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

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

How to Review and Buy Real Estate Notes

1. Property Location

The first thing we look at is property location.  Our preference is for real estate notes in Nevada and Arizona because this is where we have most experience, and as such, have a much better understanding of collateral values and state laws.  We will consider notes in other Western states, but if they are in the Central US or Eastern states we decline them immediately.

There is nothing wrong with notes in these states; they are just not within our area of expertise.  Note investors should invest only in areas where they understand exactly where their capital is going.

2. Property Type

The second thing we look at is property type.  Although we used to buy notes on vacant land, these types of notes currently do not make investment sense because there are so many non-performing land notes in our area.

Get to know one or two property types really well and stick to them.  If you have no expertise in a particular property type, stay away.  The other parties involved will know more than you; putting you at a disadvantage.

We tend to focus on mobile home with land notes, for example, but we consider other types of properties as long as they are in our comfort zone.  You too will have property types that you are more comfortable with than others.  We recommend limiting the types of property to those that you have the most experience in to limit your potential mistakes.

3. Note Payor

If the note collateral is in a geographic area that we know and property type we understand we will move on to the third consideration which is the payor.  In any note investment the payor that is the engine that makes a note investment work.  We find out what they do for income, since this will generate the monthly payment that we will be receiving, and we also ask how their pay history has been.

Again, the payor is the component that makes a note deal work… if they stop paying, you as the note investor become the engine because now you have to make the note deal work.  (Foreclosure, fixing/rehabbing, selling, taxes, insurance, working with bankruptcy attorneys, etc.)

The payor can enable a note investment to be a passive investment, but if the payor stops paying, they can enable the investment to become very active requiring a tremendous amount of time and energy.  Put in the time on the front end to analyze the payor and their pay habits as this will avoid trouble down the road.

We prefer notes with seasoning (length of payment history) where the payor has made twelve or more monthly payments.  We do consider shorter seasoning if their credit is satisfactory.

4. Equity Position

The the fourth factor is analyzing the current equity.  This most likely will come from a down payment and is a key to keeping a possible deal alive or passing on it quickly.

Any down payment of 5% or less is asking for trouble, so we tend to reject small down payment notes quickly.  A new note with 5% or less of a down payment is passed on because buyers with 5% or less have so little skin in the game that it makes it easy for them to walk away.

We prefer current equity of at least 10% and the larger the equity the safer you will be.

5. Current Property Value

Estimating the value of the collateral is fifth step in the process.  High collateral value in relation to the debt is a key incentive in keeping the payor paying you regularly so it is a very important piece to learn.

Initially we will look at the county tax records to see what value the county places on the property.  Second we take a look at Zillow.com and Realquest.com (both free) for a general value estimation.   Current comparable sales in the area are also good barometer.

If we still don’t feel comfortable with the information we will also look at what the subject property or neighboring properties sold for between 1995 to 2002 before the market went parabolic with the credit boom.  This is a good sample baseline of value if you can find it.

6. Note Purchase Price Calculations

The sixth step is determining how much to pay for the note.  While we rely on the note seller to share what their cash needs are from the note we also have our internal guidelines for investment to value (ITV).  Once we have a rough idea of the value of the property we can calculate our maximum ITV which refers to the amount of cash that we will put into a deal in relation to the current value of the property.

This is the key for keeping a margin of safety in our investment or an equity cushion in case something drastically goes wrong or we miss something in our due diligence.  Once you have calculated your max ITV you can come up with a range of options for the note seller.

Our maximum ITV is 50% and often times it is much lower than this.  This keeps our exposure low and if the property drops dramatically as we have seen recently there is still motivation for the parties involved to keep the note paying.

For example, say we purchased a note and our investment into the note was $40,000 on a property that was valued at $100,000.  Our ITV is 40%.  Now say that the property dropped in value by half in the current market.  In this case our ITV would have increased to $40,000/$50,000 or 80%.  Even though we are more exposed, we still have a 20% equity cushion that should keep the note performing.

ITV is different for different investors.  We recommend keeping your ITVs low to limit your potential losses.

When looking to price a note we do calculate yield but since yield can only be determined after the last payment has been made it is only a general parameter.  We are much more concerned today about buying a percentage of the balance as this gives us room in case the note does not pay as agreed.

While this may seem like a lot of steps, the more notes you look at the easier and simpler it gets.  Quickly discard bad notes and focus on good quality notes.  Following the above steps will help keep you out of trouble when looking to invest in notes for yourself.

