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.

Then you will want to know Ric Thom of Security Escrow, the feature of this month’s Note Buyer Interview.  Ric has been servicing and buying real estate contracts in New Mexico for over 25 years.

He’s also a true owner financing expert that has been actively involved in trying to “make sense” of the HUD Safe Act and Dodd Frank Act.

Where do you focus your efforts as a Note Buyer?

The current focus of my note-buying company, Ric Thom Enterprises, is looking for additional investors. The hard part about this business used to be finding quality real estate contracts. Finding investors was the easy part, but with all the negative publicity about foreclosures and declining property values it has become a little harder to find investors. However, default rates on owner financed transactions (installment sales) are only running about 5% in New Mexico compared to 9 or 10% for conventional financing. The reason is buyers can simply pick up the phone and call their sellers to modify the contract.

How did you get started in the note business?

I started in the business of buying and selling real estate contracts in 1984 after becoming a real estate broker and taking a CCIM (Certified Commercial Investment Member) course. The CCIM Course dealt with financial calculators, time value of money, and discounting mortgages. The light bulb went on. I bought two small contracts for myself. Someone asked me what I was doing now and I told them about this great investment where you could get double digit returns secured by real property. They wanted in and I sold them one of my contracts netting a whooping $389! He told someone and they told someone and it just built from there.

I have purchased close to 2000 contracts during my career. Although I usually sold contracts to single private investors I have sold more than 100 to national note buying companies. I have only brokered about two dozen contracts. I have increased my profit margin since my first sale and have never lost money on a contract.

What unique benefits does your company provide?

One of the unique benefits my company provides is that I test drive the contract before I sell it. In other words after I negotiate a price with the note seller I do my due diligence and buy the contract with my own funds. I hold on to it for at least three months to make sure there was no fraud and the payments continue. Then, and only then, I sell it to an investor.

What type of notes or transactions will your company consider buying?

My company will consider buying only real estate contracts in New Mexico. I won’t purchase anything over $300,000, but I will try to broker it. Most contracts are a lot less than that. I’ll look at any property type, except restaurants, motels and churches. I don’t check credit. I am buying an asset. I do look at payment history. I prefer seasoned contracts of a year or more, but I will buy green contracts if they have at least 20% down. I try to stay under 80% investment to value.

What type of deals would just waste your time?

The type of deal that would be a waste of my time would be nonperforming contracts. People say, “hey why not just buy it at a deep discount, take the property back and resell it?”. I’m not in the property business; I’m in the cash flow business and so are my investors.

How do like finding notes and real estate contracts?

The best methods for finding deals are looking through public records, but with a twist. I would calculate what the present balance of a contract would be after payments had been made and actually make a discounted offer to the contract holder. This offer would be subject to a number of items that comprise my due diligence. Having a figure as to what they can actually get for their note is so much more effective than just saying, “Hey, I’ll pay cash for your note”.

Another method is to become an affiliate of several realtor boards and advertise that you will pay a referral fee to its members. Join a local real estate exchangers group. Realtors are a great resource.

Another method is to work with an escrow/servicing company of seller financed notes. Often, the owners of these companies don’t have the time, knowledge or desire to buy and sell notes. You can either offer them a flat fee to allow you to place a flyer with the payments that go out to the sellers or you can offer a percentage of your gross profit on any contracts/notes that are generated from you soliciting their sellers.

Or you can do what I finally did which was to start/buy an escrow company.

How do you handle commissions to note brokers or consultants?

Commissions to brokers or consultants are negotiable.

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

Advice I would give to new professionals just starting out in the industry is to keep your day job and get a line of credit. It took me more than three years before I could make a living buying and selling contracts. You need that time to build contacts, reputation, and learn from your mistakes. If it wasn’t for a line of credit, I would not have been able to make it in this business. There is nothing worse than spending three weeks putting together a package to send out to investors only for the seller to sell their contract to someone else for less money because that buyer could be “Johnny on the spot”. With a line of credit you can cherry pick the very best contracts to buy and broker the marginal ones. Your line of credit can come from a local bank, home equity or friends and family. If it is indeed a good contract the payments will more than pay the interest on the line while you are selling the contract.

What is the most common mistake you see people make in the note business?

