to find and broker such notes. In addition, the complaint alleges that consumer testimonials in the defendants’ advertising are inaccurate and do not reflect the results that customers are likely to achieve if they buy the program. For example, some testimonialists, the complaint charges, stated earnings claims that were total earnings figures accumulated over several years, rather than in one year.

The complaint also charges the defendants with violating the FTC’s Telemarketing Sales Rule by making similar misrepresentations to consumers during sales calls.

Finally, the FTC and Colorado Attorney General charged Marsha Kellogg – one of the consumers who provided a testimonial in an infomercial – with falsely claiming that she earned $79,975.01 from one promissory note transaction using Dalbey’s program, and that her total earnings were more than $134,000. The complaint alleges that Kellogg made this statement even though she earned $50,000 less than what she claimed.

Source: FTC News at http://www.ftc.gov/opa/2011/05/dalbey.shtm

To read the complete press release with links to the court filings and to get information on how to spot “get-rich-quick” schemes visit the FTC website.

Here is an option for non performing mortgage notes you might not have heard about…donating to charity.  Our guest author works with a non profit organization with a unique solution to defaulted notes.

(Editor’s Note: This article is not intended as legal or tax advice.  Please seek the assistance of a competent attorney and/or accountant for legal or tax advice.)

Selling Mortgage Notes – Is a Mortgage Donation Better Than a Write Off?

By Dr. Ken Rich

What do you do with a mortgage, promissory note or deed of trust when the debtor stops paying?

After the probabilities of payment in full and resell at a discount are exhausted – is it worthless? What if the property is worth less than the 1st mortgage? What if you’ve heard that the bank is foreclosing on their 1st? What’s going to happen to you?

There are still three options available to debt instrument holders:

• Donating the mortgage note to a charity,
• Write off as a bad debt loss, or
• Abandonment.

In a foreclosure, the 1st mortgage always bids the face amount. That way if someone else wants the property they have to bid and pay at least $1 more to get the property. The result is the winning bidder must pay the 1st mortgage off in full first. If the property is worth less than the market value to sell it, that’s a guaranteed loss. If you can’t sell the property for more than the 1st mortgage, you lose.

You only have two choices: throw it away or write it off as a bad debt on your taxes. It’s too bad you didn’t take advantage of donating it before the final date of the foreclosure. You could have had another choice.

Before the final date (or anytime you decide it’s worthless) donating your mortgage gives you a very valuable option. That choice is “TIME”. The difference between the two is the time it takes to complete it.

Write Off as a Bad Debt

The IRS limits you to $3,000 per year until the total is written off. Each year’s tax refund is based on that year’s tax bracket which can change. The key is you can take the entire loss amount but you may have to do it over 20+ years (i.e. a $60,000 mortgage will take 20 years). For additional information visit IRS.gov to download publication.

Donating Mortgage Notes To Charity

The IRS limits your deduction to 30% to 50% of your Adjusted Gross Income (ADI). However, the IRS may limit you to the appraised value of what similar mortgages are selling for. If your mortgage note is worthless and you donate it, an appraiser can only go on actual sales of other mortgages. You don ‘t have to tell the appraiser it’s worthless and uncollectible. All you have to do is give him a copy of the mortgage and tell him to find his own comps. That appraisal is what the IRS may ask for. Without that the IRS will let you take a $10,000 deduction without any questions asked (just make sure you keep a copy of the mortgage).

If all you take is the $10,000 deduction, as a write off it will take you 4 years to complete it. As a donation you should be able to do it in 1 year. The tax return is the same. Only the time is different.

However, that $60,000 mortgage may be appraised at $45,000. If your ADI is $50,000 your tax refund can be 2 to 3 years. The tax refund difference is between $1,500 to $12,500 (25% tax bracket) or $900 to $7,500 (15% tax bracket) in the first two years. It will end up being between 3 years versus 15 years. How much is the vastly shortened time frame worth to you?

One more risk is that if a charity ends up selling the mortgage to someone else for any amount ($100 just to get cash for it) within 3 years of the donation, you will have to file an amended return and pay back the excess refund you got. That 3 year window voids the appraisal. As for the charity, why would they keep something that they can’t collect on?

Make sure you know how the charity will handle the mortgage note, especially if there is currently minimal value on it’s income. Community Health Training, Inc. is one charity that accepts almost all mortgages regardless of value and will hold them for the 3 year IRS time limit. They charge a fee to service the donation, but it is still worth extra cash in your pocket versus a long term loss. They will not accept any funds from you. They only work through licensed escrow companies. In other words, you pay the fee to the escrow company. That escrow company makes sure all the proper documents are filed and only releases the money when the “deed is done” (sorry for the pun). If it’s not completed, they return the money to you.

About the Author: Dr. Rich is a retired physician who devotes time to hobbies, charity work, family and travel. Prior to health care he was in marketing, public speaking, and managed a commercial real estate brokerage that specialized in barter instead of cash. The most fun he’s had in recent years has been as a courier. They give him 30 minutes to 6 hours notice to fly somewhere in the world to deliver something, never knowing what to expect or where he’ll end up. One skill he’s constantly tried to develop is how to do anything with the wrong parts and wrong tools and make it work better than expected. That includes finances and government boondoggles. It’s best to reach him by email at SeniorDirector@CommunityHealthTraining.org