The Seller Financing Solution – Note Investor Radio Interview

Why is seller financing on the rise?

It provides a main street solution to a wall street problem.

If you are wondering how to use real estate notes to achieve your goals in this tough economy then you will want to catch the audio replay of the Note Investor radio interview.

Last Tuesday we tuned in with Lisa Moren Bromma of Wise Women Radio to discuss the opportunities available to buyers, sellers, investors, and note brokers using owner financing.  Here is just a sampling of the hard hitting questions she posed:

• You talk about solving the problems of main street that wall street created. What have you seen through the years in the lending business and how does your company solve these problems?

• What does it take to be a note investor in today’s tough market?

• What is the most difficult part in brokering or buying private mortgages that one must watch out for?

• How do you qualify your investors? How do you qualify the borrower of the note?

• Can investors use their IRAs to buy seller financed notes? How does one go about buying a note for their IRA?

• You have developed a strong following as someone who knows her craft. Tell us about your online presence, what you offer to those who are interested in learning the note business in today’s upside down real estate market.

• How do you keep up-to-date with industry changes and laws like the HUD Safe Act and Dodd-Frank Law?

• Do you have any recommendations on how people can educate themselves?

• You have been so successful where many of our peers have failed. What is your secret?

• Can you give us 3 basic ways to find mortgages?

• You are in business with your husband Fred. Is it difficult to work together? What is the secret to working and maintaining a solid personal relationship/marriage.

• What’s next for you in business and in life?

Many of you already know Lisa Moren Bromma as both a marketing expert and long time note buyer / real estate investor.  She’s also a published author and has recently started an Internet radio talk show entitled Wise Women Radio.  It was fun to be interviewed by Lisa and I encourage you to listen to the free audio replay.

You can also check out the archived talk shows with past interview participants.  It is a great way to pick up ideas at no cost! All it takes is just a small investment of your time! You can listen to the Note Investor interview and others at: http://www.wisewomeninvestor.com/WWR.html

 

 

How to Avoid Going Broke Buying Real Estate Notes

The most important thing you need to know how to do as a note buyer or investor is to properly analyze a promissory note investment when it first comes into your office so that you can either pursue the deal or pass quickly.

Let me show you an overview of my 6 step analysis that I go through on every note we look at. Read more

Learn the Note Business in 60 Seconds?

OK, you can’t really learn the cash flow note business in just 60 seconds, but this “speed round” of 11 questions will certainly get you started.

Ready?

Go…

What is the Note Industry?

The note business is the buying, selling and brokering of privately held notes.

What is an example of a cash flow note?

Ever see someone selling a property that says, “Owner will Finance?” That means the seller of the property is looking to “be the bank” and payments will be made directly to them. Seller financing is one of most common ways a private mortgage note is created.

How come I never see a “note buyer” office? Read more

Free Financial Calculator for Cash Flow Notes!

Is the best financial calculator now free?

If you struggle with calculating cash flow notes on the HP12C , HP10B, or the Texas Instrument BAII then you will want to check out this great offer!

Advanced Seller Data Services (ASDS), a leading provider of marketing lists for seller carried notes, has released a series of free financial tools for note brokers and note buyers.

Here’s a sneak peak at the power behind these calculators from a recent ASDS press release:

Tool #1 – A Financial Calculator to Find the Missing Variable in a Cash Flow Note!

• Greater ease of use and faster than the HP12C or other calculators.
• Allows user to instantaneously confirm information provided by note seller is correct.
• Provides user with feedback on which variable is being solved.
• Gives warning message and possible solutions when inputted variables cannot compute correctly.
• An automatic note quote system to quickly calculate full and partial bids as determined by the user.
• A Net Sum calculator to find the present value of a series of partial payments.

Tool #2 – A “Simple” Amortization Calculator

• Creates an amortization table for straight line mortgages.
• Calculates schedule on exact day or 360 day basis.
• Includes columns to track loan payments and reserves.
• Calculates loan payment for common loan terms for any loan amount and interest rate.

Tool #3 – A “Complex” Amortization Calculator for Irregular Cash Flows

• Allows user to input in any date order:

8 interest rate changes and

12 payment amount changes and

12 bump payments

• Calculates schedule on exact day or 360 day basis.
• Includes columns to track loan payments and reserves.
• Calculates repayment amount for common loan terms.