The most common business mistake I see people make is trying to make something work that’s not going to work. When I first started I hated to walk away from any contract. The fact is some contracts/notes just can’t be sold either because of the terms, the property, or the seller. When I first started I wasted a lot of time trying to make everything work; so much so that my wife had a sign made for my office that said, “If it works, it works. If it doesn’t, it doesn’t”. From that day forward I was able to tell sellers in a very short period of time whether or not I was willing to buy their contract or not. Then I would go turn over another rock.

Have you made adjustments to the way you buy notes in the current economy?

The changes I have made given the current economy, is seeking deeper discounts and higher yields as a result of my investors requiring the same. I am also buying more partials, also known as fractionals, to minimize risk.

Where can someone contact you to obtain more information?

Email at ricthom51@yahoo.com or visit online at SecurityEscowNews.com

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

One of things that have pleasantly surprised me over the years is the number of people who genuinely thank me for helping them out of a bad financial situation by purchasing their contract/note.

If you would like to read more from Ric Thom of Security Escrow be sure to check out these articles:

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

Dodd-Frank Hijacks Owner Financing

How Congress Wants to Change Seller Financing!

This breaking news was reported by Scott Arpan of Advanced Seller Data Services (ASDS) based on the analysis of information collected by their company.

They currently compile data from the public recording offices for owner financed real estate notes in over 1600 counties across the United States.

Observations on Owner Financing Market Growth

• The number of seller carry-back loans grew 15% in 2010 and will exceed an additional 25% growth rate in 2011.

• This trend should continue. The first 3 weeks of January 2012 saw a 35% increase in seller loans created over the first 3 weeks of 2011.

• Rehabbers and developers were a major producer of notes through 2007 as indicated by sellers who created more than one note (over 20% of all notes created).

• The current market is dominated by individual sellers who create only one note (over 90% of the market in 2011).

Source: Report released 1/20/12 by Advanced Seller Data Services. See insert for additional details including an owner financing count by state and a graph comparison.

Click to View Full Report and Graph

 

 

Why Seller Financing Is On The Rise

It’s no secret that banks have tightened lending criteria following the subprime meltdown and a record number of defaults. It takes a credit score over 720 and 20% cash down to qualify for the best conventional financing rates.

On top of all that, many buyers have experienced a decline in their credit ratings due to foreclosure or job loss in the wake of a weak economy and declining real estate market. These ingredients combine to make a recipe for alternative creative financing like the seller carry-back.

About Note Seller Lists

A proven method for finding and buying real estate notes is mailing to owner financed note holders. Advanced Seller Data Services makes it easy to obtain this information by compiling the courthouse data and selling in a convenient ready to use format. No more going to the courthouse to find notes.

When we interviewed ASDS President Scott Arpan back in October of 2010, he predicted this increase with the following comment,

“As real estate agents, sellers and buyers discover the benefits of seller financing we will see even more of a boom. I believe now is the best time to enter the note business since the mid 1990’s.”

You can catch that full interview including information on their services by clicking here: Find Cash Flow Notes with Note Seller Lists  or visit them online at NoteSellerList.com.

Learning The Note Business

The note business involves matching sellers with note buyers and earning a fee.  As a note broker learns the business they can consider the transition to purchasing notes for their own portfolio or in tax-free retirement accounts. You may enjoy these articles to learn more about the note business:

Learn the Note Business in 60 Seconds?

5 Myths About the Cash Flow Note Business

Going From Note Broker to Note Buyer

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In addition to buying real estate notes as a private investor she has provided marketing consulting to the nation’s top institutional note buyers.

The author of several acclaimed books published by McGraw Hill and a past board member of the National Association of Real Estate Investors, she will wow you with her knowledge and dynamic presentation skills.

To know Lisa is to have met the “Ever Ready Bunny” in person.  She is non-stop energy that would give any three-year old a run for their money. I’m honored to call her a friend and business associate. Oh, and if you ever catch her at a Piano Bar make sure to request her killer rendition of Hey Jude!

An Interview With Lisa Moren Bromma, Real Estate Investor and Note Buyer

What is the current focus of your company?

My focus is creating dependable passive income using both real estate and notes.

I am currently looking for a mobile home park where I can add additional homes that I sell on terms, and then continue to receive monthly lot rents, which will help accomplish my goal.

I have bought, sold and traded real estate assets and continue to believe that the combination of real estate and notes can help me and my business achieve its goals.

How did you get started in the note business?

