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

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

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

By Dr. Ken Rich

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

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

There are still three options available to debt instrument holders:

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

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

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

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

Write Off as a Bad Debt

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

Donating Mortgage Notes To Charity

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

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

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

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

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

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

Historically this process was a bit easier, when everything was in an “up” market.  But with property values still on the downside or just recovering, it is often difficult to put a (safe) number on it. At least one that everyone agrees on.

Although there are excellent programs on the Internet that help the average consumer to get an idea of value, they are not always accurate. The actual value of a property can be determined in a couple of credible ways.

Often, note investors get what they call a “drive by” appraisal or valuation.

Usually performed by a licensed appraiser, the report will  include other sales or comps in the area. The main difference is a “drive- by” evaluation does not require the appraiser to have access to the interior of the property. The appraiser actually drives by and takes pictures from the street for the report.

Some investors are using what is called a Broker Price Opinion (BPO) – an evaluation based on the advice of a real estate agent or broker. They are often very similar comparable to a “drive by” and at a lower cost but do not follow the strict guidelines of a certified appraiser.

The note buyer may even require a full interior appraisal to get comfortable with the value. This might be the case when there are substantial improvements to verify or there’s concern over the property condition.

The actual approved or preferred method will be up to the individual investor.  While they are buying the mortgage note and not the property itself, the value is still important in deciding risk, investment to value (ITV), and the price they will pay to purchase the remaining payments.

• Quick sale of the property
• Monthly income from the note
• No hassles of bank financing
• More qualified buyers
• Property that is hard to sell or finance

Rather than waiting 20-30 years for payments, many sellers opt to sell future payments to a Note Buyer. Here are the seven most common questions we receive on selling mortgage notes and trust deeds.

Why Would I Sell My Mortgage Note?

Circumstances change and many sellers would prefer cash today rather than small payments that trickle in each month. Here are just a few reasons people have sold their note for cash:

• Retirement
• Taxes
• Investment Opportunity
• Expensive Medical Care
• Vacation
• College Tuition
• Unexpected Financial Changes
• Peace of Mind – no more worrying if the buyer is going to miss payments or having to foreclose
• Accounting headaches, IRS regulations, paperwork hassles, and the list goes on…

What Is A Note Appraisal?

A note appraisal reflects the current market value of your payments similar to what a real estate appraisal provides for real property. Frequently referred to as a “quote” it shows what your future payments are worth to an investor in cash dollars today. We recommend having it evaluated once a year as pricing may change based on market conditions.

How Do I Maintain the Value of My Note?

Many of the items that affect the value were determined at the time the property was sold. However, keeping good records of the payments received and requiring the buyer to provide annual proof of current taxes and property insurance will help maintain the value of your important asset.

Can I Sell Just Part Of My Promissory Note?

Investors can purchase all or part of the remaining payments. Selling part of the payments allows you to receive a lump sum of cash up front, then payments when the note reverts back to you.

To minimize the discount, many people elect to sell just enough payments to meet their cash needs today and keep some of the future payments as an investment or nest egg. Always ask for an option that meets your needs.

How Is The Value Determined?

The value of a note is affected by the down payment, interest rate, payment amount, length of repayment, buyer’s credit rating, and payment history. The type, condition, and value of the property also impact the value of your note.

The time value of money, which makes payments due now more valuable than payments due in 20 to 30 years, is also factored into the offer. Due to inflation, money in your pocket today is generally worth more now than later. All of these elements will be taken into consideration in determining the current value of your note.

How Will Selling My Note Affect The Payer?

The payer or buyer experiences no change in the way the payments are structured. The only change will be the address where the payments are mailed.

How Do I Get Started?

The first step is to obtain a quote from a note buyer. The investor will ask some questions on the property sale and terms of the promissory note. This can usually be done over the phone or by completing an online worksheet. The investor may also request copies of the documents relating to your transaction, such as:

• Promissory Note
• Mortgage (or a Trust Deed, or Land Contract in some states)
• Closing statement
• Buyer information
• Pay history and current balance
• Previous title insurance policy
• Current hazard insurance policy

The investor will provide an offer subject to the standard title, appraisal, and buyer’s credit review. Once the review is finished and the documents gathered the transaction is reading for closing.  This process typically takes 2-4 weeks.  If preferred, an attorney or title company can handle the exchange of funds for the original closing documents.