Invest wisely and have fun!

About the Author: Greg Gehlen is the Principal at Canyon Capital, which specializes in the purchase of real estate notes and deeds of trust. He can be contacted at 702.515.7416 or online at www.canyoncap.com

You may also enjoy reading these additional Note Buying articles by Greg:

How Note Buyers Protect Against Rising Interest Rates

Real Estate Note Investing: “Wow, That Sounds Risky!”

Transitioning from Note Broker to Note Investor

Note Buyer Success Story

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?

Most note brokers work out of their home. Since they seldom ever see the note holders face-to-face, there is usually not a reason for increased overhead.

Do note brokers have staff?

Some do, most don’t. Just depends on how big they are. When people start adding staff they may decide to use office space.

How do note brokers find cash flow notes?

The most common methods used to find cash flow notes are direct mail, placing ads, Internet marketing, and referral networking.

How much money does a note broker make on a deal?

It varies by transaction but the average rule of thumb is between 3-6% of the amount invested (or paid) by the note buyer (For more details read Note Broker Fees in the Cash Flow Business)

How is the value of a cash flow note determined?

The fair market value of a note is determined by several factors. The amount of equity in the property, interest rate on the note, terms, seasoning (length of time the payer has made payments), and the payer’s credit will all impact the price paid by note buyers.

Are all promissory notes purchased at a “discount?”

Although possible in theory, it is very rare for notes to be sold at par or no discount. Typically there is a discount to cover the note buyer’s yield along with the hard expenses of closing and any note broker fees.

Can anyone start a note broker business?

Yes, note brokers come from all backgrounds. You do need to become knowledgeable in the industry. It is important to know all the players, the process, basic calculations, as well as the best and most cost efficient marketing methods. Most states don’t require a formal note broker license, although a few (like California) have specific procedures.

How much would it cost for me to learn the note business?

There are a several groups out there that offer training. Many of them don’t really know the industry and most of them overcharge.  In today’s competitive market quality training is available for under $500. With over 30 years combined experience, we feel our course at FindingCashFlowNotesTraining.com is the best in the industry  – and our members agree.

Any final thoughts on buying mortgage notes?

The note industry is like any other legitimate business venture. It takes work. Despite what you may have heard, there is no “get-rich-quick” business. However, if you are looking for a real business, with flexibility and earning potential, you might want to check out the note business.

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!

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.

Note Buying Example #1 – The Full Offer

Consider a transaction with a balance of $100,000 at 10% interest with 360 payments of $877.57 per month. If the investor desires an 11% yield, the pay price will be $92,150.55.

• Current Balance:  $100,000.00
• Cash at Closing – Full Offer:  $92,150.55
• Discount:  $ 7,849.45

Note Buying Example #2 – The Partial Offer

Now compare what happens if the seller elects to assign just half of the remaining cash flow – the next 180 monthly payments. The investor can pay $77,210.31 at an 11% yield for the right to receive an amount equal to 15 years of payment.

Compared to the full offer in the first example the initial cash to the seller at closing is reduced by $14,940.24 … but look at what the seller retains!

When the mortgage or deed of trust is assigned back to the seller in 15 years, the principal balance still owed by the payer will be approximately $81,665.21. The seller defers payment of the $14,940.24 in exchange for a balance of $81,665.21 in 15 years!

• Current Balance:  $100,000.00
• Cash at Closing – 180 Partial Purchase:  $77,210.31
• Plus Remaining Balance in 15 years:  $81,665.21
• Seller Receives Over Time:  $158,875.52

Keeping It Real

You may have seen note buyers advertise:

“No Discount” or “We Pay Full Face Value”

In reality they are likely using some sort of partial purchase similar to the prior example.

There is a sum of cash at closing for the partial purchase and then the balance is reassigned to the seller in the future, with the two combined amounts equaling or exceeding the principal balance at closing. This might also be structured as a two-stage buyout with cash at closing for the first partial stage, with another advance in the future for the seller’s remaining interest or the second stage.

While “No Discount” is an eye catching marketing phrase, it can also be misleading to the seller as they aren’t truly receiving 100% of the balance at closing. Rather it is received in stages over time.

In order to avoid any confusion or misrepresentation, avoid using these marketing slogans and just present the options as partial purchases with money now and money later.

