Guidelines For A Successful Note Purchase

- FINE POINTS
A. GENERAL INFORMATION, We are not acting as lenders or property buyers. My partners and I are strictly purchasers of property seller financed real estate paper. This includes notes, mortgages, trust deeds, land contracts, contracts for deeds and bonds for title. The paper must be in the first position and the payers must be current on their payments. Outside of non common situations which include inheritances, family trusts and powers of attorney, the stated note sellers must have previously been the legal property sellers (legally owned) or currently be in legal title for the related real estate property.

B. LOAN SERVICING, Most note buyers professionally service the mortgage loans they purchase. Thus, two of the benefits for the note payers are that their monthly payments are reported to the three major credit bureaus, and so they have an opportunity to increase their credit scores. Also, the note payers annually receive IRS tax form 1099s (mortgage interest) so they can deduct both the mortgage interest and real estate taxes on their yearly tax returns.

- PAPERWORK
At the beginning of the process or shortly thereafter, the note sellers are responsible for providing timely copies of all needed paperwork. This includes – but not limited to – the notes, mortgages, trust deeds, land contracts or similar, warranty deeds, HUD 1s, property insurance policy, title insurance policy and proof the property taxes are current. Down the road, the note sellers or the closing agents are required to submit all original documents. Some of this paperwork must be notarized and also recorded. The notes, mortgages & trust deeds, warranty deeds and land contracts or similar must always be signed, notarized and recorded. If there are any defects in any parts of any of the documents, they MUST be cured prior to funding time. The common parties that can resolve paperwork errors are the note sellers, the note payers and also the closing agents.

- PAY HISTORY
We do not purchase non performing notes. The note sellers are required to provide proof of the down payments. This could be by a certified settlement statement or by a copy of a check, money order or wire transfer. Also, the note sellers are usually required to provide proof of up to the last 12 monthly payments. This proof is by one or more items. These items are copies of checks or money orders, bank deposit tickets and bank statements. If the note payers made any late payments within the past 12 months (30+ days past due date), there could be a price reduction.
- THE REAL ESTATE PROPERTY
Outside of vacant land, the commercial or residential properties MUST be in livable / good condition and must be occupied by either the note payers or renters of the note payers. In addition, all the property types must appraise at -or depending on the deal - near the note seller’s stated estimate of value. Note purchasers usually acquire BPO (Brokers’ Property Opinion) reports at their own expense. However, it can be quite helpful (although not required) if the note sellers have on hand their own appraisal or request one by a licensed appraiser. If there were recent repairs / improvements, note purchasers might require an itemized list of the work performed along with copies of the paid bills.

- TITLE WORK & THE CLOSING AGENT
Title work is handled by a closing agent that is either a licensed and bonded real estate lawyer or title company. The note seller could choose the party or the note purchaser could use its own. Some of the closing agent’s functions are doing checks on property title and property taxes, preparing a new lender’s title policy (if the current one is not assignable), resolving defects in title or other paperwork, prepare & complete note purchase closing documents, and disbursement of note seller’s proceeds from the note purchaser. FYI..It is strongly suggested that note sellers open title work from their own closing agents, ASAP. This action simply could mean a lot quicker closing of the note purchase.
- TITLE INSURANCE
If the note seller previously conveyed title to the note payer there should be a current and valid lender’s title policy. This would be simply assignable (no cost to anyone) to the note purchaser. However if the note seller is currently on title, a new lender’s title policy must be created in favor of the note purchaser. Depending on the deal, the note seller might be responsible for this cost.
- PROPERTY INSURANCE
Except for vacant land, there must be valid and current property insurance. The insured amount must be for at least the remaining balance of the note. If there are any defects or lapses, they must be cured prior to funding time for the note purchase. FYI... Immediately after funding time, the note purchaser will make the proper adjustments of the policy with the insurance carrier. Unpaid property insurance by the note payer is a foreclosure issue, so this could cause a price deduction.