Grab your copy of the Note Buyer List today!

One camp takes the “Quote on the Fly” approach, while the other has the “No Note, No Quote” mentality.

There are advantages and disadvantages to both, but the “No Note, No Quote” policy can save you time in the long run.

About 16 years ago I began playing with the “No Note, No Quote” technique. Before then I’d always quoted deals over the phone. As the seller threw me the numbers I’d input them into the calculator, spitting out offers left and right. (It’s not something I’d recommend unless you are very good on the best financial calculator).

I found myself quoting over a hundred notes a week to holders wanting to sell mortgage notes.  And, I was winning a fair amount of them (more so due to my negotiating than pricing).

I also found myself not getting a fair number of deals as well. The thought occurred to me, “How serious are these sellers in the first place?” Are they just tire kickers or were they really interested in selling mortgage notes.

The Split Test

I then split my sellers in half. One call I would quote on the fly. The next I would require them to at least send me a copy of the closing statement and note before I could give them a number.

I told the sellers I required paperwork from that there really wasn’t a way to properly give them an offer without seeing what they have. Explaining that many notes are written differently and how the documents verify the terms, down payment and other important details.

Notes are Like Used Cars?

Every once in awhile I would get a note seller that just didn’t think I needed to see the note. So I developed an analogy to help convey to the seller the reason I needed to see the documents.

I would tell the seller that I had a car for sale and asked, “How much would they would pay for it.”

The seller would reply, “What kind of car?”

I would say, “I can’t tell you that.”

They would then ask “How many miles on the car?”

I would say, “I can’t tell you that, but how much will you pay for it?”

It didn’t take long for the seller to get the idea. They wanted me to give them a price on something that I really hadn’t seen yet. More often than not, they understood and sent in the paperwork.

Motivated and Committed

In the end, I had a seller with a higher level of commitment whenever they took the time to send in a copy of the note and closing statement. Matter of fact, it became easy to be slightly “critical” of the brokers that quoted the seller without seeing the documents. Even some sellers started to think they might be irresponsible or less credible.

I like the “No Note, No Quote” policy. You have the benefit of a more committed seller and you know quotes are based on real verifiable numbers.

Since the cash flow business affords consultants the ability to determine their own fee, many new note brokers feel challenged on how to present an offer. These 5 tips should help you be that much closer to closing the deal!

1. Be Fair

Negotiating your own fee does not mean “get as much money as you can.” It means you come up with a fair amount of money to make given the amount of work it takes to sell mortgage notes. Although there is no set amount, roughly 6-8% is a good starting place.

2. Present the Seller with Options

By now you know there is more than one way to purchase a note. The talented note broker knows a multitude of ways to purchase the note (Full, Partial, etc). You should always present more than one option to your seller, even if they initially said they only were interested in a “full buyout.”.

3. Put Your Offer in Writing

Many people quote over the phone. Although this has some advantages the disadvantages are just as evident. If you are going to be giving someone a quote over the phone, be sure to follow up with a letter that indicates the various options you discussed. You would be surprised how many people throw that letter in a drawer, only to call you several months later and do the deal.

4. Know Why the Seller is Selling

This is probably the biggest and most important piece of the puzzle. You must know why they are selling. Not only is it the key to any emotional reasons for selling the note, it is paramount in determining what offers to present to them. For example if a seller wants $20,000 to buy a boat, presenting them a $15,000 partial doesn’t make sense.

5. Keep the Seller’s Interest at Heart

When presenting several offers to the seller your commission may vary offer to offer. Never try to push a seller to one specific offer just to make more money. Just help the seller find the most competitive offers and let the sellers choose what’s best for themselves; not you.

Negotiating an offer with a seller does not need to be an intimidating task. Your goal should always be to help the seller and in no way are you in an adversarial relationship. Make helping the seller your number one goal and you’ll build a winning cash flow business!

As someone who has taken literally thousands of phone calls from note holders, I’ve always been honest, but I’ve never been brutally honest, until today. Here then, is a list of the five most common questions I get from note holders. The first response is my “honest” answer – the second is my “brutally honest” answer.