I moved to Asheville, NC area in 1988 to semi retire. I thought I would acquire real estate investments in NC. I went to a local REIA (Real Estate Investor Association) and met people in the note business that introduced us to paper. We learned the business by going out there and doing it. I have continued to buy seller-financed mortgage notes since my days in NC.

What unique benefits does your company provide?

I am not an institutional investor. I do invest for my own account, and occasionally lend money privately out of my IRA to real estate investors with a track record. I have been doing a lot of equity participation deals lately where I receive income and have the potential of future appreciation at the time of sale.

I have two companies. Ocean Park Marketing, LLC provides marketing and consulting services to the financial services and real estate investment communities.

Wise Women Investor is devoted to helping women achieve their financial goals through real estate and cash flow investing. I have a radio show through Wise Women Investor where I feature experts to share tips and strategies to help other succeed. Recently, Tracy Z Rewey joined me on our show.

What type of real estate notes or deals do you like to target for your own investment?

I like both residential and commercial as long as the ITV makes sense. In commercial the ITV must be below 50%. I buy partials. I do not buy land or personal property notes.

What do you consider your best methods for finding note deals?

I like a combination of Internet and direct marketing, networking and teaching potential strategic alliances how to create marketable paper.

I am a big believer in working with third-party referral sources such as Realtors, Estate Attorney’s and CPA’s. I have developed programs that target these audiences specifically, including a CE program that helps professionals understand the benefits of why seller financing makes sense in today’s market, and these professionals get continuing educational credit hours towards keeping their licenses current.

I frequently attend real estate investor meetings in my local marketplace, as they can be a great source of notes and real estate.

I have written 3 books published by McGraw Hill. This establishes me as a credible expert with professional audiences. I use them as I would a business card.

You are well-known in the business as a leading marketing expert and consultant. What are the first things you look for when evaluating a marketing plan?

Thanks for saying this. I look to see if my potential client is really addressing the needs of the market.

• Is their plan specific, measurable, achievable?
• Are their goals realistic?
• Do they know who their competition is?
• How have they positioned themselves in the marketplace?
• What about building their brand?
• How do they get their word out and make sure to be remembered?

Finally, I look to see if they develop a unique selling proposition to make sure the message they want to deliver is one that will resonate with the prospect.

What advice would you give new professionals just starting out in the note business?

• Know your stuff.
• Get educated.
• Develop a network of experienced players in the industry.
• Make sure you know how to use a calculator and how to submit a package that an investor will bid on.
• Do not be afraid to get out there and market. Always present yourself as a professional.
• You can make money or you can make excuses but you can’t make both. When starting out, make no excuses, do what it takes to get you in the trenches, knowledgeable and confident that you have found your niche.
• How you present yourself is directly related to your success in this business.

What is the most common mistake you see note brokers make?

Not addressing the needs of the note seller. Frankly, most brokers want to tell them all about their company and themselves, when in fact the conversation should be about them the seller, not you the broker. Also, don’t rely on one option, one solution. Be in a position to offer multiple solutions to the seller’s problem. People do business with people they like and trust. When you are working for them, they will trust because you are responding to their need. Realize you will not close every transaction, and that is ok. Just keep marketing!

Given the economy, have you made any changes in the way you buy notes or real estate?

Yes, I am very careful with my own account. I not only do due diligence on the deal, I also research the market where the deal is coming from to see if it makes sense for me to invest in a market with little or no potential for improvement over the next few years. Right now I am only buying in Florida where I live or in markets where I have someone on the ground to assist me in my due diligence. I only buy notes on properties I would be willing to own.

Where do you see opportunity?

I see multiple opportunities. I believe seller-financing will continue to grow as our economy continues to be volatile, and banks will continue to be tight on lending. The foreclosure problem is real. To me it means real estate is on sale. There will always be situations where the seller must sell, and not necessarily for financial reasons alone. I look at the market like many did in the mid 80′s. People will have to create paper in order to sell a home.

Where can someone contact Lisa Moren Bromma?

My website www.wisewomeninvestor.com people can reach me there or through lmorenoceanpark@gmail.com

I am happy to answer any questions.

Is there anything else you would like to share?

The note business is not a get rich quick business. It takes education, perseverance, and patience. You must always be marketing and learning what others, investors and sellers require of you. If you treat this as a business, with the respect it deserves and if you are not afraid to go outside the typical channels of marketing, it is my belief you will be successful.