- PROPERTY TAXES
If there are any delinquent property taxes, they must be paid to current by the note seller or note payer at or prior to funding time. FYI… The back taxes can be deducted from the seller’s proceeds. Unpaid property taxes by the note payer are a foreclosure issue, so this could cause a price deduction.
- PROPERTY TAX & PROPERTY INSURANCE
Sometimes the note sellers collect the taxes and insurance from the note payers via monthly payments and thus pay these bills directly. In this event, the note purchaser would work with the note seller on reconciling the payments going back the past 12 months. The purpose of this is to verify the payments and also show the note payers are not in a credit balance. Any credit or debit balances would require actions to bring the accounts current at or prior to funding time. FYI..Any credit balances could simply be deducted from the seller’s proceeds.
THE NOTE PAYERS
It is strongly suggested the note sellers contact their note payers of the pending note purchase, AS SOON AS POSSIBLE. During the process the note payers’ cooperation might be required in certain areas such as pay history, property insurance or curing paperwork defects. Also, note purchasers usually require to conduct an informal and quick “borrower’s interview” by telephone prior to funding time.
- UNDERLYING MORTGAGES OR TRUST DEEDS
If the note seller has any outstanding mortgage or trust deed liens on the related real estate property, the closing agent would acquire the underlying loan pay off amount from the lien holder (usually it’s a bank). This amount MUST be deducted from the seller’s proceeds at funding time and would then be used to pay off that lien holder.
- FUNDING TIME

The closing agent prepares all the necessary closing documents relating to the particular deal.The note purchaser simply takes assignment of the paperwork. Once everything is in order, the note purchaser funds the deal either by wire transfer or certified check.
FYI…funding time range is two weeks to four weeks. The better prepared the note seller is, the quicker the closing can be.

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Different Demographic, Better Results

Seller financing can be an extremely useful option to sell a house in a slow real estate market. Unconventional private lending is a great way to increase the overall sales closing ratio. When the property owner is willing to "carry back" a note, it is often possible to obtain a higher selling price and reduce the time needed to find a buyer. Plus, creating a note secured by real estate can give the seller a steady, interest-generating income stream for their long-term future.

The Challenge: A Different Demographic
Home owners who are ready to offer a private loan in order to sell their houses are still faced with a stumbling block: how to find buyers in need of seller financing. Most property owners don't have any experience in finding individuals interested in buying a "high ticket" item like a home directly from the owner.
When property sellers work within the established real estate agent process to find buyers and close a deal by "traditional" methods, it is generally safe to assume that the vast majority of these customers will qualify for bank financing. In order to pursue private seller financing to sell a home, however, a property owner will need to attract home buyers who do not have adequate credit to buy real estate - a significantly different demographic.
The key to successfully orchestrating a seller-financed real estate deal is getting the right buyers through the door - just like a traditional property sale.
In order to get motivated buyers interested, the seller will need to use a targeted marketing technique designed specifically for the "unconventional buyer's market". The most effective advertising method to tap into this distinctly separate pool of buyers is surprising to some.
Unconventional Marketing
The seller's best strategy for finding their credit-challenged buyers would be to list the property in places that are frequented by individuals that do not have a real estate agent. The newspaper is one of the best places to start putting out the word.
The majority of home buyers looking for seller financing start by searching the "For Sale By Owner" ad listings in the local paper. Seller financing originated and took off via this print medium. Even in today's Internet-dominated business world, newspaper advertising continues to be an effective means to reach those looking for seller financed deals, so it makes sense to start the advertising here. A simple sale ad including the line "seller financing available" or "credit issues OK" should help to generate genuine interest from the right potential candidates.
Orchestrating the Deal
Once interested buyers start coming around, the seller can choose to work with the party that brings the most to the closing table in terms of the down payment. Of course, larger down payments are better than smaller amounts, but it is entirely up to the property seller to decide what is acceptable.
Once the details of the initial payment, payment term, interest rate, and any necessary clauses are established, the buyer and seller could create a new seller-financed note. If the seller needs money immediately to pay their down payment, the note terms can be specifically tailored to ensure that it's attractive to cash flow buyers. Once the newly-created note is sold, the property seller will have "cashed in" their future monthly payments for an immediate lump sum of cash.
The details of the note creation are easily handled with standardized boilerplate or the assistance of an attorney; some note sellers are able to manage the sale of their home without any paid legal counsel at all. In fact, once the seller understands the potential advantages of seller financing and takes the proper steps to market the property to the target buyers, the final steps in cementing the note deal are usually much easier than expected.
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CRAFTING A NOTE FOR BUYERS

