Here are a few guidelines to consider…

How Do You Make Money When Owner Financing?

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

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

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

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

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

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

Selling Your Owner Financed Note Later

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

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

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

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

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

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

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

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

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

10 Advantages to Using the Seller Carry Back

Disadvantages to Seller Financing

21 Insider Secrets You Must Know Before Selling a Mortgage Note

Granted, those signs have always been popping up, but now that you are in the note business you begin to see some additional opportunities.

But are they good opportunities?

The existence of a “For Sale By Owner” sign does not necessarily equal a potential cash flow note deal.

If anything, it may be a distraction.

Let me explain.

1.  “For Sale By Owner” does not mean the seller is willing to owner finance. It just means that they are attempting to sell the house without using the services of a Realtor. It could be they are trying to make a few extra bucks. If that is the case, they will most likely not be interested in carrying back a note (and then selling that note at a discount).

2. “For Sale By Owner” does not mean they have the ability to carry back a note. In other words, there is no guarantee the seller has enough equity to make for a viable note sale. It is more likely they have a large underlying lien (bank loan) that they need to pay off. Could be another reason they are trying to cut out a Real Estate Agent and keep the fee.

3.  Sometimes the reason someone is selling “By Owner” is that they did not believe the real value their home was worth. A real estate professional may have told them what the value was, but the seller is trying to sell for more than that (above the fair market value).

4.  Just because the property is for sale by owner, does not mean that the potential buyer has any need for owner financing. The sale could end up involving a bank loan or even a cash sale. In either case, there never would be a private note created; to be later purchased/brokered.

5.  At this point, there are very few Note Buyers that are interested in a “simultaneous closing.” A simo is where the Funder purchases the note without any seasoning (or payments having been made). Many people want money now – which is why they are more apt to take a slightly lower cash offer than deal with the hassle of selling a note later.

It is not that “For Sale By Owner” properties do not have the potential to be notes – some do. But most do not.

Do you want to spend your valuable time looking for notes that are already in existence or do you want to spend your time looking for deals that may be created.

I spent a lot of time with “For Sale By Owners” when I was first starting out.

It was a great experience builder and my best financial calculator got quite the workout. But in the end, I would guess I only closed 1 out of 100 people that I actually spoke with. (1 out of 500 that I contacted and never heard back from). And that was during a time that simultaneous closings were popular – those numbers would be even less now! (See the article Selling Mortgage Notes: Where Have All the Simos Gone?).

If you do come across a “For Sale By Owner,” it is a good idea to simply let them know what you do.

Don’t spend a lot of time – again a note may never be created. Send the seller a card or direct them to a an article on your note business website. Keep them on your radar and see if the property sells with some sort of owner financing. If it does, now you have something to work with. Or improve your odds by targeting sellers that have already indicated they have an interest in offering seller financing (see the article Finding Mortgage Notes with Reverse Ad Marketing).

Focusing your marketing efforts looking for existing notes (as opposed to notes that may be created) will always yield better results…and profits!

Tired of dismal returns in the stock market many investors turned to buying real estate, private mortgage notes, and other alternative cash flows.

They combined the power of high returns and compounding interest with the tax advantages of the IRA, Roth, Solo 401k, and other retirement accounts.

The self-directed IRA has a designated custodian that handles the paperwork and other administrative duties for the retirement account. Now these custodians are being sued by disgruntled investors reports the Wall Street Journal.

A wave of blowups in do-it-yourself individual retirement accounts has prompted some investors to go after firms that handle the paperwork.

Two custodians of self-directed IRAs were sued in U.S. District Court in Los Angeles on Monday by three investors who allege that the companies knew the investors’ money had been stolen by scam artists yet sent them reports showing their nest eggs to be intact.

Source: Article published April 17, 2012 by Kelly Green of WSJ entitled New Suits Over Do-It-Yourself IRAs.

I guess somebody missed the point of a self-directed account (and all that big bold disclaimer language on the forms the custodians make you sign)…

All investment decisions are made and directed by the account owner!

Fortunately the WSJ article went on to point this out:

Custodian firms administer the accounts, sending investment statements and transferring money from investors to investment managers. It isn’t clear how successful the suits will be, since even regulators note that custodians don’t choose the investments or take fees based on the investments’ success.

Still, the claim filed Monday underscores the recent concerns over self-directed IRAs. More such lawsuits are likely, experts say, as regulators combat a rising number of investment frauds involving older Americans’ retirement savings.

