The Not So Good Note
Advice from a Note Buyer: What NOT TO DO
I have had a couple of inquiries about what makes
note bad, or what makes a note
worthless. This is
such an important question, I thought I would devote a
series to the topic. One of the major mistakes
I see is
the language used when drafting a note. Be
run your note by an attorney.
If you have a note to sell Click here for more information
Case in point. I received a request for a note with a
face value of $100k, with the security being 10
land, and a MH in Arizona. The buyer had good
as well as a substantial amount down, and everything
looked good. However, when I got the note, there was
a clause, "Partial Release of land may be given by the
beneficiaries under the following: $25,000 to include
only one parcel".
How do you interpret this? What is a "parcel"?
interpreted that it meant if the payor gives the note
holder $25,000, an unspecified amount of land would
be released, and I, in worse case scenario, could be
left with a $100k note secured by a MH. The seller
argued that he MAY release the land but did not have
to, and the note had been drawn up by the title
company. It remains that this note language is
disputable, and I do not like "disputable clauses"
the notes I buy. His response was "it was
just 'understood' that it meant $25,000 an acre as
being one parcel." What is "understood" does not over
ride what was ambiguously written.
I had to inform the seller that unless the note was
modified, I could not purchase his note.
I have not heard back from him even after leaving a
couple of messages and emails.
Do you see how not making something clear, made
this note worthless the way it was worded? He had
good payors, good equity, and good terms, but all of
this was wiped out by bad language in the
sell your note contact me. It might save you
headaches in the future. Be sure to watch
out for little
time bombs in the wordage of notes and deeds of
trust. In the next issue, I will discuss another way
many note holders decrease the value of their note.
Piece of land under one ownership, or a lot within a
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Last month we put to rest the myth of taking
back a 1st
lien note on someone with a low credit score (below
550), with little to nothing down, and receiving
maximum value on the note. In other words, do not
expect a note buyer to make the same mistakes that
sub prime lenders were making.
With that being said, there are a couple of techniques
where creating a note, including a second
be beneficial. I call this particular one" The
Rehabber's Bailout." Here is the scenario.
You, the rehabber, have expertly rehabbed a house,
but because the sub prime market has dried up, you
are sitting on the house, which is costing you $50
daily in holding costs.
You have a hard money loan, including rehab
for $75,000. You are selling the house at
value of $100,000. You find a buyer whose credit
dented, but not broken.
Technique #1: Often what is called an 80/10/10
get you out of hot water. What this means is your buyer
will get a bank loan for 80% ($80,000), you carry a
10% 2nd lien ($10,000) making the terms easy on the
buyers, and the buyers put 10% ($10,000) down. Here
you can pay off your hard money loan, get some cash
at closing and take back a "throw away"
Technique #2: I have heard some mortgage brokers
say they can still do 80/20 loans, where they will lend
80% and you carry back a 20% second lien note, but I
have not seen one done lately. Moreover, your profit is
completely tied up in the 2nd lien. Not the best of
worlds, however it is better than having your house
on the market for who knows how long, and
pay $50 a day in interest and holding costs, not to
mention your odds of the house being vandalized
increases with every day it is vacant. What can you do
with your second lien? This is another topic. Look in
the Newsletter archives, where I have
Technique #3: Can you do an 80/10/10 where
back both the first and a second lien, then sell the
first? Yes, if the numbers make sense to both the
seller and the note buyer. But remember, as a
rehabber, your goal in this situation is get rid of your
problem and move on. Those who have taken my
course have heard me say that all problems look
better when they are in your "rear view mirror." All
successful investors know there are times when you
want to minimize your losses, not maximize your
Technique #4: When time is important in closing,
taking back a first lien, or even an 80/10/10, and
selling the first at closing is often beneficial. For
example, have you ever had a property stay in the title
company for 60 days or longer because the funder
just keeps delaying the closing? Not fun, is it? One
rehabber who does business with me regularly, will
often take a small discount on the note, even though
he has a buyer with a 650 + credit, and 10% down.
Why would he take a discount when the buyer can get
conventional funding? Because he knows, he can
close within a couple of days of getting an
and title work done. He
will gladly take a small discount on the first lien
order to close in a short amount of time and receive
his cash, and maybe have a small 2nd remaining.
There are a couple of concepts where I discuss
techniques of what you can do with these seconds in
As I advise all my investors, use note selling as your
Plan B, especially when time and profits are
If you would like to discuss how to
structure a note to
sell, contact me or for a note
Tom Henderson: Speaking Schedule
July 11 2007 Wednesday
Tom will be speaking at the Texas Real Estate
Investment Circle on Wednesday, July 11 at the
Crowne Plaza Inn located at LBJ and Coit in Dallas
Texas. It is a free meeting and I will be discussing
how to buy and sell notes, as well as how to use
notes in real estate. Go to
Real Estate Investment Circle for details. Ought
to be fun and informal. See you there.
July 21 & 22 2007 Saturday and Sunday
Tom will also be giving his seminar on THE ABC's of
APARMENT BUYING in conjunction with DFWREIN on
Saturday, July 21st and Sunday, July 22nd.
Remember, I limit my class size to 20. Do not be left
out. For details go to
s of Apartment Buying