nfs-blog

GUIDELINES FOR A SUCCESSFUL NOTE PURCHASE

Mon, 07 Nov 2011 18:10:16 +0100

- 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.

What is a Note Appraisal

Tue, 26 Apr 2011 18:46:19 +0100

Note Appraisals

A Note Appraisal is an estimation of the current worth of a Mortgage, Land Contract, Trust Deed, or other cash flow performed by an experienced buyer, seller or broker of notes. A Note Appraisal uses the "present value" approach to valuing a cash flow. "Present value" is defined as the sum of all future benefits accruing to the holder when such benefits are discounted to the present by an appropriate discount rate or yield.

Note values are affected by several factors:

Security of the investment – what is the property’s condition? Is it appreciating or depreciating? How likely is it that the note will continue to be current and timely?
Terms of the note – length remaining, interest rate, any balloons, or payoff clauses – all affect the present value of the note.
Loan to Value ratio – what is the loan balance to value of property ratio? What was the down payment?

Current rate of money in the market – the value of money increases and decreases with the fluctuation of interest rates. The present value of a note today correlates to the value of money in the market today.
When you need a cash flow appraisal, call or email our office at the contact information listed below. My appraisals may be used for tax and estate purposes as well as to give current values.
Information Needed For a Note Appraisal:
1.Copy of security document.
2.Title and Escrow Company w/policy number (If available)
3.Property insurance information (If available)
Post Your Note here For a Free No Obligation Quote!!

The Problem With Traditional Home Sales

Mon, 04 Apr 2011 13:21:55 +0100

The Problem

When it comes to selling real estate, one of the most difficult and

frustrating situations for sellers is when market conditions make it

nearly impossible to sell at the desired price point. A high initial

listing price might be because the seller simply has an unrealistic

idea of how their house stacks up against the competition in the area,

or because the owner needs to sell for a set minimum price in order to

pay off their loan against the property.

With traditional property sales methods, the only way to prevent the

property from sitting on the market indefinitely is to keep dropping

the price. Unfortunately, this technique doesn't always work -

especially if the seller is unwilling to "discount" their house by

much.

In areas flooded with homes for sale, reducing the asking price

slightly will not bring the desired result. In fact, it's common that

the property will continue to sit on the market without offers,

alongside the multitude of other unsold properties with similarly

reduced prices.

Anyone experienced in sales understands that making your product stand

out from the crowd is a critical technique for success. But if there's

too much competition offering the same attributes, the only logical

way to attract the attention of serious buyers is to drop the price so

that your property is a much better value than the competition.

In cases where the seller is too inflexible with their asking price,

this is not a practical solution. Without an alternative strategy, the

seller is forced to keep the house on the market for an extended

period of time with an unrealistic asking price, hoping for the right

buyer to come along. And as you know, that "Mr./Mrs. Right" might

NEVER materialize!

The Seller Finance Solution

Property sellers who want to both obtain their desired price and close

on the deal quickly should consider seller financing. Seller financing

is a powerful tool to remedy real estate situations that otherwise

look grim.

Many home sellers (and their real estate agents) do not see seller

financing as a viable option. In actuality, seller financing can bring

new attention to the listing and invite a different group of potential

buyers - thereby opening up a unique, untapped market.

A large percentage of people throughout the country cannot get

approved for bank funding to buy real estate because of their credit

situation. Many of these people are still in the market to buy a

house, however. The "credit-challenged" are often frustrated with the

limitations of apartment living or being renters; as a result, many

are willing to pay a higher price just for a chance to get seller

financing and improve their quality of life.

A savvy property seller who recognizes this opportunity can salvage an

unfavorable situation and turn it into a bonafide seller's market. By

using this type of creative financing, the seller could actually end

up getting more than the original asking price - without resorting to

the questionable strategy of patiently waiting for the "right buyer".

Seller finance can enable homeowners to receive a favorable selling

price despite bad market conditions. In addition, the real estate

agent (if any) gets to close a deal and move on to other sales, while

a home buyer with poor credit is able to become a home owner. It's one

of those rare situations where everyone at the negotiating table gets

what they want.