The suit accuses Equity Trust Co. and Entrust Group Inc. of touting the security and safety of self-directed IRAs without performing due diligence on the investment managers with which they do business. The claim also accuses the custodians of converting customers’ funds for improper use, conspiracy, fraud, negligence and elder abuse, among other charges.

You can read the lawsuit details in the full WSJ article but in a nutshell it appears account holders used their IRAs to make private loans to an investor that was networking through church groups. The investments matured, monies were not paid, and a suit was initially filed for alleged wrongdoing by the investor that solicited the loans and was later extended to include the custodians. The suit hopes to recover $5 million in damages and obtain class-action status.

Lessons from Buying Notes In Self Directed IRAs

After working for a corporate note buyer for ten years, I personally rolled my 401k funds over to a self-directed IRA and used the funds to purchase real estate notes at a discount.  Here are a few sample deals from past articles:

Retirement Account Purchases Texas Note

Seller Financing, Second Liens, and the 80-10-10

Seller Financing for IRA Investments

Later I taught classes approved as Continuing Education or CE credits for real estate agents on the topic of using IRAs to purchase notes and investment property.

In class we covered the details of avoiding prohibited transactions and disqualified persons. We’d start by getting a laugh out of my CPA’s joke on how the IRS views your money:

THE  IRS sees THEIRS

Next up was how the IRA let you keep a bit more of your hard-earned money for retirement making two important points when it came to using a Self-Directed account:

1. The good news?  You control all investment decisions on behalf of the retirement account. After all nobody minds your money like you mind your money.

2. The bad news? You can only look in the mirror to point blame if an investment goes bad.  So invest in something you know and perform due diligence.

Do I feel bad for the people who lost their money? Absolutely!

Should the investor that received the funds be held accountable for payment? Absolutely!

Is the custodian liable for the performance of investments? Absolutely NOT!

The outcome of this case will likely affect how custodians handle self-directed accounts going forward.  It could also lead to more regulation and possibly increased fees.

So what are your thoughts? I’d love to hear your opinion in a comment below!

Author Update 5/3/12: The Entrust Group (one of the custodians mentioned in the WSJ article) just published this article on self-directed IRA Investor Due Diligence by Hubert Bromma, Entrust CEO and Founder.

In 2008, we were contacted by a potential seller of a real estate note secured by productive farmland. He wanted to sell payments from his note to pay off his credit card debt.

The details were roughly as follows:

• Sales Price of the Property: $500,000
• Down Payment: $200,000
• Note Balance at the time he called: $286,179.80
• Term: 167 months
• Interest: 6%
• Payment Amount: $2,531.57

All of the characteristics of the note looked great so we looked for an investor who would buy the note. Unfortunately, all of our investors passed on the file. The primary reason was the property type, productive farmland. This was also the same time that the credit crunch had hit the economy and some of the large institutional investors were going out of business. Everyone at this time was very skittish about investments outside of their comfort zone. As such, our plan of brokering the note to an investor went out the window. However, this provided the avenue for one of our best note investments.

Since I did not want to let the note die I decided to see if it made sense for us to buy and hold the note for ourselves. Since it was one of the first notes we purchased for our own portfolio, we went over the details over and over and over to make sure we weren’t missing anything. We then sent the file to a professional processor who had been in the industry for many years just to review our work and take a second look at the collateral. She also gave it a thumbs up so we went ahead and made a purchase of a 24 month partial.

Our Note Investment:

• Number of Payments: 24
• Investment: $49,000
• Investment to value: 10%

The note paid perfectly and sadly the two years went by very quickly. As a note investor, you are always a bit sad when a good paying note pays off. At the end of the two years we proposed buying more of the note payments but the note seller said they just wanted to start receiving the payments again. We assigned the note and deed of trust back to the seller and closed out our investment.

Buying the Note – Take 2

About a year ago, I contacted the note seller again and just reminded him that if he ever wanted to sell additional payments that we would have an interest in purchasing more. Around the end of 2011 he contacted me and needed about $90,000 for a new business he and his wife had started.