The only requirement to run the programs is Excel 2007 or higher installed on your computer. An Excel 2003 version is also available by request.

Programming the Excel worksheets with financial calculations is similar to the exclusive proprietary programming ASDS uses to identify seller carry back notes out of millions of recorded documents each year.

“Creating these programs to help our customers become more profitable was a natural progression of the services we offer” said Scott Arpan, owner of ASDS.

You’ll be happy to know that ASDS is committed to keeping these programs available to note brokers and note buyers at no cost.  The motivation?  They would like to have you keep coming back to the site and consider their list services for finding cash flow notes.

These tools may be downloaded for free at http://notesellerlist.com/Free_Financial_Calculators.html.

I’ve already downloaded my version and have been putting it to the test with these examples from Buying Mortgage Notes: 7 Tips for Calculating Cash Flow Notes!  You’ll be glad to know they are matching to the penny!

How Partials Reduce Note Discount When Selling Mortgages

Is the sticker shock just too much when discounting notes?

It might be time to consider selling just some of the remaining payments.

Note buyers have long used the partial purchase to reduce their exposure or investment risk, but it also has benefits for the seller.

You see the time value of money makes payments due now more valuable than those further out in the future. The partial purchase takes advantage of this by letting the seller cash in the most valuable portion – the more immediate payments. Plus the seller gets to keep the face rate or interest rate on the Promissory note working for them on the portion they hold.

Take a look at how this works by contrasting examples of a full purchase and partial sale. Read more

Buying Mortgage Notes: 7 Tips for Calculating Cash Flow Notes

If you plan on selling or buying mortgage notes the pricing will eventually come down to some important cash flow calculations.  If you get cold chills or high school flash backs thinking about math you can always leave the number crunching to the note buyers. However, I challenge you to get outside your comfort zone and give these exercises a try.

Why? Well knowledge is power and you will be able to know if you are getting a fair (or not so fair) deal when selling mortgage notes. Read more

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

Tired of hearing about owner financing laws?

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

NoteWorthy Industry Achievement Award Interview

Wondering what it takes to survive in the note business for 20 years?

Read our interview with NoteWorthy Newsletter!

Fred and I have been going through work and personal items in an attempt to control the ever growing amount of “stuff”.  While sorting through the memories there were a few definite keepers.  One of these was the plaque I was honored to receive from Jon Richards, founder of the NoteWorthy Newsletter.  The inscription reads:

INDUSTRY ACHIEVEMENT AWARD
Hereby bestowed this day to:

Tracy Z

NoteWorthy National Convention
June 28, 2002

For her willingness to provide leadership, guidance and steadfastness in an industry experiencing turbulent times.  Tracy would have excelled in any industry, we thank her for choosing ours.

Presented by:
NoteWorthy Newsletter
Jon Richards, Publisher

Receiving this award was a real honor. Jon was an inspiration to both Fred and me.  In fact Jon introduced the note business to Fred in the early 90′s and if it wasn’t for that the paths of our lives might never have intersected.

Later in 2009 I was asked to participate in an interview with NoteWorthy Newsletter for a series they were running on successful Note Buyers, Note Brokers, and past award recipients. The focus was how to be successful in the note business and the information is as timely now as it was then.

Interview With NoteWorthy Newsletter

(Editor’s Note: This interview was conducted with Tracy Z. Rewey in May 2009 by Clint Hinman, acting Editor of the NoteWorthy Newsletter at that time.)

Clint: How long have you been working in the note business?

Tracy: I’ve been making my living in the note business since 1988. That’s over 20 years (but if anyone asks I started when I was 12).

What led you to choose this line of work?

The flexibility and creative problem solving make the note business both fun and challenging. It provides an opportunity to work for yourself while also helping meet the needs of the note seller.

Ultimately it was the ability to harness the power of compounding interest and the time value of money that hooked me for good. I was blown away the first time I learned to run a HP12C financial calculator and finally realized WHY investors bought notes.

Tell us about the first job you ever had.

I started out like most kids eager for cash – anything that paid. I took jobs babysitting and cleaning up behind parade horses. But my first “real” job was in 1983 when I started with a local attorney’s office.

