Real Estate Note

Real Estate Transaction On Steroids

2006-06-26T06:35:00.000-05:00

Hava Knote wanted to purchase a prime buildable lot to build the “dream-house” he had promised his wife. Realtor Deal Whiz had listed such a lot for $50,000, and the lot was perfect for Knote's plans. But Knote was having trouble getting his new home/land package financed, due to a shortage of cash. However, his financial statement included some rental properties, and a $ 132,000 commercial real estate note.

Spotting the note, Whiz suggested that Knote should sell that paper to raise cash. Knote said he wouldn't take less than $105,000 for the note, but nobody was willing to pay him that much. But Whiz was persistent. He inquired about the particulars, and learned it was 2nd position paper that Knote had carried back from the sale of an apartment complex six months earlier.

Knote had sold the apartments for $400,000, receiving $20,000 cash down. There was a $248,000 senior loan in front of Knote's note, amortizing over 20 years at 8%, with 18 years left. Knote carried the balance with a 2nd position note for $132,000, payable monthly, interest only at 8%, with 18 years left. Knote carried the balance with a 2nd position note for $132,000, payable monthly, interest only at 8%. The balance was due in 34 months. The first was now paid down to $244,000, and the 2nd was due to pay off in 28 months. Whiz also learned that the apartments had a marginal debt coverage ratio of 1.1 and the rent history wasn't yet stabilized.

Whiz contacted a cash flow consultant, FastCashFunding.com, to learn what might be done with Knote's note. Looking over the particulars, and the shaky property history, FastCashFunding.com told Whiz that an appraisal would be needed to make any decisions. As luck would have it, Whiz discovered that Knote had obtained a full blown appraisal two years earlier. He sent it to FastCashFunding.com. Though supporting the sales price; the appraisal also indicated problems that were still ongoing, as demonstrated by the continuing unstable rental history. This made the 2nd note a high risk, and certainly no chance of selling for $105,000. But Hava Knote only needed $50,000 to purchase the prime building lot, and then he could put up that free and clear lot as down payment he needed to complete his construction plans.

FastCashFunding.com offered Knote $52,000, to purchase the 28 remaining monthly, plus buy $79,000 out of the $132,000 balloon payment. Knote would keep the remaining $53,000 share of the balloon. Knote got the cash he needed to buy the lot and get construction financing- and a total of $105,000 for his note; FastCashFunding.com received a nice investment with much less risk exposure; and Deal Whiz sold his lot and made a nice little commission for himself! The partial purchase agreement turned paper into gold- and allowed everyone to solve their problems!

The Right Stuff

2006-06-16T07:22:00.000-05:00

All real estate notes are evaluated in relation to primary qualifications, used in evaluating the risk/yield acceptance levels of the individual real estate note:
Property Value
Loan to Value (Note Balance vs. Property Value)
Payer's Hard Equity (Down Payment)
Payer's Credit Rating
Payer's Income History
Real Estate Note Seasoning
Account History of the Real Estate Note

2nd Position Real Estate Notes bring several more factors to the table:
Ratio between the first mortgage and the 2nd mortgage?
Rate and Terms of the Senior debt?
Are there any Balloon Payments on the first that are due before the 2nd is payed off?
Are there any artificial terms on the senior debt that camouflage potential risk to the 2nd?

What about second position real estate notes secured by commercial real estate?
Operating history of the property
Debt coverage ratio of the property (does the property “carry itself” or carry enough income to more than cover the debt service regardless of what happens with the payer)?
The preferred ratio of income to debt ratio to net operating income is 1.3 to 1.5 for senior loans, depending on the property type. This ratio should also provide for coverage on the debt service for the second, with no negative cash flow.

Commercial 2nds are generally not too attractive to note buyers because of other circumstances in the transaction, and the Payer's down payment will usually be a very critical in a potential note buyer's decision. More real estate note information is available at Fastcashfunding.com.

2nds- More Than One Helping!

2006-06-07T09:30:00.000-05:00

In the private note industry, we routinely see real estate notes that are referred to as seconds. The term “2nds” refers to real estate notes that are in lien position, or in other words “junior” to an existing senior loan where both loans are secured by the same collateral. The senior lien note (“first”) has a priority claim over the second loan against the collateral in the event of Payor default. Behind one or more senior loans in the chain of title means that 2nd position real estate notes have less total equity to insure that there will be sufficient collateral available to satisfy the payment of the real estate note, and preserve the invested capital, in the event of default. This also means that 2nd position note holders have to absorb liability for existing senior real estate notes, in order to protect their own interests in the event of default.

Due to this potential liability, the holder of a second note must have more liquid reserve capital available to cover his/her position in the event of default. The need to maintain sufficient liquid reserves to protect a second position note, poses an “opportunity cost” to the investor in terms of not having that money available for higher yielding investments. All things being equal, a senior position real estate note is more desirable than a second position real estate note. Because of the risk factors intrinsic to “2nds”, some types of second position real estate notes are not viable in the private cash flow markets.