Paper Tigers

Many home sellers never consider seller financing because they don't

understand the benefits. There are also common misconceptions that

it's much too complicated to attempt to orchestrate a seller financed

deal, or that there are no buyers willing to sign a private note.

Once a property seller takes the time to learn about the basic

process, the advantages of offering financing instead of a lower price

to sell their property become very clear. Plus, a little education

about seller finance will make it apparent that drafting a secured

private note is actually a very straightforward process.

The bottom line is seller financing can enable a home owner to "have

their cake and eat it too" - i.e., sell at the desired price, close

the deal quickly, and even receive additional income from interest

payments as well.

POST YOUR NOTE HERE For A Free No Obligation Quote Today

Lets Structure a Real Estate Note!!

Fri, 01 Apr 2011 18:34:52 +0100

Structuring a Note

Examples:

v Note 1. $20,000.00 at 12% interest no monthly payments, principal and interest all due in 5 years.

v Note 2. $20,000.00 at 8% interest payable at $350.66 per month fully amortized over 7 years

v Note 3. $20,000.00 at 10% interest payable at $166.67 per month for 5 years and the unpaid principle and interest due at the end.

Looking at the notes above answer the following questions:

Which note would you want to owe on if you were buying a property?

Which note would you want to collect on if you were selling a property?

Which note would you find more valuable if you were purchasing the note for and investment?

Do you have your answers?

ü When buying a property, you would prefer a note where you pay the very least amount or lowest present value!

ü When you sell a property, you would want a note with the highest present value!

Let’s look at the notes from above present value by using a 15% yield as a yardstick!

№ 1. Present Value: $17,242.91

№ 2. Present Value: $18,172.21

№ 3. Present Value: $16,497.14

You now see that a $20,000.00 note is not worth $20,000.00 and not all $20,000.00 notes are of equal value.

The moral of the store is you can sell a property, and carry back $20K in the form of note 2 from above, at 8% interest and have it worth more the note 1 or 3 at 10 or 12% interest. Now by understanding this you can reduce the property price and still make more money by structuring the note in your favor.

Check out these Other Links of Interest!!

Should I Accept This Offer?

Before You List Your Home For Sale

Pricing a Home to Sell

Why Hire a Real Estate Agent or REALTOR?

Deciding to Sell

Sellers: Don't Let Emotions Rule

Real Estate Prices Fall, Will Sellers Take Note?

Priced to Sell

POST YOUR NOTE HERE For A Free No Obligation Quote Today

What is a Simultaneous Closing, Back to Back Closing, or Double Closing

Fri, 25 Mar 2011 21:06:33 +0100

Each state has different laws or requirements when performing or structuring a simultaneous, double or back to back closing the laws are always changing. What they could do 5 years ago, they may not be able to now. Some states don't allow simultaneous closings, others do. Some title companies allow this, other's don't. However, it's becoming more and more difficult to do a simultaneous or double closing because of the stricter laws with the lenders. Anymore, they want skin in the game and require (wet funds) to stay in the game. But, we as investors always seem to find a way to make it work. It's still in your best interest to search diligently for a title company that will handle this unique or creative way of closing on a property. They will be able to assist you in making sure it is performed properly according to your state's laws and regulations.

Double closings and simultaneous closings have been around for awhile so don't give up after you talk to 15 title companies and each tell you it can't be done. You may just have to explain the process to them so they understand. Talk to investors and real estate agents who invest, get referrals until you find a title company that is creative and knows what you're talking about. The right title company is worth their weight in Gold. Once you've exhausted all your options, just remember, there are more options for buying foreclosures.

There are several ways in which you can perform a simultaneous closing double closing, or back to back closing. I am going to discuss one way to do it with foreclosures that are in default. In a nutshell, this is how it works. First you take control of the homeowners property via a Land Trust. This prevents any other judgments going on title before you get it closed. It also prevents chain of title issues and due on sales clauses. Either you or (preferably) your company becomes the Trustee of that Land Trust. Beneficial interest is signed over from the homeowners to another company with the proper paperwork. You can't have the same company being trustee and beneficiary or you have a conflict of interest and may cause title insurance issues.