It’s also important to know the future payout can be impacted if the payer stops making payments or pays off the balance early. These provisions are outlined in the purchase agreement and should be reviewed carefully with a trusted legal or tax adviser.

Searching for more ways to buy and sell mortgage notes, including sample partial agreements? Be sure to check out the Personal Profit Series now available in owner financed resources.

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.

1. Five Calculator Key Strokes for Buying Mortgage Notes

The first step is to grab your favorite financial calculator or software program.  Personally I use the HP12C but you can read this article on Choosing the Best Financial Calculator and decide for yourself.

Once armed with your financial calculator of choice, the functions are basically the same. They all utilize five primary keys, which are normally located in the first or second row of the calculator. Here is what they look like and what they mean:

• N = Number of Payments

• I = Interest or Yield/Return

• PV = Present Value of Cash Flow or Loan Amount

• PMT = Payment

• FV = Future Value

The easiest way to get started is to grab a piece of paper and make columns for the five keystrokes. You’ll find it helpful to write the values down before putting them in the calculator (plus it helps avoid some common mistakes). It will look something like this:

When we are looking for a solution to one of the categories, we need only place values in the known categories and the calculator will solve for the unknown category.

2. Calculating Owner Financed Mortgage Payment Amount

Let’s say that you are looking at selling a house with owner financing for $120,000 with a $20,000 down payment resulting in a $100,000 mortgage note. You want payments amortized over 30 years (360 months) with a 10% interest rate. If we start by charting this on paper first, it will look like this:

The first thing you may have noticed is that PV is a negative number. The calculator must be told which dollars are going “out” and which dollars are coming “in.” This is typically from the investor’s perspective so they are lending or carrying back a note for $100,000. The positive money (for the investor) will be the payments that come in.

(Special Note: Be sure you have checked the instructions that came with your calculator. If you have elected to go with an HP12C, you will have learned that you must enter the 10% in “I” as 10 [G] [I].  The HP12C needs to be told to divide the 10% into monthly increments – most other calculators will do this automatically and you will only need to enter “10” into I.)

Once we have entered in the numbers from the chart into the calculator, we need only solve for the missing category [PMT] to calculate our answer.

Payment Answer = $877.57 per month

3. Calculate Term For Seller Financed Mortgage Notes

Now let’s solve for the number of payments or term instead of the payment amount. Assume someone calls and says, “I am going to receive payments of $877.57 each month. We had a starting balance of $100,000 and the interest rate is 10%. I just don’t know how long it will take to get paid off.”

We can show this as follows:

Remember, we start with what we know. We know the interest [I], we know the starting balance of the note [PV], we know the payment [PMT], and we know that there is no balloon [FV]. Now we need only take the numbers from the table and add them to their correct categories in the calculator. If we have done that, we get the following answer:

Term Answer = 360 months

4. Calculating Note Buyers Purchase Price

Now, let’s go back to our first example to look at buying a note and establishing a pay price. To recap it looks like this:

Most amortized notes have a final payment that is slightly more or less than the stated monthly payment. To obtain exact figures, it is necessary to calculate this trailing amount by solving for the future value [FV] of that final payment as follows:

Solve for future value [FV]:

Future Value Answer = 3.55

When the answer is a positive number it represents that the final monthly payment will need to be increased. In this case the final monthly payment would be $877.57 plus $3.55 for a total of $881.12. If the answer is a negative number it means the final payment would be less than a full payment amount.

If you skip this step of solving for the final payment difference, your answers to the following calculations will have slightly different results. The overall effect on yield will be nominal, but the figures can differ by a couple of dollars and cents.

Let’s say that you want to purchase the above note and want to earn an 11% return or yield. The first thing you will notice is that we do not have to change every category. In fact, it is better if you don’t. With the above calculation still in the calculator, take a look at what we are trying to calculate on the next table:

You will notice we don’t have to change all the numbers. The ONLY number we need to change is [I]. We simply put an 11 in [I] and calculate for PV to get the following:

Present Value Answer = $92,150.55 Purchase Price

In other words, if you pay $92,150.55 for the right to receive $100,000 payable in 360 payments of $877.57, you will receive an 11% return on your investment.

Want to earn 12% instead? Here is what the chart would look like:

Again, we only need to change the number in [I] to 12% and now calculate for PV.