For example, senior position notes secured by freestanding manufactured homes known as mobile homes, and business notes, already have somewhat limited markets, due to the risks and default rates associated with these sectors. “2nds” secured by such assets are virtually impossible to sell in most instances except when there is a large down payment, good credit, and decent collateral. Still the private cash flow industry has long been a source for second position real estate notes. However, it is important to understand that “real estate note” is not the whole picture in describing a note investment.

There are real estate notes that are secured by single-family homes and condos. There are commercial real estate notes that are secured by income producing property which includes multi-family housing of more than four units, retail properties, gas stations, office buildings, hotel/motel buildings, restaurant properties, industrial properties, and agricultural land operations as well. Also, there are land notes, which include prime building lots, semi-improved lots or parcels less than 15 acres such as vacation properties, commercial lots or development parcels, raw land that are unimproved or parcels, acreage over 15 acres, agricultural land.

Each of these has their own set of risk factors. It is helpful to understand that “2nds” on many condos, commercial properties, and land notes, often are not viable for the same reasons that business notes and mobile home notes are not attractive as they carry to much risk, as there is not enough equity. Like all investing, it is a question of two basic facts that drive investors to purchase any note, which is yield and the degree of risk to obtain that yield. Another important factor in the private cash flow industry is driven by investment value rather than fair market value. Investment value defines the value of an investment to a particular investor, or class of investors as distinguished from fair market value, which represents an impersonal and over all detached marketplace.

Essentially, “investment value is based on an individual investor's investment requirements. It reflects the subjective relationship between a particular investor, and a given investment, which in turn makes the private cash flow industry such a thriving marketplace. It means investor flexibility that doesn't have a tightly defined structuring norm that gives the privately owned paper asset side of financial markets a greater degree of latitude and attitude that can be found in conventional lending markets. But it is also important to recognize that the flexibility of the private cash flow markets makes it very difficult to simply provide a generic answer to how much is my real estate or other note is worth? As no two notes are the same, and no two real estate note or other cash flow buyers are the same. All real estate notes or other cash flows have to be carefully scrutinized individually in order to provide a truly thorough answer to this question.

Though buyers for “2nds” inherently require higher discounts and yield spreads to justify the risk of purchasing this type of paper, the availability of this resource, and the ability to creatively structure real estate note purchases, serves as a lifesaver for your clients who have a pressing need for liquid cash now. Fell free to contact me if you need more information on how to solve your clients problems by selling any second position notes they are holding.

Manufactured or Modular?

2006-06-03T16:27:00.000-05:00

The origins of manufactured homes can be traced back to the 1930's. Originally, all manufactured homes were known as trailers, and they were 8 feet wide. By the 1950's, the width on most models had grown to 10 ft; by 1962 the width expanded to 12 ft, which at this point trailers became known as mobile homes. What's the difference between a mobile home, a manufactured home, and a modular home? For the most part, it all depends on how the home is built. Since 1976, all manufactured homes must comply with the National Manufactured Home Construction and Safety Standards, administered by HUD.

The federal legislation greatly improved the quality and the overall government intervention of manufactured home construction and design, including fire resistance, energy efficiency, and durability. If built to these HUD standards, which includes retaining the chassis, it's a manufactured home (still commonly referred to as a mobile home). If a home is built in the factory to meet state or local building codes, it is a modular housing or prefab housing, that technically built to higher standards. In reality, however, most of the major manufactured home builders produce both types of homes with relatively few differences with regard to superstructure and infrastructure.

The real differences materialize is in the quality of the interior finish work, plumbing fixtures, flooring, appliances, cabinetry, and other similar amenities. A high end manufactured home (mobile home), will often present a durable, spacious, comfortable, and richly appointed living area, whereas a low end modular home will be smaller and more reminiscent of a basic small tract site built home, with very limited features. If you are currently selling a mobile home or single family real estate note, please go to Fastcashfunding.com, as we are buyers of both including business notes.

Business Notes Bust or Bonanza!

2006-05-31T13:58:00.000-05:00

The practice of “hiding” income is commonplace in the world of small business, but off the books income will not add to the sales price or worth of the business. In fact, most likely it will have an adverse affect and decrease the value of a business. As potential buyers for the business are going to be wary of a business seller who insists that an unverifiable income will be included. As you can see income verification can become a double-edged sword, whereas if the buyer is not willing to be above board with Uncle Sam, then most likely s/he will not be honest with a potential buyer as well. And the potential buyer could blow the whistle on the Seller, therefore creating havoc on the whole transaction.