In previous issues, the best method for selling a home in a tough market with seller financing was explained. The benefits to the seller from involving a qualified cash flow finder with a seller financed deal and having a note buyer "on board" before the note is created were also covered. While using seller finance techniques to sell a property are no more difficult than a traditional real estate closing, following a logical and proven plan is the best method for ensuring a successful real estate sale with seller financing.

The sellers' misconception

Many property sellers stay away from seller financing because they mistakenly believe that creating a note is not a viable solution for selling their home. After all, if they can't walk away with enough cash to provide the down payment on another property, they'll be powerless to replace the property they're selling.

As a consequence of this common misunderstanding, many sellers feel compelled to stick with conventional real estate methods, limiting their options and missing out on the benefits that seller financing could offer them.

In actuality, many notes created through seller financing are quickly sold and the seller ends up with the cash they need. Even better, if the note is created with buyers' purchasing criteria in mind, the seller could walk away from the closing table with cash in hand. This means that the net result is almost exactly the same as with a conventional real estate sale!

In the cases where the note holder does have a problem selling their monthly payments, the difficulty in liquidating the note is typically a result of one general problem: the note was not created with the buyer in mind. Instead, it was created with only the payer in mind. To ensure that a newly-created note will be attractive to potential buyers, it is important to recognize that their purchasing criteria are important as well.

Too good of a deal

For property sellers looking to sell their note immediately, it would be a grave mistake to create the note by prioritizing only the payer's demands. A buyer must have a compelling reason to agree to collect payments in order to buy a note, such as a substantial down payment, a respectable payer's credit score (to minimize risk), a competitive interest rate, or a fairly short term.

An example of a "bad note" from a buyer's point of view would be a seller financing situation where no down payment was collected, the payer's credit score was not checked, and the interest rate is fixed at 3%. Basically, this is TOO good of a deal! Even payers that qualify for loans from traditional lending institutions would jump at this offer with no out-of-pocket money required and a rate below prime.

Clearly, the note payer and note buyer are looking for very different things. Payers would love a "no money down" purchase with financing at a low interest rate, but most buyers wouldn't want anything to do with this sort of note simply because it is a bad deal for them.

In a situation without a reasonable down payment there is nothing holding the payer to their obligation. After all, a payer involved in a "no money down" purchase could walk away and lose almost nothing financially. Abandoning their obligation to pay may hurt their credit score, but it was their substandard credit that forced them into a seller-financing situation in the first place.

When there is no equity in the property (buyers will use the lower of the property value or the sales price to calculate equity), all offers to purchase the secured note will be discounted substantially in order to compensate for the buyer's risk of default. A heavily discounted buyout offer often means the seller will not be able to get the money they need.

If the seller of a private note needs a large amount of cash immediately, they must be able to sell the note as soon as it has been created. And to quickly find a buyer, the note must meet the general buying parameters of these people, which include a solid down payment, a decent interest rate, and typical terms.

Creating notes that can be sold

Every buyer has their own criteria that determine what they will or won't buy, but a down payment of at least 10% is a good minimum figure when creating a note. This upfront payment immediately creates equity in the property which acts as the buyer's safety net in a foreclosure. A competitive interest rate is important because it will make it easy for the buyer to purchase the note and yield the desired profit without much of a discount to the note holder. Finally, keep in mind that people typically avoid notes that do not follow a traditional term (amortized over 120 months, 180 months, etc). A two-year, interest-only balloon term is a perfect example of a note that most buyers would avoid.

The points described above are only a rudimentary starting point for note creation; there are certainly other things that buyers look for when considering a note. It is always a good idea for the seller to contact a qualified note finder in order to get the specific information they need.