Since it was a rural area the law office handled many transactions with owner financing providing my first introduction to the note business. I learned real estate closings, title searches, servicing, and documentation. Eventually I moved to the “big city” and my position with Metropolitan’s note buying division from 1988-1997. Metropolitan provided an unmatched intensive hands-on education in the paper business.

You were part of the production team when Metropolitan was at its strongest. You went on to start your own company, Diversified Investment Services. What is your current focus from a business perspective?

A desire for financial independence led to the creation of Diversified Investment Services, Inc. in 1997. We continue to cultivate our business from a three-prong approach by developing long-term income as a private investor, immediate income as a broker, and educational materials for referral sources.

A primary focus has been adapting to the changing economic environment by developing alternative note funding sources. During the past year we have dedicated significant time and energy to providing educational resources at www.noteinvestor.com.

What was the most significant event in your life?

It was the moment I decided to be the driver rather than a passenger in my own life. To borrow a line from the movies, “You can get busy living or get busy dying!”

Who has been the greatest influence on your professional life?

That is a tough question because there are many that have contributed to the tapestry of my professional life. At Metropolitan I was thankful to both Irv Marcus and Mike Kirk for sharing their investment knowledge and believing in my abilities. My husband, Fred Rewey, has been instrumental in pushing me to embrace new challenges outside my comfort zone, including leaving the security of a corporate job to start my own business. Over the years many other greats in the industry have generously provided their expertise and insights. The willingness to share really is one of the incredible things about the note business.

What do you feel is the single most important characteristic one needs to have to be successful in the note business?

Persistence, persistence, and more persistence. Be ready to adapt and change the approach but don’t give up!

What do you see as the biggest threat to the seller-financed industry? How can we mitigate that threat?

If you had asked that question two years ago my answer probably would have been a few unscrupulous professionals bringing unreasonable regulation. However, in light of today’s economic challenges it seems the seller finance industry became too dependent on the cheap money provided through conventional funding vehicles. With the collapse of the mortgage backed securities market we must come full circle and return to the days of reliance upon independent and private investment funds.

Seller financing is helping to fill the void left in the wake of the credit crunch. As the use of owner financing increases there is a demand for note buyers to help educate the sellers and real estate professionals on the safest and most profitable methods to carry back paper.

What kinds of mistakes do you see new note brokers make? What kind of advice would you give a new broker?

The note industry is similar to most businesses. First, you need to provide a service or product that is in demand. Second, you must effectively market to get your message out to the customer. Third, you must work hard every day to meet, satisfy, and exceed the needs of your customers.

Unfortunately many new to the note business fail to treat it like a long-term business. Frequently this is first evidenced by the failure to consistently implement a proven marketing plan. Growing discouraged many give up. It comes back to persistence, persistence, and more persistence!

You and your husband Fred produced the Personal Profit Series on Notes – how would someone new to the industry benefit from this product?

From marketing and negotiations to funding and investment strategies, we share the knowledge we have gained during our 35+ years of combined experience. The Personal Profit Series allows people to avoid expensive mistakes and profit from the note business. At over 475 pages, it is the most comprehensive system dedicated to the private mortgage business. The goal is to take someone from broker to investor at a price that doesn’t break the bank. (Editor’s Note: This is now an online course entitled Finding Cash Flow Notes!)

What has been your greatest personal achievement?

The creation of a stable and nurturing family environment has been one of my greatest challenges and achievements. My path has not always taken a conventional route but I’m fortunate to have shared it with Fred, a fellow adventurer. This year our daughter is graduating and it is with a sense of wonder and satisfaction that we send her out into the world to discover her own path.

Give an example of something you do every day that contributes to your success.

Making a list of what I want to accomplish each day helps prioritize my efforts. There are always more things to finish then sufficient time to complete. A list helps keep my focus on the best place to expend energy. Oftentimes I’ll start with the least desirable task first and everything else seems seem easy after that! Envision your goals, commit, develop a plan, write it all down, and then prioritize your actions to reach the goal.

Source: NoteWorthy Newsletter 2009

The State of the Note Business

Owner Financed Note Business Increases 56% since 2008!

Why the big jump? More importantly, where is the opportunity for note brokers and note buyers?

Call it a mini “State of the Note Industry” if you Read more

Note Business Success in Five Words

We are often asked,

“How can I make it in the note business?”

That usually prompts us to ask a couple of questions to understand what, specifically, they mean by the question.

Some people want to Read more

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