It would be better for the seller to simply learn about the multitude of various tax advantages that are now available to the small business owner, so that s/he can shelter their income in a verifiable and legal way. Even more problematic are the instances where sellers fail to properly account for the tangible assets of the business, and the appropriate value of those assets. Far too many business sellers have not accurately kept good records, as some tangible assets may have been “expensed out” in the same year as the purchase under favorable tax guidelines, rather than capitalized. These assets are frequently overlooked. And intangible assets are not normally recorded on a company's books unless they were purchased from outside the company.

Those that were generated internally by the existing owner do not show up on the balance sheet, including identifiable tangible assets. Chances are high that your client purchased a preexisting business, and again, when it was resold the parties involved all took the easy way out by simply lumping all the intangible assets together into everything else and classifying it as “goodwill” rather than carefully segregating those discrete intangible assets that could have been expensed out, depreciated, or amortized, and properly valued accordingly.

Intangible assets often represent the largest component of economic value of a small business or professional practice. Note investors are very interested in making sure these asset values have been properly accounted for, particularly if some of these intangible assets have collateral value as hard assets, which will usually increase the viability of the note. But what if you are coming late to the party? Or what if your client already sold his business and now is holding a business note and now needs cash? What if the note is a little wrinkled around the edges? No question, that could pose a problem... but thankfully, in many instances, these poorly crafted deals can be salvaged. For more information, go to fastcashfunding.com.

Manufactured Housing On The Rise!

2006-05-30T13:31:00.000-05:00

Welcome to part 2 of my blog on Manufactured Housing. Fortunately, the private paper investment markets have slowly gravitated toward the seller and dealer financed carry back notes secured by used manufactured homes in parks. It is important to recognize that real estate note buyers are not lenders. Real estate note investors purchase existing loan notes to hold as alternative investments, comparable to what they can get with a well managed stock portfolio or real estate investment. Where lenders traditionally look to bond market returns as a benchmark, working on thinner yield spreads on higher volume and discount points. Naturally real estate note buyers demand higher yield structures for their mobile home note investments.

Another important distinction is risk management. Though the private investors who will purchase these real estate notes are much more risk tolerant than traditional lenders due to the well documented default factors in manufactured housing, knowledgeable investors purchasing notes secured by mobile homes, require a deeper equity cushion to protect their investment. This in turn causes these types of notes to have a steeper discount structure than real estate notes do. It is helpful to understand that the manufactured home industry's research through the latter half of the 1990's, indicated that lender's loss recovery rate on defaulted loans was only 82.5 cents on the dollar and that was in a market that was thriving!! Real estate note buyers will not accept that type of loss exposure. They demand 100% on the dollar recovery on any defaulted notes. Subsequently, a note buyer for mobile homes will purchase an existing mobile home note at a deep discount if necessary, to preserve the necessity equity cushion.

Alternatively, we will use a safe structured purchase agreement such as a partial purchase, or a split funded purchases, when necessary, to achieve the necessary equity protection. These structured purchase agreements can be deal savers in situations where the seller is not able or willing to discount deeply enough to satisfy the note buyer's equity protection requirements. If you have clients who are holding manufactured home notes and are looking for ways to get needed cash, feel free to give me a call. I'll be happy to explore their options with you.

Manufactured Housing On The Rise!

2006-05-30T13:29:00.000-05:00

Grease The Wheels

2006-05-25T15:51:00.000-05:00

Manufactured housing industry estimates indicate that approximately 800,000 to 900,000 used manufactured homes change hands throughout the U.S. In the average year! Although some real estate offices specialize in mobile home sales, and some have incorporated mobile home sales into their inventory on a case by case basis, the “freestanding” mobile home brokerage industry has never been strong. Part of the reason is no doubt due to the fact that mobile home prices are generally much less, so the average commission per sale is a lot less motivating on a time/cost basis.

A more obvious problem, however is that there is no strong lending pipeline in place, to provide the financing necessary to grease the wheels of a sale for used mobile homes! In fact, industry studies indicate that the major market for mobile home financing lies in resales. When there is no structure for financing in a cash deficient marketplace, there is no liquidity creating a vacuum that inhibits normal business activity!

Brokers need financing to make sales without this financing, the distribution channel breaks down, and many mobile home owners are faced with going it alone! Subsequently, these private homeowners either wind up selling their manufactured homes for much less than they are worth, in order to get the cash they need or they wind up with owner financing themselves, in order to make the sale. Historically, about 46% of these sales are owner-financed. If this much owner financing is going to happen anyway, how can the secondary private paper marketplace help the manufactured home broker, and his homeowner client?

The primary advantage is the provision of a new source of fluid funding options and additional liquidity. Understanding how to work in this environment allows the creative broker to increase his inventory of “bread and butter” commission sales; and also provides a back door for converting mobile home note holders into customers for the purchase of new homes or other properties. If you or your client have a mobile home note or real estate note that you would like to fund, contact us or call us toll free 866-841-2420.