[Editor's Note:  Warning! Please secure your sense of humor before reading the brutally honest answer!]

Q: Why is the note discount so high?

Honest Answer: Well, I expect to realize a certain yield when I purchase a mortgage note. Based on your note’s LTV, the credit quality of your borrower, and the payment history, I require this amount of discount to get comfortable with my investment.

Brutally Honest Answer: First of all, I didn’t write this discount into the note, YOU DID. What were you thinking giving some deadbeat with a 507 credit score a 3% interest rate? Are you insane or just dimwitted? And did you waive the down payment so they could use that money to improve the property instead? Yes? OK, you just answered my previous question…

Q. How can your BPO possibly be right? Property values haven’t gone down where I live!

Honest Answer: Plain and simple, there are a lot of foreclosures nationwide. Our BPO agents must use recent comparable sales in the neighborhood. If the majority of sales have involved distressed properties at distressed prices, that’s going to be reflected in the value of the property you sold.

Brutally Honest Answer: Oddly enough, every person I speak to says the same thing! This must be a major media conspiracy, complete with the fabrication of a national housing meltdown. If we all agree that housing prices have dropped everywhere in America except where we live, then obviously housing prices haven’t dropped anywhere! Were it not for that pesky little thing called REALITY, we’d have just solved a big part of our nation’s economic problem!

Q: When can I get my money?

Honest Answer: Average closing time is usually around 30 days, depending upon the time it takes for a title update and a property valuation. This assumes all your documentation is in order and that we receive it quickly.

Brutally Honest Answer: That depends. Are you going to continue shopping this deal to brokers who will bring it back to me for pricing next week? Even though you say you know right where the original note is, are you going to call me the day before funding and tell me it’s lost? Are you going to drag your feet getting me all the documentation I need to underwrite the file? I’m not a door – don’t try to trial-close me.

Q: Why does my borrower’s credit matter? They’ve always paid me on time!

Honest Answer: We want to be sure they have the willingness and the ability to continue making payments after we buy the note. If they are laden with debt or have fallen into delinquency recently on their credit cards or car loans, we can reasonably ascertain they may soon have difficulty making their mortgage payment.

Brutally Honest Answer: We’re not in the business of making your deadbeat borrower problem our deadbeat borrower problem. Would you buy a car without test-driving it or even seeing it? Would you wire money to a Nigerian prince because he seems like a good guy that’s down on his luck? Then why would you sell and finance your property to someone without knowing anything about their fiscal responsibility? Are you insane or just dimwitted? Sorry, I forgot we’d already determined the answer to that question.

Q: Why should I work with you instead of one of your competitors?

Honest Answer: We have the experience, professionalism, and efficiency you would expect when discussing the sale of one of your most valuable assets, your note. We can provide references from other satisfied customers, and though we do not expect to be given your trust at the onset of this process, we will certainly earn it throughout it.

Brutally Honest Answer: Not only are we nicer, more compassionate, and smarter than our competition, we’re way better looking.

About the Author: Clint Hinman is the President of Proficient Note Buyers LLC, a buyer and broker of non-performing notes/loans and REO. With over 17 years of experience in real estate-related cash flows, Clint is part investor, part broker, part consultant, and part plain nuts. Contact him at clint@pronotebuyers.com or visit his website at www.pronotebuyers.com.

Wishing for a lump sum of cash today?

If you sold property with seller financing chances are you’ve wondered about selling the real estate note. Here’s how to sell a mortgage note, trust deed, or contract in 7 easy steps.

Step #1 – Request Quote

Just complete a short informational worksheet to receive a free no obligation quote. This can be submitted online, by fax, or over the phone.

Click Here for a List of Note Buyers

Click Here to Download a Worksheet (PDF)

Step #2 – Provide Document Copies

To get started note buyers like to see copies of these three documents:

• Settlement Statement
• Promissory Note
• Mortgage, Trust Deed, or Contract

It is also a good time to be sure you know where the originals are located, especially the Promissory Note, as they will be requested at closing.

Step #3 – Accept Offer & Agreement

Once an offer is accepted it will be outlined in a written agreement. In addition to stating the price, the agreement will specify conditions of closing and who pays costs.