If you are investing for your own account, remember that no one will care more about your money then you. Be extra careful before you buy.

The Noteworthy Convention Main Event is Friday-Sunday, November 11-13th

It offers three days of sessions focusing on building wealth and generating income with seller financing, distressed assets, creative real estate investing, private lending, and more. There will be expert panel discussions, Q&A sessions, introductions to key vendors, and networking events throughout.

They are currently offering Early Bird Registration for $399 until October 16th with several “Early Bird” Bonus Items:

1) The NoteWorthy Pre-Convention Workshop on Thursday, November 10th

A half-day workshop that runs from 1-5 pm will be taught by Note industry veterans. This ‘Making Money with Notes 101′ workshop is geared towards new note brokers or investors wanting a refresher course in the economic fundamentals of note buying.

 2) $477 in proprietary software for your note business

 3)  Discounts on additional spouse or partner tickets

The convention will focus on turning a down real estate market into a viable note business by harnessing the power of seller financing and private mortgage notes. We all know real estate investing in most markets is pretty tough right now. Here are just a few of the challenges:

• You can’t count on property appreciation anymore. In fact, most investors LOST equity in their properties over the past 3-5  years.

•  You can’t count on you (or your buyers) getting financed by the banks.

• Short sales flips are pretty much DOA.

• It’s tough to get private money for your deals.

We could go on and on, but we all know the challenges already, right?  After all, they are the reasons we are seeing seller financing making a huge comeback.

You can view the full NoteWorthy Convention Video here.

(Spoiler alert…..the secret niche is….the note business!)

We share your pain.

First the Safe Act had a say on Seller Financing and then the Dodd Frank Act.

Why the government would want to slow the housing rebound further by putting stringent restrictions on seller financing – one of the few alternatives to bank financing available in today’s struggling economy- is beyond us.

And it’s not over yet.

Government agencies are still sorting through how to implement portions of the laws affecting both seller financing and lenders in general. The outcome will affect sellers that want to owner finance and when they want to “sell my note!”

Ric Thom, a long time note buyer and servicing agent, shares our concerns.  He recently wrote in to urge NoteInvestor.com readers to take action by commenting on proposed rules before an upcoming deadline. He’s spent considerable time researching the issues and you are sure to find his following thoughts insightful.

Owner Financing Laws – From the Desk of Ric Thom

The Federal Reserve is requesting comments on the proposed rule of the ability-to-repay.  NAR refers to it as Qualified Mortgage which appears on page 10 of the proposed rule.

This standard would be applied to seller financing.  It’s the same underwriting standards that banks are required to perform.  The bottom line is that the only people who will be able to use seller financing are the same people who would be able to qualify for conventional financing.

This rule also allows the buyer a three year right of rescission if the seller did not properly qualify them.  This right to rescission also applies to anyone who has bought the note.

Comments are due before or on July 22, 2011.  I have attached my comments.  Please get the word out.

I have also given a link to the National Association of Realtors (NAR) website which summarizes the final SAFE Act rule as it pertains to seller financing and a brief update on Dodd-Frank.

My Comments on the Dodd-Frank Act and Seller Financing

Submitted by Ric Thom President of Security Escrow Corporation

The Dodd-Frank Act does not exempt property owners who wish to use seller financing (installment sale) even though no money is lent, there is no table funding, and under the Truth and Lending Act they are not considered creditors.

The Dodd-Frank Act (ACT) does exempt property owners who offer seller financing from having to become Mortgage Loan Originators (MLO) provided they only sell 3 properties or less in a 12 month period and they follow the restrictions below. Yet, the Act subjects the property owner to the same liability as an MLO.

Title XIV Section 1401 (2) (E)

1. The seller did not construct the home to which the financing is being applied.

2. The loan is fully amortizing (no balloon mortgages allowed).

3. The seller determines in good faith and documents the buyer has a reasonable ability to repay the loan.

4. The loan has a fixed rate or is adjustable after 5 or more years, subject to reasonable annual and lifetime caps.

5. The loan meets other criteria set by the Federal Reserve Board.

Under this Act the only buyers who will be able to use seller financing are the buyers who can already qualify for conventional financing with perhaps the exception of how much of a down payment they need. Seller financing has always been the alternative to government regulated financing. It is a meeting of the minds between two private individuals who negotiate an arm’s length contract to purchase property using an installment sale.