The finder will be able to utilize their experience in working with buyers to give the seller general guidelines about what should meet most buyers' parameters. Of course, there are no absolute guarantees of a quick sale, but when the seller creates a note with the buyer.s needs in mind, it should not be a problem to locate an interested buyer who will give the seller the cash settlement they need.

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THE SELLER FINANCE SOLUTION

Seller financing can be a great way to get a house sold without slashing the price. By recognizing the millions of people who can't get traditional financing as potential buyers, resourceful property sellers (and their real estate agents) can minimize their time investment in getting a property sold. Even better, sellers who offer financing can usually get a higher asking price for their property, even in the slowest markets. Clearly this is a win-win situation.

Most home sellers never consider financing the buyer directly because they are not aware of the benefits or don't fully understand how creating a note works. Let's take a closer look at the advantages of owner finance.

Three Advantages

Seller financing is very powerful when the market is slow or when there are many similar houses on the market. Just listing the house as "OWC" - Owner Will Carry - will make the house stand out and attract more buyers. Because many individuals cannot get funding from a bank, offering financing will open the doors to these prospective customers as well, essentially significantly increasing the pool of potential buyers. So, advantage #1 is MORE BUYERS.

Seller financing also brings the property seller another critical advantage . the likelihood of selling for a higher price. Offering to carry back a note will not only greatly increase the number of potential buyers, but also bring a unique demographic of buyers who are willing to pay more for a given property than the general population. Advantage #2: MORE MONEY.

Additionally, when the property seller finances the buyer, they get to act as "the bank". That means they could structure the deal to collect interest. Over time, if the seller holds on to their note, this can add up to tens of thousands of dollars in additional income. Advantage #3: LONG TERM PROFIT.

The Seller's Strategy

Even when these benefits to "carryback" lending are made clear, many sellers are still hesitant to offer financing because they are entering unfamiliar territory. It's a natural, human response -- everyone is uncomfortable with new things.

For many property sellers, considering owner financing when they've only dealt with buyers via traditional funding is definitely "thinking outside the box". But once sellers understand the process, they are likely to choose seller financing instead of the unattractive option of cutting the listed price or waiting indefinitely for the "right buyer".

A seller-financed real estate sale is simply a real estate transaction where the seller acts as "the bank" or lending institution. The seller sets the sales price, determines and accepts a down payment, and then finances the remaining balance. The final step is the part that may scare some sellers, but in actuality, it can be very simple. Here is an example.

If the sales price is $100,000.00, and the buyer gives the seller $10,000.00 cash (the agent.s fee will be deducted from this down payment), the seller will finance the balance of $90,000.00. The buyer and seller would then agree to the terms, such as the interest rate and the total term, and use an attorney to create the mortgage document and close the deal. From that point on, the buyer sends the seller monthly payments for the house he/she has just purchased.

Special Circumstances (and a Solution)

The whole process can really be that simple. But, there are some substantial differences between a seller-financed deal and one that relies on traditional bank funding.

First of all, the seller in this example does not receive a large, one-time payment at the time of the sale. In fact, they will only receive the down payment, and in some situations, most of that will go towards paying the real estate agent's fee. On the other hand, the seller will be receiving monthly payments at a decent interest rate, but this income stream can't be used as a down payment for a new house.

Since many home sellers are also looking to buy another property, the seller will need to get enough at closing to pay their own down payment. Without this payment, the seller's hands will be tied when they look to purchase another house and need to have a substantial amount of funds available. There is a common solution to this issue, however.

The Solution

In order to get the money the seller needs from the loan they just created, the seller could sell the monthly note payments to a specialist buyer for a lump sum of cash. If the seller finds someone willing to buy the payments, now they can "have their cake and eat it too".

In summary.

Step one: Use the seller finance option to find unique customers willing to buy the house at a higher price than would have been possible otherwise and complete the real estate transaction quickly.

Step two: Decide on the terms of the deal and create the note.

Step three: If the property seller needs immediate cash to buy another house or for any other reason, their new incoming payment stream can be resold. The person who buys the future payments from the seller will provide the funding to act as a down payment on a new house, and every party involved in the deal comes out smiling.

