One perk when investing in notes is that you can do it anywhere.
For some, that means doing it from a beach town in Central America (looking at Tracy and Fred) or from a parking lot at a ski resort (looking at me). But it also means you aren’t stuck only investing in notes from your state.
To prove that concept, we are taking a trip to the North Pole, Alaska (maybe we should have saved this one for Christmas Time).
Seller-Financed Cabins in North Pole, Alaska
This note came across our quoting desk and immediately piqued our interest, mainly because Tracy and I may have a slight obsession with tiny houses in the woods. But I digress.
The property has four cabins/tiny homes, three of which have been completed and one of which has all the appliances and cabinetry on-site and ready to install. All three completed cabins have electricity, heat, and water, making them “wet” cabins (versus “dry” cabins, which have no water). Before the sale, the cabins had a combination of long-term and short-term renters.
The property was built and owned by the Seller’s father, who left it to the son upon his passing. The son, who did not live in Alaska, sold it using owner financing to an LLC comprised of 8 local real estate investors. He’d received over a year of timely payments and was interested in selling the note.
The Seller Carry Note Terms
- Sales Date: January 1, 2023
- Sales Price: $170,000
- Down Payment: $25,000
- Original Balance: $145,000
- Interest Rate: 6%
- P&I Payment: $1,610.00
- Payments Made: 15
- Payments Left: 105
- Unpaid Balance: $131,269.83
- Loan-to-Value: 77% to Sales Price
We performed our initial due diligence. Checked out the property with the county tax assessor. Saw what we could from Google Maps. Checked the math. Verified the down payment. Confirmed the payment history. While we like to buy notes in-house, this one didn’t fit our current investing profile. This would be a referral deal where we earn a fee at closing. Let’s dive in.
Finding a Note Investor for a Rural, Commercial Property
The most challenging part of this deal was finding an investor.
That was due to two things. First, this property was extremely rural—the North Pole isn’t a happening, bustling place. Second, after chatting with the borrower, we realized that only one of the cabins was currently occupied while renovations and upgrades on the others were being conducted. The borrowers were comfortable covering the payment and continued to be timely in payments, but this was temporarily a negatively cash-flowing property.
Two strikes — but not three.
We were initially working with an investor who had a full buyout option on the table, but unfortunately, after reviewing with their underwriters, they could only offer a partial until the property was fully occupied again. The seller only wanted a full note purchase.
It was up to us to put our heads down and exhaust our resources to find an investor who felt comfortable moving forward with a full buyout. It also meant working closely with the Seller to keep him feeling comfortable and okay moving forward. Luckily, we were able to get him to stay with the deal, even with a slight reduction in pricing to satisfy the higher yield requirements of the investor.
Finding Note Service Providers in Rural Areas
The next challenge was getting a BPO. There were not many companies or folks in the North Pole doing appraisals or drive-bys (and Santa’s elves were unfortunately not trained for this type of work).
Luckily, the borrowers provided some assistance. The borrowing LLC is made up of a few folks, most local to that area and a few working in the real estate industry. While they obviously could not offer their services*, they could pass on a recommendation for a licensed professional in the area, which helped keep this deal moving.
*If it needs to be more obvious, you should not have the borrower/payor provide a BPO or appraise the property.
Please Get a Personal Guarantee if the Borrower is an LLC
Public Service Announcement (PSA) for those creating owner-financed notes:
If the borrower is an LLC, get a Personal Guarantee.
(We are working on getting a celebrity endorsement for the PSA, but the budget is a little tight—the holiday season is around the corner and all.)
What is a personal guarantee?
A personal guarantee makes an individual (or individuals) personally responsible if the entity defaults. Without one, the sole recourse is the property. When working with a buyer as an entity, there are challenges to assessing creditworthiness. Obtaining a personal guarantee can offset that challenge.
We Love a Third-Party Servicer
One thing we absolutely relied on was the third-party servicer with this deal.
Because there was no personal guarantee, having verified, timely payments was a big deal. The servicer also became a resource to help navigate some of the challenges of doing business with such a rural property.
So, What Would We Have Liked to See Different with this Seller Financing Deal?
As the note finder and referral, one takeaway was how important it is to cast a wide net for out-of-the-box deals like these.
When you encounter a note that seems different — the answer can still be yes. You need to find the right fit of an investor. If you’re starting in the business, take time to cultivate relationships with investor groups. If you’re at an event, chat with different folks to get a feel for what properties and buyers would be suitable for them. That way, you have someone for (almost) every deal.
When it comes to the note terms, the two things we wished were different were 1) a higher interest rate and 2) a personal guarantee. While not deal breakers, that would have allowed the note seller to get better pricing.
Note deals can be found everywhere—not just in your home state or in big cities. It’s time to start looking outside the single-family Texan home box (though we still love that box, too).
Happy Note Investing!
Note Investing and Seller Financing Resources
So what happened with this note? You left me hanging.
Hi Martin! While we purchase notes in-house, we referred this deal for a fee and it was successfully closed. All is well in the North Pole!
Good job reviewing this situation!! Tiny homes at the North Pole. Who would have thought? Elves are small (so I’ve been led to believe) so maybe it does make sense. That was not only instructive but fun to read!!
Hi Peggy – thanks for much! It was a fun deal to work.