Self-Directed IRA Custodians Sued by Investors

Watch out note buyers!  The self-directed retirement account, a popular vehicle for purchasing notes, is under attack!

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. Read more

One of Our Favorite Note Buyer Purchases

One of the best investments we made as a note buyer happened a bit by accident.

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: Read more

Do Some Investors Pay Par Pricing When Buying Mortgage Notes?

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

First off, here is the Note Broker Question…

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

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

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

And Now The Note Buyer Answer:

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

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

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

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

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

Par Pricing Example When Buying Mortgage Notes

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

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

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

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

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

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

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

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

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

Additional Articles on Discounting Mortgage Notes

How Partials Reduce Note Discount When Selling Mortgages

Calculating Cash Flow Notes for LTV and ITV

What is the Face Rate of a Note?

What’s Your Discount?

 

Charging Late Fees on Notes

Successfully owning or buying cash flow notes requires a solid plan for collecting and servicing the payments.  But what happens when the note payments are late?  John Moren, a 25+ year veteran of the note business, explains the issues with charging late fees on notes. 

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.

What Private Note Buyers Can Learn from MERS

Note Buyers take notice; a U.S. Bankruptcy Judge has now ruled MERS’s business practices are unlawful.

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.

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

Wondering how to buy notes?

Get some real life lessons learned from my worst real estate note investment!

The note was secured by a small single family house in Arizona. Read more

How to Build a Note Business Website in 7 Steps

Why do you need a website for your note business?

There are over 239 million users online making up 77% of the US population according to Internet Word Stats – and that number is only growing!

With potential customers online there are great reasons for note buyers and note brokers to build a website. Your site will Read more

The Need for a Solid Note Business Website

I think we can all agree that the web is not a “fad” nor is it going anywhere in our lifetime.

I think it is also safe to say that there really is not any business on this earth that can’t directly benefit by managing a strong web presence. That of course applies to the note business!

So what stops note brokers from creating a web presence that can help them

Find Cash Flow Notes and Get More Business?

Here are a few “objections” that keep people from getting deals online.

“I am in a people business”

Sure, I get it. You like face-to-face interaction. But how are they going to find you? Are you going to work 24/7, running around every major city, diner and Starbucks trying to connect with someone who might need your services?

A website works full-time. And the best part is once it’s properly set-up and maintained it can help people find you. Not having a website for your note business is like having a car without an engine…or tires. You can sit in your garage but no one will ever see you.

“It is too hard to build a note buyer website”

No. It is too hard to build a rocket ship – websites have come a long way. Granted, it used to be really hard and really expensive. Have the time to learn it? Go for it.

Check out anything that is WordPress related…you will be surprised and pleased with the power of this platform. (Just avoid the “free” accounts and plan on hosting it yourself).

“I built a free website from my Internet provider and it sucks”

Yea, that whole “free” thing doesn’t typically work out well does it? While there are some decent free templates out there, understand it does take some savvy and time to figure out how to make it look professional.

You don’t have to spend an arm and a leg to get a professional looking site. You just need to know where to look.

“But I have Facebook”

Really, that is going to be how you plan on getting business? Hoping someone checking out your Cat Video also needs to sell a note?

Look, Facebook is a blast, and you certainly need a Fan Page for your business as a form of social proof – but don’t kid yourself into thinking that it is a true lead source.

“But I have LinkedIn”

So does my grandfather but potential leads still need to go somewhere. LinkedIn is a great place for just that, linking to other people (especially professional referral sources). But in the end, they need to go somewhere to take action and that would be your website.

“I have a site, just no traffic”

Yea, we hear that a lot. Just putting up a website is only half the picture. You need to have engaging articles and a way to collect names/prospects. You can’t just build a site and forget about it. You need to add content on a consistent basis using search engine optimization techniques (another reason Word Press is a great option).

Don’t worry; it is not like you need to write a novel or anything. Just write down your most recent conversation with a prospect. Chances are these frequently asked questions could transcend into 3-4 new articles for you.

You Decide

Frankly, you are either trying to get business or you are not. If you knew that 77% of your potential customers were going to be at your local park this Saturday, would you be there? I hope so.

Well guess what? They are all on the Internet!

According to Internet World Stats that’s the percentage people in the US that are online (and it is only growing) – so find a way to talk to them!

The Note Buyer Sites Solution

Looking for a solution that won’t break the bank? These 5 Note Buyer Sites provide a professional and effective option that will get you online in less than 72 hours. Just click the photo below to take a tour of these new sites designed just for note buyers and brokers.

Click on the banner below to check out some turn-key websites!

How to Use Google Places for Your Note Business

3 Tips for getting your mortgage note business found online using Google Places and Local Maps.

When was the last time you used a phone book?

Chances are you’re more likely to use it as a booster seat or doorstop than to look up a business. Online search has quickly replaced the yellow pages. In fact many cities like Seattle are looking at requiring opt-outs for phone book delivery.

With about 65% of market share, Google is undoubtedly the “Big Daddy” of search engines and…

they’ve just made it easier for small businesses with Google Places.

Formerly known as local maps, a Google Places page provides a free listing containing contact information for your business. Google uses this information to serve up results for local search and place you as a “pin” on their maps. In fact it’s not unusual to see a Google Places page showing higher in the rankings than a company’s own website.

Steps for Using Google Places for Your Note Business

1. Claim your Note Buyer Listing Read more

Free Financial Calculator for Cash Flow Notes!

Is the best financial calculator now free?

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

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

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

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

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

Tool #2 – A “Simple” Amortization Calculator

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

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

• Allows user to input in any date order:

8 interest rate changes and

12 payment amount changes and

12 bump payments

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

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

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

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

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

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

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

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