Since we had done a thorough job of due diligence the first time and were quite familiar with all of the details involved in the file, due diligence the second time around was a breeze. We focused much of our time evaluating the value of the collateral and reviewing the payment history. The payors had been making their payments on almost exactly the same date each month just as when we held the investment. While the value of the collateral had fallen since we made our first investment, the note payor still had around 25% equity. Our previous experience with the payor, note seller and collateral allowed us to be more aggressive with our second purchase than we would have been had it been the first time we saw the note. We decided to move ahead with a 48 month partial and here are the details of the note at the time and our investment:

Note Details:

• Remaining Balance: $238,912.43
• Remaining Payments: 128

Our second investment:

• Number of payments: 48
• Balance Purchased: $107,795.08
• Investment: $91,000
• Investment to value: 29%
• Yield if pays as agreed: 14.97%

We have now held the investment for about 5 months and are pleased we have had the chance to get involved again. Moral of the story is to proceed cautiously with a property type you are not as familiar with by purchasing a partial, which in turn may leave a door open for more profit in the future.

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

Ready for the other side of the coin? You may also want to read the article on Greg’s least favorite deal at:

How to Buy Notes: Learning From My Worst Real Estate Note Investment

First off, here is the Note Broker Question…

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

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

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

And Now The Note Buyer Answer:

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

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

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

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

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

Par Pricing Example When Buying Mortgage Notes

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

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

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

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

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

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

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

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

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

Additional Articles on Discounting Mortgage Notes

How Partials Reduce Note Discount When Selling Mortgages

Calculating Cash Flow Notes for LTV and ITV

What is the Face Rate of a Note?

What’s Your Discount?

This is not just theory – it really works.

Need proof? Just last month we were fortunate enough to get one of those surprise payoff checks for $57,569.28!  And that was on a note we sold back in May of 2000.

Now before you start thinking this is some sort of easy overnight riches please understand that this does NOT happen on every deal.  In fact the average note broker fee is about 3-6% of the amount invested by the note buyer. (Check out How Much Money Will I Make in the Note Business for more on this topic.)

But when you combine the power of interest with time and the partial purchase there is an opportunity to earn residual income. How is this possible? Well here are the details from the initial note sale followed by the payoff update.

Excerpt From Article “Real Deal #151 – Residual Income With Notes!“

We were approached with a well-seasoned note secured by five retail strip mall type commercial units. The units had been purchased by a religious organization to use as meeting facilities.  The particulars looked like this:

• Sale Price: $135,000
• Down Payment: $10,000
• Original Balance: $125,000
• Terms: 10% interest payable in 360 payments of $1,096.96 per month
• Remaining Balance: $121,248.52
• Remaining Term: 306 months

We negotiated to pay $92,804 for the full purchase of the remaining 306 monthly payments.  We took a full assignment and purchased the entire note payment stream from the seller.

We then negotiated to sell a partial of 186 monthly payments for a purchase price of $95,046.  We realized an immediate profit of $2,242 on the sale of the note AND retained the right to receive 120 monthly payments of $1,096.96 each commencing in 15 ½ years.

To recap:

• Payments bought: 306
• Payments sold: 186
• Payments retained: 120

Money was made at closing but even better, we retained the rights to a future residual income stream totaling over $130,000 ($1,096 x 120).

If you have heard me speak at conventions this is the “Buy Full Sell Short” or “Tail-End Payments” strategy on the deal affectionately referred to as The Church Note. You also know there are three reasons I prefer to broker rather than hold church notes:

1. They are often single or special use buildings;
2. Income is dependent on donations from the congregation (so if the pastor runs off with the organist it’s quite possible donations would go down); and
3. If they don’t pay who wants to be the one to foreclose on a house of God?

So we were happy to sell this note, make a small fee of $2,242 at closing, and keep a future piece of the cash flow in the form of monthly payments when the investor’s partial paid off in December of 2015. Instead it was,  “Surprise – the buyer paid the note off early!”  So rather than getting $1,096 per month for ten years we received the present value of those future payments in cash today.

Understanding The Partial Note Purchase and Schedule B Amortization

If you are scratching your head wondering, “How is this possible?”, then it’s time to discover the time value of money along with the Schedule B or partial amortization.  It varies by partial agreement, but basically there are three balances or amortization schedules going on at any given time.

• Schedule A -  The full balance amortization owed by the buyer or payer
• Schedule B – The partial balance amortization owned by the investor
• Schedule C – The remainder interest due to the seller and/or note broker (or A minus B equals C).

At the time this deal was sold:

• the full balance (A) was $121,245.48
• the partial balance (B) was $103,515.87
• and the remainder balance (C) was $17,729.61.

Then almost 12 years went by when the buyer paid off in March 2012 so the figures had changed to:

• a full balance payoff (A) of $96,915.46
• a partial balance payoff (B) of $39,346.18
• and the remainder interest (C) had increased to $57,569.28!