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STRATEGIES FOR STRONG RESALE

When property sellers need to receive as much cash as possible immediately for the down payment on their next house, it is critical to anticipate this need in order to use seller financing to their advantage.

Getting top dollar for a note

In a typical seller-financed closing, the seller only receives cash from the down payment at the time of sale. This amount could be used to pay the real estate agent and put the remainder toward their own down payment on another house, but in many cases, the amount received is not enough. In addition, sellers who uses private financing to close the sale will not get the full amount financed when the note is sold.

Most sellers need as much money as possible when they "cash out" their newly created note, so their objective is to sell the note at the lowest discount possible. And to do this, they will need to create a secured cash flow that is attractive to note buyers.

Note pricing factors

The size of the discount - i.e., the difference between the purchase price and the remaining balance - depends largely on factors such as the specifics about the payer, the property/price, and the note terms. If the note is created without these important criteria in mind, the seller may have a difficult time finding a buyer to pay the amount that the homeowner needs.

The Payer

Clearly, there isn't much the seller can do about the "quality" of the payer because most people interested in accepting seller financing are higher-risk borrowers. Still, if there is more than one party interested in buying their property, sellers offering financing can still discriminate based on credit history or the amount of the down payment offered.

The Property/Price

Similarly, the seller can't change the basic facts about their property - where it's located, the type of structure, or its age or condition. But, the seller can control the price they set for their property.

Most sellers have a specific amount in mind that they need to get out of a sale. In traditional real estate sales, getting that money usually is determined by the property's price. But with seller financing, there is another step that is taken before the seller ends up with the total amount of money they were looking for - the note must be sold.

Since private notes are typically sold at a discount, the seller must set their price higher than the amount they were looking for to compensate for the drop that will come with the buyer's offer. By setting the price slightly higher than market value, the seller can create a note that sells with a minimal discount. Individuals that don't qualify for conventional funding are motivated to buy real estate, even if the price is somewhat higher than market value.

Increasing the sales price and the implied value of the property will not actually affect the buyer's discount, but the adjustment could lead to more money in the seller's pocket.

A higher sale price means a note with a larger unpaid balance, which could still bring the seller the desired net amount after discounting. Keep in mind that higher sale prices can also lead to larger down payments (as a set percentage of the price), resulting in more money in the seller's pocket.

The Note Terms

The most important thing for sellers to do is to structure their note so that the buyers won.t be forced to incorporate a deep discount into their offers. From the buyer.s point of view, higher interest rates and shorter terms are preferred. The actual offer made is based on the yield the buyer is looking for; in general, higher yields are associated with riskier notes. The discount is directly related to the difference between the interest rate on the note and the buyer.s desired yield.

While sellers can.t know exactly what a buyer.s required yield will be, the seller can certainly create a note that could minimize the expected discount. Generally, buyers will want to receive a yield anywhere between 12% and 20% on a note. While yield parameters will fluctuate with the market, a 10% yield is typically the lowest they will accept for new notes.

A note creation example

Because buyers usually want to earn a yield above 12%, creating a note with an interest rate under 10% would automatically mean a steep discount when the note is sold.

For example, creating a cash flow with a 3% interest rate doesn.t make any sense if the seller needs to get top dollar for their note, because there is already a seven-point difference between the interest rate and the buyer's desired yield. In addition, most buyers will create a gap in their favor by yielding at least one point more than the interest rate.

Sellers can also avoid unnecessary discounts by reducing the terms of their notes. Another part of a buyer's discount is based on the time-value of money principle, meaning that notes that take longer to be paid off will usually be discounted accordingly. An ideal term for a private secured note is between five to ten years (60 to 120 months).

Conversely, it isn't a good idea to shorten the term down to two years or less because a foreclosure situation will be created - the monthly payment will likely be too steep for the payer to keep up with for long.

By keeping the eventual note buyer's criteria in mind when creating a private note, property sellers can ensure that their real estate note deal works out the best for them. and that they net the highest amount possible when a cash settlement is reached.