Tin Cans To Gold Pans!

2006-05-25T15:13:00.000-05:00

Despite an history of severe up and down cycles, the manufactured housing industry is booming throughout the United States. It is estimated that close to 10 million American households now live in manufactured housing, including almost two million new manufactured home sales over the past few years, which represent one out of every three total new home sales. Contrary to the “trailer trash” stereotype of the people who inhabit them, manufactured homes have evolved in an acceptable alternative to site-built homes, condos, and apartment housing. These new generation mobile homes aren't the same as the mobile homes that our parents or grand parents may have lived in. As the construction of mobile homes have dramatically improved since 1976, so too have the demographics of the people who purchase them.

The driving force behind the mobile homes has been the affordable price, as the average sales price of a new stick built home cost on the average 3 to 4 times more than a similar quality manufactured home (not counting the cost of the land). And at the same time, improvements in construction quality have led to an average useful life of 55.8 years, while also providing a distinct advantage in the cost effectiveness of owning and maintaining a manufactured home, further enhancing the growing broad based appeal among current home buyers.

The growth in manufactured housing has also spawned corresponding growth in several related industries as well to include; dealerships, park owners, and manufactured housing rehab/remodeling specialists. However, many of these businessmen, as well as the many manufactured home owners themselves, have had to contend with a major problem over the years. The manufactured housing market place has historically been a stepchild in the traditional institutional lending arena long under served by a fragmented funding pipeline. For “freestanding” mobile home parks, finding purchase money hasn't been a difficult proposition when buying a new home- but refinancing, and finding the funds to purchase an existing resale manufactured home, are almost impossible!

Consequently, over the past 10 years, owner financing has facilitated an estimated 46% of all mobile home resales. Creating an average of approximately 430,000 new notes every year, these seller held paper assets are estimated to represent $6 billion annually of owner financed debt and $ 30 billion dollars of total assets in just the past five years alone! For many of these note holders, this paper is an albatross, weighing down their present circumstances. For manufactured home dealers, holding this paper on their used homes resales may be drying their ability to obtain needed “floor plan” financing to maintain their sales inventory. And for the park owners, it may tie up the funds necessary for capitol improvements, or other more attractive investment opportunities. And for real estate and mobile home brokers, it may determine whether they can get a particular property sold. As for homeowners, these paper assets can be a real nightmare to wade through in resolving new home purchases, divorce, estates, medical emergencies, retirement planning, and similar circumstances requiring liquid cash.

Fortunately, the private paper investment markets have slowly gravitated toward the seller and dealer financed carry back notes secured by used manufactured homes in parks. It is important to recognize that real estate note buyers are not lenders. Real estate note investors purchase existing loan notes to hold as alternative investments, comparable to what they can get with a well managed stock portfolio or real estate investment. Where lenders traditionally look to bond market returns as a benchmark, working on thinner yield spreads on higher volume and discount points. Naturally real estate note buyers demand higher yield structures for their mobile home note investments.

Another important distinction is risk management. Though the private investors who will purchase these real estate notes are much more risk tolerant than traditional lenders due to the well documented default factors in manufactured housing, knowledgeable investors purchasing notes secured by mobile homes, require a deeper equity cushion to protect their investment. This in turn causes these types of notes to have a steeper discount structure than real estate notes do. It is helpful to understand that the manufactured home industry's research through the latter half of the 1990's, indicated that lender's loss recovery rate on defaulted loans was only 82.5 cents on the dollar and that was in a market that was thriving!! Real estate note buyers will not accept that type of loss exposure. They demand 100% on the dollar recovery on any defaulted notes. Subsequently, a note buyer for mobile homes will purchase an existing mobile home note at a deep discount if necessary, to preserve the necessity equity cushion.

Alternatively, we will use a safe structured purchase agreement such as a partial purchase, or a split funded purchases, when necessary, to achieve the necessary equity protection. These structured purchase agreements can be deal savers in situations where the seller is not able or willing to discount deeply enough to satisfy the note buyer's equity protection requirements. If you have clients who are holding manufactured home notes and are looking for ways to get needed cash, feel free to give me a call toll free at 866-841-2420 or please visit our website. I'll be happy to explore their options with you!

Fair Market Value?

2006-05-16T07:59:00.000-05:00

We have heard it said many times, “ I couldn't get anywhere near the fair market value of my house if I put it on the market today,” of “ The value of ABC Company stock is really much more or less than the price it is selling for on the Stock Exchange today”. The standard value that those people have in mind is some standard other than fair market value. This is because the concept of fair market value means the price at which a transaction could be expected to take place under prevailing conditions existing at the valuation date.