(Now if you are following along with your Best Financial Calculator and 7 Tips for Calculating Cash Flow Notes you will notice some slight variations in answers.  These are due to adjustments for extra payments and other servicing items. This is also a good place to mention that we don’t provide legal, financial or tax advice so please seek the counsel of an attorney, financial planner, or accountant if you need this type of assistance.)

So the full balance and the partial balance went down as monthly payments came in but the remainder balance went up!  Why? That is from harnessing the power of interest at the face rate of the note over time!

Want more advanced strategies and calculations for selling and buying mortgage notes?  Be sure to login to the member’s area of Finding Cash Flow Notes.  You can view sample agreements along with a printout of the partial amortization schedule B in Chapter 10 “Mastering Partials for Maximum Profits” on pages 122-140 of the PPS Module.

Whether you are a note broker, a note buyer, or a real estate investor using owner financing, you can put these time value of money strategies to work!

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

Wait…what?

Yep, interest rates were high. Double digits.

These high rates made it virtually impossible for people to qualify for bank loans. And those that did qualify were going to pay dearly for that borrowed money.

Enter Private Mortgage Notes (aka Seller Financing)

Although not new, private mortgage notes hit their stride in creation during the 1980′s. Not because anyone wanted to carry back a note – it was because they had to. It was one of the only chances they had to sell their house in a tough market.

Eventually the bank rates came back down to reasonable levels and the creation of notes subsided. But not before a whole cache (or is that “cash”) of notes were created to be brokered and purchased for investment.

Flash forward to now and we are in the same boat.

Gas is expensive, politicians are doing their best to blame each other and not get anything done, and banks, well, they are just not playing.  Even though rates are now incredibly low the underwriting standards are incredibly tight.

It is also true today that selling a property is pretty tough…but getting easier.

2012 has a big advantage over 2011 and 2010. Properties are starting to move. The drops in value across the country have stabilized. Sure, we are not vaulting back up to the levels we were seven years ago…but we don’t need to.

In a nutshell, sellers are out there creating notes as we speak. Notes that we can buy or broker. With real estate values stabilizing it just may point to 2012 – 2013 being a banner year in the note industry. In fact the real estate note statistics are already indicating a 40% increase in the note business.

It is not a matter of being “optimistic” or “wishing” for something to happen. It is just the natural order of things. The economy does rebound. People need to sell houses and people need a place to live.

When banks don’t lend, people create their own methods. Eventually the sellers that use owner financing will look to sell their payments for cash. Note buyers and brokers help fill this important void.

Be ready.

In speaking with our NoteSmith loan servicing software users, I sense a lot of confusion and unnecessary creativity concerning late fees around the country. Here are some issues we have seen over the last few years.

Definition of late fees:

A late fee is a small, state sanctioned fee you collect as reimbursement for the nuisance of processing a late payment. Most states limit the fee to 4 or 5% of the installment amount. It is a one time, flat fee.

Late fee versus interest:

IRS Publication 1099 (www.IRS.gov) is the instruction booklet for completing Form 1098, which summarizes a borrower’s annual mortgage interest deduction. That publication allows deducting late fees along with interest “unless the late charges are for a specific mortgage service.” A late fee of $10 on a $200 monthly payment easily can be construed as a specific service, that is, sending a late letter or making a collection call. But what about a late fee of $5 per day? First of all, this is not a single fee and violates most state law about charging more than one late fee per periodic payment. It also has a time component to it making the charge sound more like interest than a flat fee. After all, isn’t interest really just a charge per day? If you are looking for an incentive for your payors to make timely payments, a tax deductible late charge is not the way to go.

Unconscionable fees:

We received a software question concerning a monthly payment amount of $253.06 which carried a late fee of $150.00 after 4 days. I do not know the state this was in, the collateral, or whether the payor was a natural person or a corporation (corporate payors generally can be legally and financially gouged without typical retail consumer protection). If this note ever makes it into court, a skilled attorney could have a field day with it. To answer their question, one of our support people wanted to call back and ask for the person who would be left behind when the rest of the office was in jail! We bit our tongues and faxed back politely, but more on this note later.

Pyramiding of late fees:

Imagine you were holding a note that required monthly payments of $965.56. One July, you receive a check for the mortgage payment in the amount of $956.65. As a conscientious investor, you accept this partial payment, add your typical 4% late charge of $38.62, and wait patiently for the next payment. On August 1, you receive a payment for the next month of the normally expected $965.56. Still being conscientious, you apply the first $8.91 to the close out the July payment and the next $38.62 to zero the late fees owed. Now the August payment is almost fifty dollars short, so you charge another late fee. This is called “pyramiding of late fees” and, although it appears to be statistically correct, is illegal in all states of which we are aware. The reason is that one short payment caused two late fees. It does not matter if it was caused by a clerical error, a late payment, an insufficient amount, or an insufficient check, you can charge only one late fee per late payment.