The following is a breakdown of these restrictions. I listed them in order of greatest impact on property owners, buyers and the economy.

3. The seller determines in good faith and documents the buyer has a reasonable ability to repay the loan

The implication is that the seller must use the ability-to-repay underwriting requirements when offering seller financing consistent with the Dodd-Frank Act which amends the Truth in Lending Act. This new, proposed rule is 169 pages long. http://www.gpo.gov/fdsys/pkg/FR-2011-05-11/html/2011-9766.htm

The Consumer Financial Protection Bureau has spent a lot of energy developing a new, easy to read, two page mortgage disclosure form. It is unreasonable to expect sellers and buyers to fully understand and apply this 169 page rule. If buyer’s and seller’s negotiations deviate in the least the buyer has up to three years to rescind the sale and demand back all money paid to the seller, or anyone that the seller might have assigned rights and interest to, or any bank who takes the note as a collateral assignment.

This could be financially devastating to the seller. Let’s not forget that today’s buyer will be tomorrow’s seller. These sellers are a diverse group. They come from all walks of life: low income, high income, non-English speaking, seniors, widows, minorities but this requirement places the same standards on individuals as banks and mortgage lenders, only with more risk – the banker is in the business of mortgage loan origination and factors that risk into his business plan, whereas the individual seller does not have capital reserves and doesn’t do this as a business. Also, unlike a bank, they do not carry errors and omission insurance.

Unlike banks and mortgage lenders, both the buyer and seller are consumers. They should both be equally protected. The buyer is purchasing real property and the seller is investing in/creating a financial product where they receive their equity over time. The seller is relying on the buyer to make monthly payments and maintain and protect the property. Terms are not dictated to either party, but rather they are negotiated between the parties.

Requiring the buyer to turn over all their financial information to a stranger opens the door for Identification theft and fraud. Furthermore, why should the buyer be required to divulge their income and assets to the very person with whom they are negotiating the terms of a sale? This is not required when there is a 3rd party lender.

This also creates the opportunity for predatory borrowing. This is where an unscrupulous buyer knowledgeable about the Dodd-Frank Act leads an uninformed seller (and this will be the majority of sellers) into negotiations not in compliance with the ability-to-repay requirements. (An example of that could be a balloon, an interest rate greater than 1.49% above a standard mortgage, or the seller did not know how to calculate the income to debit ratio correctly, or know what residual income means). That buyer lives in the property trying to resell it for a profit and if they are not successful within three years they rescind the sale and get all their money back.

The SAFE Act does not put in place the ability to repay requirements, or any other requirements, unless the individual habitually and repeatedly uses seller financing in a commercial context. So there is some consistency between the two laws the Dodd-Frank Act should not require sellers to use the standard of the ability-to-repay unless they use seller financing more than three times in a 12 month period. It is HUD’s feeling that Congress never intended under the SAFE Act to restrict private property owners from using seller financing, unless they did it as a business.

2. The loan is fully amortizing (no balloon mortgages allowed).

There is a good chance that a seller 55 years or older will die before receiving all their equity by not allowing them to negotiate a balloon payment. A lot of seniors have invested in real property with the intent of selling it using seller financing (an installment sale) in order to supplement their income in retirement, but also with the hope that they would not be stuck with a 30 year investment. The Dodd-Frank Act does the same thing insurance companies do who sell 30 year annuities to seniors. Our government has criticized this deplorable practice because seniors will die before they receive all their investment.

The restriction of no balloon doesn’t affect just seniors, it has financial consequences for anyone using seller financing. Under the Dodd-Frank Act community banks are allowed to originate fully amortizing loans with a five year balloon. The rationale is that they hold these loans in their own portfolios and the government recognizes their need to hedge against inflation and rising interest rates. Yet, the Act refuses to recognize that private property owners who have 100% skin in the game need the same protection. Obviously the Act does not feel that a five year balloon is predatory lending. This restriction should not be placed on seller financing until a property owner sells more than three properties in a 12 month period. If there has to be a restriction it should at the very least be the same allowance given to community banks of a balloon in 5 years.