Fair Market Value is the most widely accepted standard of value in the United States. A current definition agreed upon by agencies that regulate federal financial institutions is “The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and the seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus”. Implicit in this definition is the consummation of a sale as of a specified date, and the passing of title from seller to buyer under conditions whereby:
1- The buyer and seller are typically motivated
2- Both parties are well informed or well advised, and acting in what they consider their best interests.
3- A reasonable time is allowed for exposure in the open market.
4- Payment is made in terms of cash in United States dollars, or in terms of financial arrangements comparable there of.
5- The price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

(Uniform Standards of Professional Appraisal Practice)

This is also the standard that generally applies to most federal and state tax matters, as well as many other valuation situations. It is worthwhile to observe the use of the phrase “the most probable price”, in place of the previous “the highest price” used in most definitions widely accepted a few years ago, as it takes two to tango when it comes to value! To find out what your best price for your real estate note or other cash flow please contact us right away. You will be glad you did!

Cash or Carry?

2006-05-15T15:54:00.000-05:00

Small business sellers frequently have many misconceptions about their business, and about the critical elements of the selling process itself like the following. They think the business is worth more than it really is as acute pride of ownership seems to be a highly contagious disease among most business owners. They expect to receive payment in cash that's not usually a problem for a seller who purchased a previously existing business.

In an industry where 90% of the sales are seller financed, chances are high that this is how he purchased the business in the first place! But what about the guy who started up his own enterprise from scratch, or maybe inherited the family business from the original founder? Now it's 10 years later, and chances are s/he will want all cash, for the money that's been invested over the years.

Expect the buyer to have the same high opinion of the business as the seller does. That might happen some day, but usually not until the buyer assumes the mantel of ownership. Finding a buyer who needs a business, is comfortable with a particular type of business, who can afford it, and where the numbers work for this specific person is like finding a needle in a haystack. Educating clients has long been an important staple in building a relationship with them.

If an opportunity presents itself, counseling your business-selling client on the importance of preparing a detailed and documented sales presentations, and assisting him in structuring both the sales transaction, and the subsequent note he may carry back as a result of selling his business, can go a long way in helping you and/or your client to achieve their objectives satisfactorily!

Cash or Trash!

2006-05-15T15:18:00.000-05:00

Only 10% of small businesses and professional practices actually sell for all cash! In most cases, the buyer typically comes in with a cash down payment of 20% to 40% of what is referred to as a transaction value with owner/seller financing the balance of the purchase price on the sale of the business, carrying back an installment contract secured by the business via a business note. However, it is a common practice for business brokers, and their principals, to think of the cash value of a business or professional practice on the basis of the face of the sales transaction and on the terms at which the business type is sold in the marketplace.

Unfortunately, the deal wasn't for cash and far too often, the business note for the balance of the transaction price is usually bearing interest at a rate that is below the market rate! In other words, third party lenders would generally charge higher rates on loans that have comparable collateral and the same terms as those in the seller financed business notes written for the balance of the typical transaction price. And many of these owner/seller held contracts may include contingency clauses related to the outcome of lawsuits, settlements of tax liabilities, refunds from prior periods, certain costs of compliance with various regulatory agencies requirements, or provisions for customer retention or earn-outs. This makes the full expected amount that the seller will realize dependent on certain future events.

Also, many business sellers inflate the sales price to try to shift income from ordinary rates over to capital gain rates. Others actually have some concept of cash equivalent value, and the fact is that they likely will have to take a discount when they go to sell the note. So they try to turn the tables in their favor by increasing the sales price, in an effort to absorb the cost of the discount when they sell the note. Nothing wrong with that, if the deal is well crafted. In many instances, the trade off between price and terms can be a good and reasonable strategy.

In fact, it usually can be argued that seller financing should warrant a small premium, or other concessions from the buyer. The problem is most sellers tend to take it too far. They may offer terms that are too lenient, and they elevate the price to a point that they now have created a pure Blue Sky dollar valuations that cause the paper to be higher risk of default, and less secured in relation to true collateral values, so now the fellow is sitting there with an oversold business, and an over sold note!

It is generally understood that fair market means a value in cash or cash equivalents, unaffected by special or creative financing or sales concessions granted to the buyer. Consequently, the fair market values of such contracts in terms of cash or cash equivalents accepted as part of the consideration in a sale, are usually less than their face values. In the world of finance, there is often a great deal of difference between transactional value and cash equivalent value. Business notes present their own set of special circumstances and risk factors and professional business valuation experts are very aware of the market factors that play in to the value equation with regard to discounted values, and how substantial these factors are: We know of no other class of transactions whose prices diverge as far from a cash equivalent fair market value, as the values of contracts arising from sales of small businesses and professional practices.

It is not at all uncommon for the terms of the contract and the business note to be such, that the cash equivalent value is 20% to 50%, or more, BELOW the transaction value as presented on the face of the transaction documents, or as reported in some of the data reporting services. Such as Valuing Small Businesses & Professional Practices by McGraw-Hill Publishing.