Increasing income without pyramiding:

Almost all notes specify that the order payments will be applied is first to costs of collection, next to interest, and the remainder to reduce principal. Let’s again use a $200 monthly payment where about $170 pays the interest, about $30 goes to principal, and there is a $10 late fee after 10 days. Of course, the payor is 15 days late but sends you $200. We’ve seen servicers apply the first $170 to interest and the remaining $30 to principal. The late fee is accrued as if they expect to collect it someday. Instead, the first $10 needs to go to the late fee, which never can bear interest, then the next $170 to interest, leaving only $20 for principal reduction. The next month, interest will be higher than expected because of the principal shortfall.

Increasing income with pyramiding:

Continuing with the same scenario, the servicer still has a choice to make. Do they close out the month or not? According to the terms of the note, the above payment is a partial payment. If the month is not closed, then $10 is still owed. When the payor makes the next $200 payment, even if it’s on time, the first $10 goes to close out the previous month and this payment is now $10 short-and subject to a late fee if not paid within the 10 day grace period. This seems to be pyramiding, because each subsequent “timely” payment ends up with a late fee. Only one late fee is charged per payment. Payments are not timely unless the entire payment is received timely. Check with your state law before attempting to service a loan in this manner. If your law prohibits pyramiding, and if this scenario matches their description of it, then take your $200, apply the payment appropriately, and close out the month even though you have not collected all that is owed for that period. You will collect all the principal owed to you, plus interest, when the note pays off.

Grace periods:

The whole notion of late fees opens up a legal can of worms and here is the argument. Since the payor has a grace period of 10 days, the note specifically states that it is acceptable to pay at least 10 days late. Further, it implies permission to pay even later since the late fee is the payment in full for the right to make a payment after the grace period expires. Some of our software customers do not write late fees into their notes because they are afraid it may inhibit foreclosure efforts.

Late fees are not the punishment:

Punishment is designed to modify behavior. A late fee is not the big stick, foreclosure is. A late fee is merely reimbursement of the costs of collection. The threat of foreclosure is the punishment that forces timely payment. Going back to late fee accruals, if you have been shorted repeatedly on the principal necessary to amortize the loan, you are in a foreclosable situation. If you have been politely applying the payments first to interest and principal, while accruing non-interest bearing late fees, it is doubtful whether you could foreclose. Would you rather go before the clerk of the court-or the court itself-with outstanding principal or outstanding late fees?

“Good clauses do not make good notes, good payors do.”

I heard that once at a Jimmy Napier seminar and I have been encouraging investors to upgrade their portfolios ever since. All the creativity, punishment, and coercing you can muster is in vain if the payor does not have the financial ability-or the mental desire–to make a payment. Remember the $253.06 payment with the $150.00 late fee? The payor paid the whole amount, $403.06, and the check bounced.

Written by John W. Moren, President of Princeton Investments, Inc., publisher of the original NoteSmith loan servicing software since 1988, copyright C 2012 by Princeton Investments, Inc.

The NoteSmith family of loan servicing software tracks mortgage notes, discounted notes, leases, rent, and other cash flows. Loan originators, mortgage lenders, note buyers, real estate investors, attorneys, accountants, and charitable organizations know that NoteSmith products were created for them and by them.

Not me. I tend to look over a real estate note and make a pretty rapid decision.

So, how do I do it?

First off, I tend to go for the big stuff first. You know, 30,000 foot level. It is easy to get caught up in the details that won’t really matter when it comes times to make a decision.

But let me back up for just a minute and explain what I mean by…

Looking at a Cash Flow Note From 30,000 Feet

Let’s say you want to buy a car. You are set on the color red. You won’t consider any other color. You also want a two-door car. Lastly, you are set on a convertible.

Doesn’t sound too hard to find does it?

Now, let’s say you are walking into a car dealership and see several dozen cars in front of you. To your left is a blue four-door hardtop of some sort.

Are you going to walk over and look at the interior? See what kind of stereo it has? Of course not. You knew from a distance that this car did not meet most, in this case “every,” one of your hot buttons. You knew this from a 30,000 foot level (or from at least 40 yards away).

You continue to scan the dealership and spot four cars in the back. All red, all two-door, all convertibles.