4. The loan has a fixed rate or is adjustable after 5 or more years, subject to reasonable annual and lifetime caps.

This restriction is reasonable, but it will eliminate the ability for any buyer to wrap an existing obligation that has an adjustable rate even if they feel they can afford any rate increase. Again, for consistency with the SAFE Act there should not be any restrictions on any property owner that uses seller financing 3 or fewer times in a 12 month period. If the seller does not know about the ability-to-repay requirements and that they are not able to have a balloon, they certainly will not know that you have to have a fixed interest rate for the first five years.

1. The seller did not construct the home to which the financing is being applied.

There are a lot of small builders that have a spec house or two that they can’t sell unless they offer great terms using seller financing. Otherwise they have to let these properties go back to the bank which does not help housing or the economy. There is also that group of out of work construction workers who built their own homes when times were good and now need to sell. This takes away their ability to use seller financing. Builders should not be subject to any restrictions unless they sell more than three properties in a 12 month period using seller financing. Builders are in the business of building; not of originating loans.

Using a mortgage loan originator to facilitate a seller financed transaction creates additional risk and expense for both the buyer and the seller.

It has been said that a seller financing the sale of his or her own property would completely avoid the issue of licensing by retaining the services of a licensed loan originator. If a mortgage loan originator (MLO) fails to properly follow the ability-to-repay guidelines the buyer still has three years in which to rescind the sale which leaves the seller at risk and will most likely bankrupt them. Furthermore, there is no provision in a MLO’s errors and omission insurance that covers seller financing. None of the continuing education classes or the exams that an MLO must complete has a single chapter or question regarding seller financing.

Who is supposed to pay the MLO? MLOs can charge a flat fee or up to 3% of the transaction. The only advertisements I have seen so far advertise a flat nonrefundable fee of $450. This fee has to be paid in advance, which makes sense because why would a MLO spend hours and hours on an installment sale transaction which might not close? If the buyer pays the fee, then this is a forced origination fee never before imposed on buyers seeking seller financing. Why should the buyer have to pay money just to have an offer presented to the seller? A lot of buyers use seller financing because they are low income and seller financing, up to now, has been an inexpensive way to purchase property. If the seller pays they will have to pay money for the simple act of the MLO forwarding them the installment sale offer. If the seller receives multiple offers this could easily run into thousands of dollars in MLO fees just to sell their property. A lot of sellers are also low income individuals. The MLO will have to be a part of every offer and counteroffer because the sale and terms of an installment sale are one and the same and cannot be separated. For instance, the buyer might be willing to pay a higher interest rate if the seller is willing to come down on the price and down payment. A lot of seller financing takes place in rural areas that are underserved by mortgage lenders and banks. It is going to be very difficult to find a MLO in those areas who are also willing to take the risk facilitating a seller financed transaction. This has the potential of pushing seller financing underground – not a desired result.

The Dodd-Frank Act allows a property owner to use seller financing without having to become a mortgage loan originator as long as they don’t use it more than three times in a 12 month period and comply with the above restrictions. In the SAFE Act there are no restrictions to the number of times seller financing can be used as long as you are not in the business of being a mortgage loan originator. The coauthor of the Dodd-Frank Act, Representative Barney Frank, sent a letter to HUD on July 22, 2010 urging them to place the maximum amount of seller transactions that an individual could do before becoming a MLO, or having other restrictions on them, at five in a 12 month period. I would propose that the Dodd-Frank Act adopt that same number and place no restrictions on seller financing until 5 is surpassed. The only restrictions that should apply to 5 or less are those restrictions that the States already impose either through state statute or case law.

Under The Act loan officers at community banks do not have to become a Mortgage Loan Originator if they originate 5 or less transactions in a 12 month period. The rationale is that this is burdensome, costly and there is not enough volume to create a systemic risk. Ma and Pa on Main Street should be granted those same allowances. The Act puts more restrictions and risk on Ma and Pa than it does on financial institutions.

In watching the debates in Congress last summer it was repeatedly said that the Wall Street Reform and Consumer Financial Protection Act would not negatively affect or over regulate Ma and Pa on Main Street. If this doesn’t negatively affect and regulate seniors, minorities, and lower income individuals on Main Street I don’t know what does. These restrictions will all but do away with seller financing which will have a negative impact on housing, existing property owners, those desiring to be property owners and the economy.

Related Articles on Owner Financing Laws From NoteInvestor.com

Dodd-Frank Hijacks Seller Financing

Safe Act and HR 4173 Update – Is it Good News for Seller Financing?