Step #4 – Note Buyer Review

The mortgage note buyer will perform a detailed review of the transaction, known as due diligence. This includes a review of the buyer’s credit, current tax and insurance status, payer interview, and other important items. They may also request copies of additional documents including a payment history, insurance policy, and existing title report.

Step #5 – Appraisal

The note investor will order an evaluation of the current property value. This usually takes the form of a BPO or drive-by appraisal. The investor wants to be sure the property value is still equal to or greater than the sales price. If the value comes in low, the note investor may present a revised offer for consideration.

Step #6 – Title Search

The title search verifies ownership of the property and the mortgage note. It saves time and money to work with any title report that might exist from the original sale date. If the title search shows money is still owed on a prior mortgage it will usually be paid from proceeds.

Step #7 – Closing

When all steps are complete the note buyer will send the final closing documents for signature. The title company is often used to handle the exchange of money for the original note and transfer documents. Funds are typically paid in the form of a wire transfer or cashier’s check. You are also encouraged to have your attorney review and advise with the closing process.

Selling your mortgage note can be a simple process when you work with an experienced note buyer. Just take a few minutes upfront to gather your information and documents and they will handle the rest for you!

Sometimes it is not only what you know, but who you know.

Knowing the right people can not only make things easier, in the case of the 2010 Directory of Owner Financed Note Buyers, it could also make you more money!

Gain access to our personal Rolodex of experienced note professionals that took years to develop.  Work direct with knowledgeable investors, educators, and master note brokers.

But what options are there for notes when a balloon is due but the buyer can’t refinance? Should the seller consider extending?

Here’s a look at a common dilemma facing sellers and note brokers. (Note: The specific details were modified for privacy protection.)

Dear Note Investor,

I was approached with a balloon payment mortgage note now due after 5 years of payments… but buyer/payer cannot come up with new financing due to market conditions for financing.

Should the note holder…

1.   Create addendum to existing note and extend payments until financing can be arranged? Or…

2.  Create addendum/rewrite to existing note for terms, interest and payments to eliminate balloon? Therefore, having a marketable note.

Here’s the existing info:

• Selling Price:  $300,000
• Down Payment:  $84,000
• First Lien:  $216,000
• Date of Note:  6/1/2005
• Terms:  360 /60 (payments based on 30 year amortization with balloon due in 5 years)
• Payment:  $1,192.76
• Balloon Amount:  $199,042 +/-
• Interest Rate:  5.25%
• Pmts paid:  60
• Pmts left:  Balloon Payment

Any advice… please?

And here’s our answer the the Balloon Payment dilemma:

Dear Note Broker,

Great to hear from you! You ask a very good question, especially in today’s economy.

You are correct. In order for this note to be purchased by an investor they would most likely need to look at a modification to extend the balloon.

There are two big unknowns on this deal that would play a major role on any note buyer’s offer:

1. the credit score of the property buyer; and

2. the current value of the property.

If the buyer can get refinancing, the seller would probably just want to extend for a couple of months.

If the buyer is unable to refinance, the seller may want to consider a modification and longer extension rather than starting foreclosure for nonpayment of the balloon mortgage.

One solution is for the seller to modify the note with monthly payments based on a 25 or 30-year amortization and keep, but extend, the balloon payment to 7-10 years from the date of modification.

They could agree to let the note fully amortize and eliminate the balloon altogether. However, this could limit the seller’s options in the long run.

By extending the balloon, the seller is not obligated to keep receiving payments for another 25-30 years. The extension provides the buyer both time and motivation to get their financial affairs in order to qualify for refinancing.

A balloon payment can also improve pricing from note investors based on the time value of money. (For more information please read: Owner Financing – Why Balloon Payments Are Good For Mortgage Notes.)

It would be to the seller’s benefit to get that interest rate increased in exchange for extending out the balloon. They should be sure any modification is prepared and recorded by a title company or attorney to be certain it follows the laws of their state and protects their first position lien holder’s interest.

I have to give the disclaimer that I can’t give financial or legal advice as that is not my licensed profession. My comments are based on what makes the note more valuable to somebody that would be purchasing the note. For specific pricing mortgage buyers will want to review the documentation along with the current property value, payment history, and credit history.

All the best,

Tracy Z. Rewey of NoteInvestor.com

It’s natural for sellers to want to know the amount of money they will receive to sell future payments on a contract or mortgage. After all, it is the need for cash that made them make the call in the first place.