Once you have negotiated the debt with the lender, your company, purchases the home from the homeowners for the agreed negotiated price. Your title company will prepare a HUD for this transaction. Your end buyer will then provide funds in escrow at title company. When your end buyer runs a title report, it still shows the homeowners last name in the form of a trust on title. So there shouldn't be any title issues.

Then your company sells the property to the end buyer. This is done simultaneously through your title company. Your title company wires the negotiated debt amount to the foreclosing lender. This must be the same as the first HUD 1. You get to keep the difference from the negotiated payoff amount with the bank and your end buyers purchase price minus any closing costs. It is best to consult with a legal professional or title company to find out if your state allows simultaneous or double closings. Each state will vary on procedures and your title company will assist you in the process.

We've found the best option is to do a back-to-back or same day closing using transactional funding because it's clean, safe, legal and everyone qualifies. Transactional Funding has made it possible again for anyone now to flip real estate.

Just a Reminder: Every state is different and laws continue to change. This information is presented with the understanding that neither the publisher, author and or staff are engaged in rendering accounting, legal, and financial or other professional services. If legal advice or other expert assistance is needed, the services of a competent professional person should be secured. Considerable efforts are made to provide the reader with timely and accurate information; however there are no guarantees.

For More information Click Here or to get a free Note Quote Click Here

Time Value Of Money

Tue, 22 Mar 2011 19:22:44 +0100

THE TIME VALUE OF MONEY:

How We Determine The Cash Value Of Your Real Estate Contract

When determining a cash value for your trust deed or mortgage we must consider the following:

What type of property is it?
Where is it located?
What is the interest rate of the note?
What is the dollar amount involved?
How long will it take to collect all the payments?

The most important factor is usually the

length of time it will take to collect all the payments.

By utilizing our services to buy your contract you will receive all your cash immediately. We, on the other hand, will wait for payments during the remaining term of the original contract. The longer we wait the less value (buying power) the money has for us due to inflation, etc. This is what is referred to as the "Time Value of Money". Immediate cash is more valuable than money in the future. It will take a lot more money in the future to buy exactly the same things you buy at today’s prices!!

Time Value of Money (TVM) Definition 04:37

PARTIAL VERSUS FULL SALE OF A PAYMENT STREAM

Sometimes In an effort to be flexible we can give you two options, depending on your immediate needs:

Option 1 Full Sale: A Full sale relieves you of any further interest in the contract in the case of default or foreclosure. By Selling the total contract results in the most cash to you.

Option 2 Partial Sale: In a Partial Sale you sell a part of the payment stream for a given period of time. You still retain the interest, responsibility and future payments due to you. To understand Partial Purchases better Click Here

POST YOUR NOTE HERE For A Free No Obligation Quote Today

Why Sell Your Residential or Commercial Note Now?

Tue, 08 Mar 2011 13:13:30 +0100

Market conditions.

Interest rates fluctuate creating bull and bear markets in the Stock market. Real estate notes are long-term instruments and are also affected by interest rates. Here is an example:

You own an 8%, 30 year real estate note. Interest rates are down and are hovering around 4.5%. Your note is appealing to investors, because it is offering a return bigger than the return at prime rate.

If interest rates shoot up, there is a point where other instruments will be more appealing to investors than real estate notes. In this case, the value of the real estate note could go down, and your 8% note would not be as appealing as it was before.

The opposite could also be true. An 8% note would suddenly be more appealing if the interest rates go down to 2%. However, this is a general rule, as there are other factors which would also need to be considered. Market conditions matter.

Credit record of the Payer.

The credit history of the Payer could affect considerably the value of a real estate note. For example, if the Payer had B credit three years ago, but has been unemployed over the last year and has some collection accounts on credit cards and a couple of tax liens, the credit rating may now show D credit.

Even though the Payer may be making timely mortgage payments, risk has now become a factor for any investor interested in purchasing the note. The note would go down in value and/or appeal.

