Note Professor Newsletter

How To Structure a Note To Sell at Closing - The Property Continued

By this I mean, it makes no difference if you are getting a 500% yield, if you have to foreclose, and your collateral is not worth the amount of your investment. Likewise, although credit worthiness is very important, we have seen with the collapse of the dot com industry, and companies like Enron, there were many credit worthy people who lost their jobs, and were unable to continue making their mortgage payments. If the lenders did not have high equity or LTV ratio (loan to value) in the property, they lost money.

Note Buyers are aware that buying owner financed notes, especially in today's market has a risk. Rather than LTV, note buyers go by ITV, or investment to value. ITV refers to the investment in the note relative to the market value of the property. As I say in all my newsletters, I am going to talk about "concepts", and not specifics. The market may change tomorrow, but the "concepts" will remain the same, whether you are reading this now or in 10 years.

Note Buyers will want a minimum of approximately 80% ITV for "owner occupied" properties and 75% for "non owner occupied" properties. For example, if a house is valued at $100K, the Note Buyer would want to pay around $80K for O/O and $75K for NO/O.

If you remember nothing else, remember this: Note Buyers must have a full appraisal by an appraiser of our choice before we fund. This is usually the only cost that the seller must pay for up front.

Some guru's will have you believe you can raise the price of the property to cover the note discount. It is not going to happen. Lenders are taking financial mud baths in foreclosures, where a "friendly" appraiser would inflate the property, resulting in the lenders having to sell the properties at substantially less than the inflated appraised value. This has become such a problem, that Fannie Mae is requiring the lenders be responsible for the appraisals. OUCH!!!! The same inflated appraisal scams have happened in the note buying industry also. We have learned from others mistakes.

When selling your property using "owner financing", be sure to sell at top value, but do not inflate the price. This will only cause problems when everybody is ready to close, only to find the property is not worth what is being asked.

Make sure all your rehab work is done in a good workmanship manner. Make sure you are using "sold" comps, not what is active on the market for the last 180 days. If the house is worth what you represent it to be, there should be no problem in closing fast and easily. A win/win/win situation for all involved. The buyer gets a property with no points, loan origination fees, or PMI. The seller is able to move his property and get cash at closing. The note buyer gets a good note.

To summarize, make sure the people are credit worthy. The credit score does not have to be perfect, but a low 540 credit score is going to greatly devalue the note. Secondly, make sure the paper, or note, is realistic. Do not make the interest so high, the payors cannot pay, nor make an unrealistic balloon, that will be almost impossible to payoff. Most importantly, make sure the property is worth what you represent it to be. If all these are in place, you should have an easy time selling your note at closing, or anytime thereafter, at the best price.

But Professor, what happens if the appraisal comes back that is less than the contract price, or the buyers' credit score is in the tank. Can you still buy the note?

The answer is YES!!. There are several methods of buying notes. The Note Professor will discuss partials and split payments next month. These methods can be very profitable for both the seller and buyer. But there are also traps to avoid. Be sure to go to "Partial to Partials" and "For the Greedy Only" to fully understand the specifics and real life applications to partials and split payments.

Above all, remember..the more the down payment, the more money in your pocket.

As usual, be sure to get the advice of an attorney or CPA before dealing in notes or real estate.

Please contact The Professor with your questions or comments. It is from your questions that I get topics for my newsletters.