How HUD Safe Act Will Hurt Seller Financing

Desperate homeowners are offering all sorts of incentives to buyers in the wake of some staggering new data.

But forget granite counter tops, hardwood floors, and shiny new cars.  What the real estate world needs is financing.

So first the harsh reality…and then the owner financing solution!

The National Association of Realtors (NAR) released some sobering news last week for February sales. Not to get you all depressed but consider this:

• Existing home sales dropped 9.6%
• Housing Inventory rose 3.5%
• All Cash Sales were a record 33%
• Discounted Distressed Homes were 39% of the market
• National Median Home Price fell 5.2% to $156,100

It should be mentioned that this decrease came after three months of improved numbers. But if you think its getting better soon consider that…

• one-third of all homeowners are underwater (owing more than their house is worth), and
• the 2.9 million homes in some stage of foreclosure in 2010 are still sorting their way through the market.

Wondering what the real estate world needs now?

Well it’s love sweet love from mortgage lenders.

But don’t take my word for it.

NAR chief economist, Lawrence Yun expects an uneven recovery.

“Housing affordability conditions have been at record levels and the economy has been improving, but home sales are being constrained by the twin problems of unnecessarily tight credit, and a measurable level of contract cancellations from some appraisals not supporting prices negotiated between buyers and sellers,” he said.

“The decline in price corresponds to the record level of all-cash purchases where buyers – largely investors – are snapping up homes at bargain prices,” Yun explained.

“We’d be seeing greater numbers of traditional home buyers if mortgage credit conditions return to normal.”

(Source NAR news release 3/21/11 at http://www.realtor.org/press_room/news_releases/2011/03/feb_decline with emphasis added).

Tired of waiting for mortgage conditions to change?

Consider the Owner Financing Solution

Many sellers are taking matters into their own hands and offering seller financing. For Sale ads and listings abound with the “Owner Will Finance” incentive.

And the news is noticing. Seller financing was recently mentioned in USA Today in an article entitled Home Sellers Pull Out All Stops To Attract Wary Buyers.

Regular readers know I love seller financing!

I bought my first house as a single mom with financing from the owner and later purchased a 4-plex the same way. Next it was acting as a seller offering financing to a new buyer.

Now my husband and I benefit from buying seller financed notes at a discount for long-term interest as a strategy to build our retirement accounts. Another option is to earn referral fees finding real estate notes for note buyers. (If any of these strategies sound interesting be sure to check out the free video mini-course on finding cash flow notes.)

Of course it’s not without risk. The saying goes that you will pay for education one way or another. So it is best to invest in knowledge and seek help from competent legal and tax professionals upfront. You can also browse the articles here for more great free information including:

The Downside of Owner Financing – Disadvantages to Seller Financing

Owner Financing – 10 Advantages to Using the Seller Carry Back

Owner Financed Resources

About the Author: Tracy Z. Rewey has been helping sellers, buyers, and investors achieve their goals with owner financing for over 20 years. Grab your copy of her free report and newsletter at NoteInvestor.com. This article is copyrighted and available for reprint when a link to this site has been included.

In an effort to sell fast and stand out from the crowd, sellers are turning to the owner financed installment sale. By accepting payments over time from the buyer, the seller provides an alternative to bank financing. This attracts more buyers and helps the owner get attention in a market flooded by oversupply from foreclosures.

Of course sellers don’t want to jump from the frying pan into the fire by trading a house that won’t sell for a buyer that won’t pay.

Here are 5 safety tips for sellers considering an owner carry contract:

Tip #1 – Review the Buyer’s Credit

How buyers have paid bills in the past is a good indicator of how timely they will make future payments. Always review the buyer’s credit prior to accepting a promise to pay. Sellers can obtain a signed authorization from the buyer to pull credit through a reporting agency, or the seller could simply ask the buyer to obtain a copy of his or her report for the seller’s review.

Tip #2 – Get a Down Payment

The more money a buyer puts down, the more “skin” they have in the deal. The greater this equity, the lower the likelihood the buyer will stop paying.

When people have little to no equity, they are more likely to default or just walk away from the home. Few sellers want the hassle of taking back a property through foreclosure, so increase the odds in your favor by requiring a down payment.

Tip #3 – Set the Terms

The terms include interest rate, payment amount, frequency, and the due date for payment in full. There are also late fees, default clauses, requirements for insurance, and other standard provisions.