Present Value Answer = $85,315.99 Purchase Price

In other words, if you pay $85,315.99 for the right to receive 360 payments of $877.57, you will receive a 12% return on your investment.

Understanding Discounted Notes

You can see that the “note discount” really comes from the difference between how much the investor wants to earn (yield) and how much the note is already earning (face rate).

The greater the disparity between the yield and face rate, the greater the discount.

The closer together the yield and face rate, the smaller the discount.

If we wanted to earn 10% as a note buyer, we would pay $100,000 for the note (in real life you would have what is called a “minimum discount” to help cover closing costs when purchasing notes). You can see as we increase our yield requirement from 10% to 11% to 12% the “pay price” continues to go down. We are paying less money for the same cash flow – thus the note buyer return is higher.

5. Calculate Yield When Buying Mortgage Notes

What if we know the pay price but want to calculate for yield? We are simply solving for [I]. Keeping with the same example, we plan to invest $87,000 but want to know our return:

The [PV] category is replaced with the known value of $87,000 and we solve for [I]:

Interest Answer = 11.74% Yield

The yield or return on the $87,000 investment for this cash flow would be 11.74%. (If using the HP12C the answer for [I] is .98 per month, which must be multiplied by 12 to express as an annual rate.)

6. Calculating Current Balance on Cash Flow Notes

Suppose someone wants to sell a note but has already been receiving payments for 5 years or you just want to know the current balance on a seasoned mortgage note. The monthly payment of $877.57 represents both the principal and interest on the owner financed note, which will amortize or pay off in 30 years (360 payments). Each month the balance goes down and the remaining term is reduced. To calculate the remaining principal balance after 5 years or 60 payments use these values:

Solve for FV and you will get:

Future Value Answer = 96,574.44 Remaining Principal Balance

This remaining cash flow of $96,574.44 payable at 10% interest with 300 payments left will be now be the basis for calculating the Note Buyers Purchase Price and Yield.

Want a Calculating Cash Flow Notes Challenge?

What amount would a note buyer offer for this seasoned note if they desired a 12% yield? (Hint: Return to #4 above and replace the values with the updated information).

Need a little incentive?

Just post your answer below and we will email you a handout on Mastering Partials for Maximum Profits. (This offer is valid for all comments posted for the next 7 days and will apply for both right and wrong answers!)

7. Common Mistakes When Calculating Cash Flow Notes

If you calculated the correct answers in these examples, then congratulations! If not, don’t worry. What you need to do now is simply “recall” the various categories and determine where you have a wrong number in a category (this is why it is helpful to write down the calculations first on paper). Here are a couple things that can help you out:

Was PV entered as a negative number?

Remember, the calculator needs to know “money out” and “money in.” That is how it can figure out a yield or interest rate. So, for purposes of keeping it simple, we always use the investors’ side and make PV the negative money going out and PMT the positive money coming in. (This is accomplished by using the – sign of the [+/-] key on the HP10B or the Change Sign [CHS] on the HP12C.)

Wrong Payments per Year?

Most of what you do will be 12 payments per year. That is something we have to tell the calculator. If for some reason you want to change your calculator to quarterly payments or annual payments (see your calculator manual), then you have to make sure you switch it back when you are done.

Incorrect input?

When you make a mistake, use the “recall” key. This allows you to check the input in each category without changing them all. When you make a mistake, you may feel like you want to clear everything and start over – it is often easier if you use the “recall” key, find the error, and just change that category.

Old number in the wrong category?

There might have been a number from a prior calculation left in [FV] or some other category by mistake. When starting calculations on a completely new transaction or cash flow, be certain to use the clear all key or key equivalent on the calculator. This avoids carrying any numbers over from prior calculations.

Receiving an Error 5 Message?

This usually means that there are too many unknown categories to solve the equation. Carefully review input to verify the categories contain the correct information. If you continue to receive this error message, it could indicate the cash flow never pays off at the interest and payment provided.

Looking for More Great Tips On Selling and Buying Mortgage Notes?

Of course these calculations just touch the surface of note buying options. There are also:

• partial purchases
• balloon mortgage note payments
• interest only notes
• schedule B for early partial payoffs, split partials
• ITV implications, and more.

Click Here for a Special Finding Cash Flow Notes Offer!

For complete details and step-by-step instructions check out Chapters 8, 9, and of Personal Profits Series: Notes (currently included as a free bonus with the Finding Cash Flow Notes Training).