The private secondary market is inherently a higher risk marketplace than the institutional lending sector. This market offers the advantages of purchasing more substandard paper, and more flexibility in structuring note purchases, than most lenders can, or will offer, when originating new loans. Investors in the private secondary marketplace are generally more risk tolerant than institutional lenders. But, just like anything else in this world, there is a price for risk tolerance. By understanding the difference between “cash” and “trash”, you can help bring your clients expectations into line with realty, thus helping them create business sales transactions that make sense, and allowing them to carry back financing that has liquid viability-in the event they need to convert the note to cash some time down the road. If you or your client have a business note that you would like to sell, please visit fastcashfunding.com.

Business Notes Bust or Bonanza?

2006-05-15T10:14:00.000-05:00

America is the land of small business. Every day, hundreds of small businesses like dry cleaners, laundries, medical practices, restaurants/bars, liquor stores, convenience stores, auto repair, printers, gas stations, florists, vending machines, antique shops, cabinet makers, machine shops, small manufacturers, distribution companies, barber shops, beauty salons, and many others are bought and sold. Despite the growth of government programs such as the SBA, SBIC's, and SBDC's, and the many small business loans offered by the banking industry, the vast majority of these small business sales by virtue of necessity, require the the seller finance a large portion of the purchase price by taking back their equity through owner financing with installment payments.

According to Business Reference Guide 2001, 90% of the approximate 200,000 small businesses that are sold annually are owner-financed! About 180,000 new business notes, worth about $25 Billion Dollars are created each year! Many of these business note holders are likely to be one of your clients! Accessing that cash is difficult proposition for these people. The good news is there is a thriving private secondary marketplace that can provide the liquid capital that many business sellers need. Here in the secondary marketplace is where such cash is available. The bad news is many of these sellers may still have problems in gaining access to this cash for the same reasons that bank financing for business sales is so limited.

If you are fortunate enough to be able to assist your client structure the note carefully at the time of the sale, you can overcome these difficulties. Meanwhile, according to the business press, more businesses would successfully sell if business sellers structured the whole transaction properly. Your input may be critical to your client's ability to even sell his/her small business in the first place. The two biggest problems in the sale of most businesses are “hidden” income and assets. The first problem is usually intentional, and the second is usually a mistake, but both can have the same devastating effect on the sale of the business, and/or the subsequent sale of a note secured by the business. Bookmark this page for part 2 of this blog. In the meantime, should you have any questions, feel free to contact us.

Real Estate Note

2006-05-11T15:08:00.000-05:00

Hey did you hear that old Bud Theweiser is retiring, and wants to sell his pub for a $ 135,000; including real estate valued at $70,000? Bud wants $50,000 dollars down in cash to pay off closing costs and pay off some personal debts, and $15,000 to put into a money market fund, for retirement income and emergencies. Bud is willing to carry the remaining $85,000, payable at $913.41 per month over 15 years, at 10% interest. He is counting on this income to supplement his retirement over the coming years.

I heard that Roger Mantis wants to purchase the pub, but he only has $12,000 cash. But Roger does however holds a $16,000 business note paying him $298.82 per month, with 72 payments still due. And Roger also owns a building free and clear that is worth $40,000, that he wants to keep as an investment. So Roger's attorney Elmer Lawson, contacted Fastcashfunding.com , to look into ways to resolve Roger's cash shortage problem.

Fastcashfunding.com suggested that Roger offer $65,000 for the pub, with $28,000 down, in the form of $12,000 cash, and the $16,000 dollar business note. The remaining balance of $37,000 dollars would be carried back on a 15 year real estate note at 10% interest. Roger would also give Bud $70,000 for the tavern real estate in the form of two separate real estate notes. The first real estate note was to be in the amount of $40,000 dollars, that is to be amortized over 30 years at 9 % interest. The payments would increase by $200 at the 140th month, and increase another $400 per month, beginning at the 181st payment. The second real estate note would be for $30,000 and would have a term of 360 months at 9% interest rate, with the payment increasing by $300 per month, beginning with the 73rd payment. This real estate note would be payed off in 139 months.

In order to create equity protection, Roger would pledge his free and clear building as additional collateral for the $40,000 dollar real estate note. Bud on the other hand, will sell the first 137 payments of this note to Fastcashfunding.com who will pay $23,000 dollars for them. Although Bud only gets $35,000 total in cash on the front end of this deal, he still retains an additional $15,000 in liquid equity, earning a weighted average coupon of 9.3%, rather the 4% paid by the money market fund.

By using this approach, Bud receives an average $938 monthly payment for 137 months, two payments of $1,260, and 41 months of $919. At 180 months, Bud will have received $168,755 in total monthly payments. Better yet, he has a balance of $22,173 remaining on the first real estate note. If he wants to cash out, he could sell his real estate note for around $20,000.