But if you listen closely, you will realize they are asking something beyond just the bottom line number. Sellers want to know:

Will you pay me a competitive price?

Are you trying to take advantage of me?

Will you treat me fairly?

This means the answer needs to accomplish several things:

1. Reassure the seller;
2. Help the seller understand why pricing varies;
3. Establish a friendly yet professional relationship; and
4. Set the stage to obtain enough information to provide a quote.

Of course the simplest answer to:

“What’s Your Discount?”

would be

“It depends!”

But be careful – what you say next is very important. Here’s the standard script we use to both reassure and answer the seller’s question.

“How much we pay really depends on your note. Each transaction is unique so we look to 5 key factors for pricing.

These include the type of property, the buyer’s down payment and credit rating, how long the buyer has been paying you, and the terms of your note like interest and payment amount. An average note will demand 75 to 95 cents on the dollar depending on the items mentioned.

If you have a few minutes we can go over the details of your individual deal. This helps us calculate the accurate fair market value of your payments rather than just a ballpark estimate. This of course is at no cost or obligation to you. Do you have a few minutes now to answer some simple questions about the property you sold?”

We then take the time to ask them questions about the transaction to gather enough information to complete the intake form or quote request worksheet. If possible, we also obtain a copy of the note, mortgage (deed of trust, or contract), and settlement statement. We can then provide an accurate quote subject to standard due diligence.

However you decide to answer the discount question, just be sure to address the seller’s real underlying question, “Will you treat me fairly?”

Looking for more scripts and tips?  Be sure to visit our bookstore for Personal Profit Series: Notes – Your Complete Money Making System to Buying, Referring, Creating and Holding Real Estate Notes!

Note Investor (NI) recently interviewed Greg Gehlen (GG) to learn more about his note buying programs. Canyon Capital specializes in mobile homes on land and pays fees to cash flow brokers for the purchase of notes, trust deeds, and contracts.

NI: What is the current focus of your company?

GG: We buy seller-financed first-position lien notes in the Western U.S. Our primary focus is buying partials to still keep deals together that may not otherwise work.

NI: How did you get your start in the note business?

GG: In 2004 I wanted to buy or start a business and after I looked at a number of existing businesses I decided the best option for me would be to start a business. I attended Noteworthy here in Las Vegas and found a wealth of great information (people and materials) at the conference to get started in the paper business.

NI: What unique benefits does your company provide?

GG: We are able to make decisions quickly on files and we also buy notes that many people are not interested in – mobile homes on land.

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

GG: We buy notes in the Western U.S. which includes WA, OR, CA, AZ, NV, NM, UT, CO, MT, ID, and WY. The type of note we prefer is mobile homes on land (no park paper). We will look at notes up to $150,000 but prefer partials under $50,000. We like to look at credit if possible but down payment, a solid pay history and property value are more important to us.

NI: What type of deals would just waste your time?

GG: New notes with small down payments and poor credit are not files we will fund.

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

GG: Direct mail for consistency and working with the various servicers of seller financed paper.

NI: How do you handle commissions to brokers or consultants?

GG: Wires transfers go out to the note seller and consultant on the same day once the file records. Our price is a wholesale price and the consultant would build in their fees.

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

GG: If you are persistent you will be successful. I had visions of how easy this business was going to be and I quit my job sooner than I should have… Make sure you have a consistent deal flow so you don’t add more strain to your situation than you need to early on… and don’t quit your day job too soon.

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

GG: Not learning the marketing end of business sooner. Knowing the business is essential, but you need to have deals to look at to get any benefit from your knowledge.

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

GG: We are buying more partials and are really checking under every rock to make sure value is there and building in further value drops to keep our investments safe.

NI: Where can someone contact you to obtain more information?

GG: The best way is to email me at greg.gehlen@canyoncap.com. Our telephone number is 800.995.1856 and the address is 1930 Village Center Circle, Suite #3-838, Las Vegas, NV 89314.

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

GG: Not trying to brown-nose, but your program “Personal Profit Series: Notes” helped me out when I was first starting and I highly recommend it.

NI: Thanks for sharing your time and knowledge with the owner financing sellers and note brokers at Note Investor!