Flexibility with Notes – Getting Deals Done

Let’s dive into another real deal seller-financed note example. This time, we are taking a trip to the Lightning Capital of the United States — Florida.

This transaction shows how note investors can work with less-than-ideal terms, get the yield they want, and move quickly. We all want our deals to close fast, but this one took that to a new level…

The Details – 1st Position, Performing Note in Florida

Sale Date: 2019
Sales Price: $533,525
Down Payment: $0
Original Seller-Financed Note Balance: $533,525
Original Term: 180 Months
Interest Rate: 2%
Payment Amount: $3,433.23
Payments Made: 73 months (107 Remaining)
Credit: Good
Unpaid Principal Balance (UPB): $336,215

The property was a nice single-family home in Southwest Florida. It was well maintained, and the property buyer had a strong payment history, with current property insurance and taxes.

Photo of Florida Neighborhood with words "Flexibility with Notes Getting Deals Done"

No Down Payment, but Great Equity

Note investors never want to see a $0 down payment. But it’s not always a deal breaker.

The investor will look to offset that with something that tips the scales. The biggest factors for this note were a solid verified payment history and an increase in the property value since the sale.

What do we mean by verified payment history? Ideally, that’s through a third-party servicing company that tracks incoming payments and the remaining balance. If that’s not available, the other option is proof of the last 12 months of payments, often with bank statements.

Along with over 6 years of seasoning, the other big win was the collateral value, which came in at $785,000. The Seller didn’t state that value; that was verified through a Broker’s Price Opinion (BPO). That put the mortgage note balance at 43% Loan-to-Value based on the current value.

While the borrower had no equity when the note was created, they had substantial equity by the time the note was sold.

Low Interest Rate Means a Bigger Discount

A 2% interest rate isn’t our favorite. Yes, it’s better than 0%, but in times when interest rates are 7% or more, it can be an obstacle. And then you factor in what yields investors typically want.

In this case, the investor kept their required yield in the 7.5% range, but even then, it was still over a $50,000 discount. Investors often like to see yields above 10%, ideally closer to 12-15% depending on the transaction. The investor was comfortable with their skinny yield and had access to bank funds, which helped close the deal.

Take Costs Into Consideration

This mortgage note required a new Lender’s Title Policy, as only an Owner’s Title Policy was in place at the time of sale.

It is important to confirm whether the note investor will cover the title and closing costs or whether you or the Seller will be responsible for them. In this case, the investor would only cover their BPO fee and would not cover the title policy. We prefer to present an offer that covers all fees, so we factored that into our costs and referral fee.

Motivation to Move Quickly

This Seller was MOTIVATED. They wanted to close, and they wanted to close yesterday.

While it’s great to have a Seller who is so ready and on top of things, managing their expectations can become a juggling act. As a note broker, you have to find the line between bothering the investor and keeping them moving, all while handling the Seller’s frustrations and desires.

With that, this deal took just 18 days from the first phone call to the final wire! That’s lightning speed. We typically tell Note Sellers to expect 3-4 weeks to closing once we have all the needed documents. Even with how fast things were moving, we kept that clear to the Seller so the investor could complete their due diligence at a comfortable pace.

Working with a Co-Broker

This real estate note was brought to us by an accounts receivable factoring broker contact that Tracy and Fred worked with “back in the day” (their words, not mine…).

Co-brokers can be a great resource for closing more deals; after all, it’s another pipeline for you. We do purchase notes in-house, but we decided to refer this one to access the low-cost bank funds it took to get the deal done. We gave the co-broker the option to go direct, but they preferred we take the lead on processing and closing.

We split the referral fee 50-50. When referring notes, it is important to keep pricing competitive. There’s a fine line between splitting a fee that works for everyone and pricing yourself right out of the deal.