Three is not a crowd!

2006-05-11T14:17:00.000-05:00

Adopting an appropriate system for collecting real estate note payments, and establishing reliable payment records, is often the most neglected aspect, of “owner financing” yet, attending to the necessary documentation may ultimately be the most critical step in most real estate note transactions. The real estate note records protect the Seller, Payer, and any other advisors who may have been involved in assisting the completion of a “owner financed” transaction.

Good record keeping is vital for establishing earned interest calculations, and providing the Payer with an accurate Form 1098 each tax year. This is equally important for investors who are holding real estate note paper for the purpose of “Installment Sale” tax benefits. Well-documented account history records often paramount in the event of future disputes, or in the event of default. The other side of that coin is when a Payer must refinance to pay off a balloon documented in the original real estate note.

Verifiable account history is also of utmost importance if the real estate note holder ever decides to sell all, or part of the note. Good or bad, note buyers must be able to determine exactly what it is that they are buying. Is the note performing according to its terms? Are the balances, and payment amounts correct? Have their been any modifications, or concessions, been properly accounted for?

Without verifiable payment records, many real estate notes are not salable, and those that do sell, are subject to significant discounts to compensate for risks, thus reducing the cash price a note seller will get for his real estate note. The best defense for most note holders is the use of professional “third party” account servicing firms. The better firms provide high quality records, and diligent collections services, at relatively little expense, that takes a huge load of the principals' shoulders.

An Equity Question?

2006-05-11T10:13:00.000-05:00

What if your client should want more security and more cash out of the deal as well? His best bet would be to split the $28,500 in to two new second notes- one for $14,000, secured as a junior lien against the duplex; the other note for $14,500, as a new second secured by the home he is selling to the buyer. By going this alternative route, the buyer still only brought $6,500 in cash to the closing table and your client is still holding $28,500 in secured real estate notes. But now, your client has much deeper equity behind each note ($90,000 + $14,000/$140,000 = 74% CLTV, and ($90,000 + $14,500/$125,000) = 84% CLTV. Now, what about that extra cash your client wants to pull out of this transaction? Frankly, this deal is still a little thin, but the duplex property has a two-year history under the buyer, and a deeper equity cushion. All things considered, your seller may still be able to sell the duplex note for perhaps $7,000 (depending on rate and term).

What if he needs $10,000? Well, that gets a little trickier but if he is willing to accept the possible risk of loss, your client can offer the 2nd real estate note he is holding against the house, as additional collateral for the duplex note. Or in other words, the note buyer would purchase the note secured by the duplex, which is additionally secured by the real estate note against the house. Your client still holds the house note, but in the event of default on the duplex note that was sold to the note buyer, your client may lose the real estate note on the house, but only if the note buyer is unable to recover $10,000 out of the defaulted note. And if the real estate notes are structured properly, your client can take steps of his own to protect his interests in both real estate notes. The result is that a deal with apparently little equity, now has a much higher protective cushion. Contact me for more information on structuring equity on a real estate note.

An Equity Question?

2006-05-11T10:02:00.000-05:00

A borrower's equity in a given deal is a good indication that the loan is relatively secure and more so on a new loan. Equity in this context, presents two closely related nuances- the borrower's vested economic interest in the deal (a risk of loss)and, the “cushion” offered by the liquidation value of the collateral. Lenders refer to this cushion as “protective equity”. The minimum equity considered sufficient to mitigate the low equity risk factor, ranges from 20% of the purchase price for owner occupied residential property to 25%-30% for prime commercial loans and up to 35%-50% for higher risk “special use” properties, businesses, and various types of land deals. The problem is, most buyers don't usually have the cash available to make these kinds of down payments.

People tend to think of down payment equity as represented by the amount of cash the buyer puts into the deal. Fortunately, equity can come in many forms such as cars, antiques/collectibles, boats, fine jewelry, stock portfolios, time shares, other properties, even other notes. This might be viewed as a form of bartering, and it occurs quite frequently, particularly in real estate exchanges. For astute deal-smiths, creating equity can take can take on several other practical forms as well. Substituted collateral is one such effective technique.

A good illustration is your client is asking $125,000 for his home. He has an existing 1st mortgage of $90,000 dollars. He gets an offer of $6,500 cash down, and a owner financed second mortgage for $28,500. Both you and your client are concerned about the limited down payment, especially when being asked to carry back a 2nd position junior real estate note. However, the buyer owns a duplex he exchanged two years ago. The value of the duplex is $140,000, with an existing first mortgage of $90,000 owed against it. Instead of securing the 2nd note by the seller's residence, the buyer offers his $50,000 equity in the duplex, as substitute collateral to secure the real estate note.