While the terms can be whatever the buyer and seller agree upon, it makes sense to set terms that are affordable to the buyer AND favorable to a note investor. This way a seller is more likely to own a note that is valuable to an investor in case they ever want to sell future payments for cash.

Tip #4 – Get Help with the Documents

In addition to putting the terms in writing, the documents evidence the lien. The obligation to pay (or IOU) usually takes the form of a promissory note, which is secured by an owner mortgage or trust deed recorded in the county records. A land contract or real estate contract are also used in some states. A qualified attorney or title company familiar with local laws should prepare the closing documents.

Tip #5 – Collect Payments Like a Pro

Tracking the payments, interest, and balance is often referred to as servicing the note. In addition to collecting payments, a servicer should verify the real estate taxes and insurance are kept current. The seller can perform servicing but it is a whole lot easier to hire a third party company to handle this process.

If you are looking for the complete system for safe owner financing be sure to read our how-to manual. It includes documents, examples, terms, credit reading tips, note investor criteria, and lessons learned from 20 years of real life experience.

Here is what one satisfied reader said:

“Your product is one of my go-to programs. I am glad you took the time to put it together. I think I paid more than 10x when it first came out and I think it was worth every penny!”  Greg G – Canyon Capital

Available today in our bookstore as an instant download for just $99.97

Article written and copyrighted by Tracy Z. Rewey at www.NoteInvestor.com.

It can also be the most difficult. Why?

Well it can seem a lot like looking for the proverbial needle in a haystack.

The Challenge with Real Estate Notes

On average about 6% of residential real estate sales involve some sort of seller financing. And it’s the seller carry-back that makes up the lion’s share of the cash flow note business.

Now it can be more or less depending on where you live. It’s also higher in a tough economy (like now) or with hard to finance properties (land, mobile homes, commercial, businesses, etc).

But that 6% has been a pretty reliable statistic for the 20+ years I’ve been buying and selling notes. I know six percent may seem like a small number but it can really add up.

Cash Flow Note Statistics

Just take a look at residential sales for one year. In 2009 there were 5.156 million existing home sales units with a median price of $172,500 [Source: National Association of Realtors®].

If we apply the 6% seller financing average that results in roughly 53.3 billion dollars of cash flow notes created in just one year. That number grows substantially when you combine with the notes created on new homes, land, mobile homes, business notes, and others not included in this NAR report.

So how do you find the needle in a haystack?

Target Marketing – The Solution to Finding Mortgage Notes

It’s a waste of valuable time and money to market your note buying services to the 94% of the population that don’t hold a note.

To find cash flow notes you need a powerful magnet…and that’s targeted marketing.

A marketing plan targeted solely to the needs of sellers holding cash flow notes is what will get your phone ringing and your pipeline full of deals.

5 Ways to Find Cash Flow Notes

In our business there are 5 preferred methods for locating deals. We cover this in more detail in the Finding Cash Flow Notes Videos (click the link  for free access to the mini course), but to summarize they are:

 1.  Ads – Using ads to find people receiving payments on real estate notes

 2. Direct Mail – Sending letters or postcards to a verified list of note holders

 3. Referrals – Networking with professionals to obtain referrals

 4. Online – Building an online presence with websites, directories & SEO

 5. Building Your Brand – Establishing yourself as an expert in your local area

Over the last two decades we have used a combination of all five methods.

So what’s the best way to find cash flow notes?

Well that depends on three things:

1. Budget

How much are you able to spend on marketing? This is a huge factor when first starting out. For example direct mail is effective (if done right) but also expensive.

2. Time

How much time can you devote to the business? Reverse Ad Marketing and Referrals are low-cost but they take an investment of time.

3. Skills

What are your strengths and weaknesses? Do you already have relationships with existing real estate professionals? Are you great with computers? Do you like (or hate) to give presentations? This also impacts your selection.

So start with the 5 main methods, realistically assess your budget, time, and skills, and then make a marketing plan that is best for you.

To get more details on our five favorite methods for Finding Cash Flow Notes watch this special free video:

You can also read these additional articles on:

Finding Cash Flow Notes

Note Broker Questions: How Do I find Notes on a Budget?

Should I Visit the Courthouse to Find Cash Flow Notes?

Find Cash Flow Notes with Note Seller Lists

Seller Financed Note Business Increases 40%!