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

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

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 will, but here are a few points about the current condition of the cash flow note business.

Real Estate is Down

Sure, that was not an eye-opener to anyone reading this. There are still plenty of properties for sale out there (if you don’t believe me, just drive down any street).

But you have to remember that the Note industry literally exploded when it was hard to sell real estate.

Owner Financing Is Up

Back in the 1980’s the owner financing increase was due to high interest rates – now it is due to a flooded market – but the impact is the same. People have to carry back notes in order to sell a house in this market – that means more notes are being created.

How many more?

Bloomberg News reported a 56% increase in the number of US Homes purchased with various forms of owner financing when comparing 2008 to 2010.

Leading the nation for listings advertising seller financing were Michigan, Florida, Ohio, California, Wisconsin, Minnesota, and Texas.

(Source: Home Sellers Step Up as Last-Resort Lender to Poor-Credit Buyers, May 11, 2011, Bloomberg News)

More notes being created means more sellers.

Rates Are Going Up

Not bank rates (although that will have to happen at some point) but the rates that funders require to buy notes.

A higher yield requirement from note buyers will in effect create a higher discount.

For sellers that is not good news. But for those of you that are buying notes in your own portfolio, this will be great news! You might be able to get double-digit returns on low risk notes (something that has not happened for some time).

Why? Many players are out of the game or on the sidelines.

The fact of the matter is that the real estate (and Wall Street) tumble took out a few big funders in the note industry. Most of these were heavily reliant on lines of credit and securitization for their success.

With traditional investments yielding very low returns look for some new players to enter the market (and a few old faces as well). The industry has returned full circle to a heavy reliance on local private investors.

People Need To Sell Mortgage Notes

During the “Great Recession” you had a lot of people holding on to their cash flow note as long as possible.

Well, the time to sell has come for many.

People can argue “exactly” how long the economy has been hit, but, for the most part, we can agree that it has been for over 24 months.

With real estate and the economy still struggling to stabilize you will see more notes hitting the market from those that never really wanted to sell in the first place.

The Big Picture…

None of these things actually create “buyable” notes.

In other words, some basic underwriting still needs to be in play for a note to be sold (credit, equity, ITV, seasoning, etc.). But, with more notes on the market, more notes are bought and sold.

Finding Cash Flow Notes

Want to participate in this great expansion? Learn to position yourself as the local owner-financing specialist. Make sure your business is up on the latest online marketing techniques for finding cash flow notes.

Now more than ever people are searching for note buyers online. This is a completely new way of marketing considering there wasn’t even Internet access when the last flood of real estate notes were created!

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 buy their own cash flow notes for investment purposes and interest income.

Others simply want to act as a note broker or consultant; passing notes on to a note buyer and collecting a referral fee.

In either case, the answer is pretty much the same and can be reduced to five words.

“Treat It Like a Business!”

I have to admit, the note industry, in essence, is really not that hard. I don’t want to say, “If I can do it, anyone can do it” but it is probably true.

I was never really good at math, or at least I wasn’t in school. The basic “math” behind the note industry is not terribly difficult if you have a couple hours and a financial calculator. Matter of fact, if you are just brokering notes on to a note investor, they will pretty much crunch all the numbers for you – just find the note.

Note Business Reality

Despite what some people may tell you on television or through slick marketing, there are not 10 million notes in your neighborhood and all you have to do is list them online and make $100K.

There are plenty of notes out there and there are plenty of Funders and private investors that are looking to buy mortgage notes – but it does take some concentrated marketing to find them.

Finding Cash Flow Notes

There are many ways to find notes. You can take an ad out in the paper, you can direct mail note holders, you can network with professionals, and even “reverse” market the people that may be taking back notes in the near future.

What determines which method you use to find notes is largely based on your business model. Items like your marketing budget and personal preference will come into play.

No matter what the marketing technique or whether you choose to hold or broker notes, remember it is a business.

You will want to set up space in your home (most people work out of their home) and you will want to measure the hits (and misses) of your marketing efforts (so you can tweak and make your processes more and more profitable).

Above all, you need to have direct access to note buyers, solid marketing materials, and good training.

We created the Finding Cash Flow Notes training for those individuals that were looking to work in the note industry and treat it like a business. In our training we provide proven marketing materials you can use today (just add your own name). Learn what has (and hasn’t) worked for us over the past two decades. More importantly, learn what is working in today’s note business.