The opposite may also be true. If the Payer's credit improves, your note may become more appealing, relatively speaking. Watch the credit record of the payer.

Equity on the Property.

This applies to both Residential and Commercial properties. Most real estate properties appreciate over time, that is they go up in value every year. But occasionally the real estate market gets into a slump and properties go down in value 10, 20, 30% or even more.

If last year you issued a 90 percent LTV mortgage on a property that just lost 30% of its value, your note has gone down in value, too. In fact, in this example, the note balance is greater than the equity on the property.

Note buyers prefer generally a large equity on the property to get cushioned against sudden slumps. Most buyers consider a 10-15% equity or less a risk, and either stay away from these notes or price them accordingly. Equity is very important.

Seasoning

As a note is being paid off, the payer builds up his credit and becomes credit worthy in the eyes of the note buyer. A note that is at least 1 year old, is considered a seasoned note by most buyers.

Note Holder's relationship to the Payer.

Over the years, we've seen that the closer the relationship between the note holder and the payer, in the event of a fractured relationship, the higher the risk for a situation that could lower the value of a note.

Sometimes employers hold notes for employees. If the employee is dismissed, the value of the note may go down.

Sometimes spouses hold notes for their significant others, where the value of the note may be affected if there are marital problems.

There are even cases of certain types of extortion that payers exercise over the note holders. Something along these lines: 'You want to sell your note? Well, if you want me to paint the building and repair the roof to validate the appraisal, you are going to have to shave off 5% of the outstanding balance. Oh, and we need you to refinance the mortgage, too. Just a 3% reduction in interest rates. Thank You." By the way, these people were friends.

We are not advocating that you should never hold a mortgage for a loved one or for an acquaintance. We would simply like you to be aware of all these factors. Relationship to the payer is important.

Risk.

Most note holders created their notes for individuals or businesses that would not have qualified otherwise for a traditional loan. For most lenders, these payers are considered 'risky'. Any investor when buying a seller-financed real estate note assumes that extra risk.

Liability.

This applies mostly to commercial properties. If the building you're holding a note on, has, for example, a Dye Maker and a Night Club as tenants and somebody just found some old rusted leaky tanks on a storage facility on the rooftop, you are facing a large liability risk and your commercial note could lose value.

But you don't own the building, right ? It doesn't matter. The perception is that the dye maker could generate some environmental liability, the Night Club could become part of a drug or money laundering ring.

As a result, the building owner (payer) could become embroiled in a multi-year investigation/lawsuit/litigation, that could render him insolvent. The payer may still pay every month on time, but the note may go down in value, regardless.

Corey Bell of Note Financial Services will be happy to discuss the details of your mortgage note with you !

We take pride in providing our clients with quick, professional, and courteous service, working with them to meet their cash flow needs.You will rest assured that you have received the highest payout on your mortgage or real estate note. Call us today! We will provide you a quick no obligation quote usually within 24 hours. If you contact us at the end of the day or at the end of the week, we will process the information the following business day. You can also fill out our Note Quote request form.

Real Estate Note Appraisals

Thu, 03 Mar 2011 19:25:15 +0100

A Note Appraisals is a useful for estate planning, financial planning, and division of assets (in the case of divorce proceedings or estate settlement).

A Note Appraisal is an estimation of the current worth of a Mortgage, Land Contract, Trust Deed, or other cash flow performed by an experienced buyer, seller or broker of notes.

A Note Appraisal uses the "present value" approach to valuing a cash flow."Present value" is defined as the sum of all future benefits accruing to the holder when such benefits are discounted to the present by an appropriate discount rate or yield.

What this could mean to the Note Broker: This means knowing before hand if the note is a worthwhile investment or not to your buyer(s) or not. By simply taking the time to have the note appraised will give you the tools and I believe the opportunity to inform your client(s) if it is indeed a sell-able note, and if so a price range her/she/they could expect. Not to mention if you see below, you will have all the documents you will need to present to your buyer(s) if indeed the note is sell-able.