Now you can go over and check out what the interior looks like and what is under the hood.

That is kind of how I look at a real estate note.

I focus, first, on the items that are important to me; then I take a look under the hood.

I like seasoning and equity best. They are my foundation. If they don’t look good to me, it will be hard pressed to go much further into reviewing the deal.

Next I look at credit and the actual property.

I can hear a couple thousand people right now… “What, you don’t look at the property first?”

No, I do not.

I learned long ago not to get hung up on a property. Sure, it is a consideration, but it is not the first thing I look at. There are plenty of beautiful properties that get foreclosed on every day. There are also some “rougher” looking properties that people will never miss their payment. I am not buying the house (hopefully)…I am buying the note.

Now, with that said, sometimes items “offset” each other. I might have a poor down payment but great seasoning. Maybe not a lot of seasoning, but great credit.

But before I ever drill down that far, and start looking at offsets, I need to like it from 30,000 feet.

It also makes it easier when trying to find a note buyer. Most investors will let you know what they are looking for (at the 30,000 foot level). Every investor is different. If the note buyer wants a red convertible don’t bother trying to sell him a blue hard top. You are just wasting their time and yours!

*Disclaimer. Does it “really” take me 60 seconds to evaluate a note? I suppose you can ask Tracy. I can tell you that my attention span won’t last much longer than that if you haven’t interested me in the deal in that first minute.

Heard of robo-signing, burger king kids, and attorneys promising to stop foreclosure?  Well that’s all part of the MERS mortgage lending mess and it just got a lot harder than calling for a cleanup on aisle 5.

What’s the impact?  L. Randall Wray, Professor of Economics, wrote this:

“United States Bankruptcy Judge Robert Grossman has ruled that MERS’s business practices are unlawful. He explicitly acknowledged that this ruling sets a precedent that has far-reaching implications for half of the mortgages in this country. MERS is dead. The banks are in big trouble. And all foreclosures should be stopped immediately while the legislative branch comes up with a solution.”

Source: For all the details including a great explanation of MERS be sure to read the full Huffington Post article at New York’s U.S. Bankruptcy Court Rules MERS’s Business Model Is Illegal.

So What Can Note Buyers Learn From MERS?

It reads like a refresher course in Note Buying 101:

• Get the original promissory note,
• Get it endorsed,
• Get an Assignment of the Mortgage or Deed of Trust
• Get the Assignment recorded in the County Records
• Make sure the chain of endorsements matches the chain of assignments, and
• Keep all the originals together in a safe place.

Why?

Well you can use these items to prove ownership, collect payments, enforce your rights, foreclose in the event of default, or defend against any claims.

In legal lingo it grants you the power of 4 magical words… Holder In Due Course.

This was common practice when I started buying notes for the insurance company in 1988.  When going out on my own in 1997 I used the same note buyer criteria.

Of course not every note fits my buying parameters (and I’m not Oprah, Warren Buffet, or Mark Zuckerberg with seemingly unending supplies of funds) so some notes get referred to other investors.  Most investors follow the same Note Buying 101 closing requirements… most but not all.

I can still remember the first time we got to closing on a deal being placed with outside funds only to discover the original note was lost and to my astonishment the investor said,

“That’s ok we will just have the seller sign this lost note affidavit.”

Normally a lost note means a frantic search by the seller followed by calls to the original closing or servicing agent to track down the original. As a last resort option we get the payer/buyer involved to execute a duplicate note and affidavit along with the seller’s affidavit.

But just the seller?

That was certainly easier… but not safer.

You see this investor was placing seller-financed notes into a conduit for mortgage-backed securities and it wasn’t required.  Next assignments started getting executed in blank and after closing we noticed the investor wasn’t recording some assignments.

Now that sounds like 4 letters that will haunt mortgage lenders for years…. MERS

Fortunately on notes purchased in-house we followed the Note Buying 101 steps.  These are the same steps taught in our Finding Cash Flow Notes training course and in articles here at Note Investor including Note Buyers Demand Original Promissory Note and Understanding Note Endorsements.

It’s safe to say that if private note buyers are still around today they are following these guidelines and have used solid legal counsel. (Author’s note: I am not an attorney so unable to give legal advice but encourage you to get some before buying notes.)

Whether note buyer, broker, or seller it is essential to know where the original note is located and keep an unbroken chain of title for smooth closings.

While the death of MERS will surely hurt the mortgage lending world the boomerang effect will be an increased need for alternative financing, note buyer services, and private investors.