STRATEGIES FOR STRONG RESALE

When property sellers need to receive as much cash as possible immediately for the down payment on their next house, it is critical to anticipate this need in order to use seller financing to their advantage.

Getting top dollar for a note

In a typical seller-financed closing, the seller only receives cash from the down payment at the time of sale. This amount could be used to pay the real estate agent and put the remainder toward their own down payment on another house, but in many cases, the amount received is not enough. In addition, sellers who uses private financing to close the sale will not get the full amount financed when the note is sold.

Most sellers need as much money as possible when they "cash out" their newly created note, so their objective is to sell the note at the lowest discount possible. And to do this, they will need to create a secured cash flow that is attractive to note buyers.

Note pricing factors

The size of the discount - i.e., the difference between the purchase price and the remaining balance - depends largely on factors such as the specifics about the payer, the property/price, and the note terms. If the note is created without these important criteria in mind, the seller may have a difficult time finding a buyer to pay the amount that the homeowner needs.

The Payer

Clearly, there isn't much the seller can do about the "quality" of the payer because most people interested in accepting seller financing are higher-risk borrowers. Still, if there is more than one party interested in buying their property, sellers offering financing can still discriminate based on credit history or the amount of the down payment offered.

The Property/Price

Similarly, the seller can't change the basic facts about their property - where it's located, the type of structure, or its age or condition. But, the seller can control the price they set for their property.

Most sellers have a specific amount in mind that they need to get out of a sale. In traditional real estate sales, getting that money usually is determined by the property's price. But with seller financing, there is another step that is taken before the seller ends up with the total amount of money they were looking for - the note must be sold.

Since private notes are typically sold at a discount, the seller must set their price higher than the amount they were looking for to compensate for the drop that will come with the buyer's offer. By setting the price slightly higher than market value, the seller can create a note that sells with a minimal discount. Individuals that don't qualify for conventional funding are motivated to buy real estate, even if the price is somewhat higher than market value.

Increasing the sales price and the implied value of the property will not actually affect the buyer's discount, but the adjustment could lead to more money in the seller's pocket.

A higher sale price means a note with a larger unpaid balance, which could still bring the seller the desired net amount after discounting. Keep in mind that higher sale prices can also lead to larger down payments (as a set percentage of the price), resulting in more money in the seller's pocket.

The Note Terms

The most important thing for sellers to do is to structure their note so that the buyers won.t be forced to incorporate a deep discount into their offers. From the buyer.s point of view, higher interest rates and shorter terms are preferred. The actual offer made is based on the yield the buyer is looking for; in general, higher yields are associated with riskier notes. The discount is directly related to the difference between the interest rate on the note and the buyer.s desired yield.

While sellers can.t know exactly what a buyer.s required yield will be, the seller can certainly create a note that could minimize the expected discount. Generally, buyers will want to receive a yield anywhere between 12% and 20% on a note. While yield parameters will fluctuate with the market, a 10% yield is typically the lowest they will accept for new notes.

A note creation example

Because buyers usually want to earn a yield above 12%, creating a note with an interest rate under 10% would automatically mean a steep discount when the note is sold.

For example, creating a cash flow with a 3% interest rate doesn.t make any sense if the seller needs to get top dollar for their note, because there is already a seven-point difference between the interest rate and the buyer's desired yield. In addition, most buyers will create a gap in their favor by yielding at least one point more than the interest rate.

Sellers can also avoid unnecessary discounts by reducing the terms of their notes. Another part of a buyer's discount is based on the time-value of money principle, meaning that notes that take longer to be paid off will usually be discounted accordingly. An ideal term for a private secured note is between five to ten years (60 to 120 months).

Conversely, it isn't a good idea to shorten the term down to two years or less because a foreclosure situation will be created - the monthly payment will likely be too steep for the payer to keep up with for long.

By keeping the eventual note buyer's criteria in mind when creating a private note, property sellers can ensure that their real estate note deal works out the best for them. and that they net the highest amount possible when a cash settlement is reached.

A trial brigade fumes above the load.

A trial brigade fumes above the load.