What this means to the Note Holder: With knowledge of what your note is worth before hand as well as if it is sell-able or not, gives you the option to make a more informed decision, whether as to sell the note now, or latter, and what price range to include a minimum and a maximum amount you could expect.

Some note appraisers offer this service for a fee between $100 to $500 depending on the note. As well as some note appraisers such as Note Financial Services will, not only appraise the note but if given the opportunity to buy the note will wave the fee.

A note appraisal could take anywhere between 2 to 5 days depending on the note, as well as the information provided.

Note values are affected by several factors:

Security of the investment – what is the property’s condition? Is it appreciating or depreciating? How likely is it that the note will continue to be current and timely?
Terms of the note – length remaining, interest rate, any balloons, or payoff clauses – all affect the present value of the note.
Loan to Value ratio – what is the loan balance to value of property ratio? What was the down payment?

Current rate of money in the market – the value of money increases and decreases with the fluctuation of interest rates. The present value of a note today correlates to the value of money in the market today.

Information Needed For a Note Appraisal:

1.Copy of security document.

2.Title and Escrow Company w/policy number (If available)

3.Property insurance information (If available)

Just click the Here to have you note appraised.

Partial Partial Note Purchases

Thu, 03 Mar 2011 19:17:23 +0100

You are probably aware the sub prime mortgage market has not being doing well. This subject is discussed daily on the major news stations. Also articles are written in well-known newspapers. Unfortunately, in regard to note purchases underwriting criteria has gotten tougher and pricing has been downsized.

A lot of note deals we come across have negative factors such as down payments of less than 20%, continuing sharp decreases in property values, high loans to values (above 80%) , low credit scores and or Mobile Homes with 30 year terms. Also, very rarely is there private mortgage insurance securing the loans. Note buyers (just like banks) have investment to value limits. (Investment to value simply means how much money is being funded in relation to the current property value.) Please keep in mind banks require prime credit buyers who put down less than 20% (loan to value above 80%) to purchase the private mortgage insurance – thus securing the loan - in order to get approval for a mortgage or deed of trust.

In situations where we see the above-mentioned negative factors, the discounting can be steep on full note buyouts. Partial purchases you might come to think are a smart alternative. An example of a partial is where there’s a note that has terms of 9% at 360 months. An offering range would be 45% to 50% of the remaining note balance for 10 to 15 years of the remaining time.

In seller financing, private note holders generally don’t report their buyers’ mortgage payments to the 3 major credit bureaus. After note deals are completed, this should start to occur. Thus subprime credit buyers have an opportunity to establish or rebuild good credit.

Probability factors on partial deals…After sub prime credit buyers’ credit ratings improve, they would be in a position to refinance the high interest rate they’re paying or when the need arises, sell the property (and buy another without seller financing). IN EITHER CASE, THE NOTE WOULD BE PAID OFF EARLY. Please consider that most Americans do not live in the same home for 30 years. Statistics show most long term notes do get paid off early. The average is 5 to 7 years. (Please keep in mind too that seller financed notes generally do not have early payment penalties.) THUS, MOST LIKELY YOU WON’T BE FORCED TO RECLAIM THE NOTE PAYMENTS IN THE FUTURE.

In the probability of an early note payoff, (against the total remaining note balance) the relating note purchaser would be paid the outstanding principal amount due them and thus you’d receive the remainder. For example, there is a note that has a face value of $100,000.00, terms of 9% at 360 months with monthly payments of $804.62. Six years after purchasing the property, the borrower either refinances the note or sells the property. The remaining note balance after 72 payments would be $94,810.71. If you were to be funded $45,000.00 now, via partial purchase, the note purchaser would consequently receive their remaining balance due. You’d then be entitled to the remainder.

Yield wise on partial deals instead of full purchases, (yield is the average annual rate of return) note holders typically can get higher yields as opposed to the interest rates they’re receiving on their notes.

If you are interested in a Partial Purchase offer please visit Note Financial Services website

STRATEGIES FOR STRONG RESALE

Thu, 03 Mar 2011 19:08:59 +0100

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.

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