Going this route, your client picks up the difference between the Combined-Loan-To-Value he would have carrying the note back against the property he is selling ( $90,000 + $28,500/$125,000 = 95%), as opposed to the lower CLTV he would achieve by accepting the substituted duplex collateral for the real estate note ($90,000 + $28,500/$140,000=85%). The use of substituted collateral in this instance has increased the buyer's equity in the deal by 10% more. Bookmark this blog now, and come back for the rest of this story in my next blog. For more information now on this subject contact me.

Seller Financed Real Estate Notes

2006-05-10T13:15:00.000-05:00

They say “ a rose by another name, is still a rose”- but the same can't be said for real estate notes. The private real estate note industry is made up of several sectors, generally categorized by the type of collateral securing the paper. For example, real estate, mobile home and business notes are all different types of cash flows instruments that are regularly bought and sold in the secondary market place. Various “niches' exist within these sectors, which differentiate them even further. For example, there is no such thing as pure real estate note- there are residential notes, commercial notes ( further broken down into sub-niches such as multi-family residential of more than four units, retail properties, gas station notes, land notes, mixed-use property notes, special use property notes, etc. These notes are also differentiated between senior and junior lien priorities. Different types of risk factors, and collateral assets, exist for each note sector and niche. These differences are reflected in the various grading mechanisms that apply in the individual note segments, the diversity in yield requirements and investment to value thresholds for each sector.

Residential real estate notes are generally tend to have lower discount pricing than similarly commercial real estate notes. When looking for real estate notes secured by single family properties, real estate note buyers generally want to see a down payment of at least 10%, though down payments of 5% is acceptable. (20% is considered ideal). The acceptable credit scores for these notes can range from 500 to 650 or better, but usually credit scores of 550 to 620 supports the majority of the real estate notes that are sold. Maximum IVT (investment to value) levels range up to 95% of the balances remaining on these types of notes.

Real estate notes secured by commercial properties tend to require down payment ranges of 15% to 35% although 25% seems to be the norm. Credit requirements are a little tighter, and investors typically look for credit scores of at least 600+ although a score of 650 seems to be the most preferred. The investment to value threshold for commercial real estate notes ranges from about 60% to 75%, with the norm of about 65% to 70%. Real estate notes are usually non-recourse as no personal guarantees are required. Also, with real estate notes secured by income producing real estate, note buyers will rely much more on the operating history in making a buying decision. The debt coverage ratio can go a long way in making up for other weaknesses in the real estate note, such as the down payment or credit issues. Most other types of notes, including business notes, don't have that luxury!

Business notes are much higher risk than real estate notes. The two factors that help contribute to the risk is the large portion of the purchase price in the sale of the business is based on the expected future earnings potential of the business. No matter how carefully quantified the earning potential might be the real value is not rocket science. In most cases, tangible assets are typically 50% or less in a business note, which creates the problem of pinpointing it's net worth. And unlike real estate, many business assets are difficult to objectively value. The value is further complicated by the lack of effort most business sellers who fail to get an business appraisal. Therefore, business note investors need to offset this misrepresentation of value by wanting to see higher down payments and overall credit ratings from the business buyer.

Down payments are typically range from 20 to 40% for the purchase of small businesses, although the customary target down payment range is 33 to 40%. In addition, business note buyers look for minimum credit scores of 620 or better, with preferred scores of 650 on up. Also investors look for personal guarantees to back up the note. Most of the time, ITV's for a business note are likely to run anywhere from 40% to 65% depending on the type of business, the tangible value collateral securing the note, and several related factors. Although the parameters can be somewhat relative, a well secured and located note of high quality on some land around Lake Tahoe will fetch a higher price, and higher ITV threshold, than a note secured by the Bates Motel.

Risky or Calculated Investment ?

2006-05-10T07:22:00.000-05:00

Almost everyone understands that the whole purpose of investing is to make a profit. What many people fail to consider is to offset the risk! Investors who don't pay attention to the inherent risk factors with their investments, will find themselves in the red in a hurry. Interestingly, risk evaluation in its purest form, demonstrates a strong relationship to the odds of game theory, the very real science that has allowed the casinos in Vegas to thrive! Using the same concept as the casino industry, game theory based risk taking is the driving force in real estate note and other cash flow investment underwriting- such as insurance companies, credit card companies, mortgage companies, and retirement funds.

Like these other knowledgeable investors, experienced real estate note buyers also perform risk analysis when looking for notes to purchase. Real estate note analysis is very similar to loan underwriting in terms of the variables measured including a down payment, Payer's credit score and credit profile, the age and payment history of the account, the Payer's income history and debt to income ratio and of course, the market value of the collateral securing the real estate note. However, a major advantage for note sellers is that note investors as a group are generally much more risk tolerant than the lending community. Subsequently, note buyers are frequently able to bring cash to a situation, where traditional lenders not dare to tread!

The important thing is in order to gain access to this cash, it is important for real estate note sellers, and their advisors, to insure that clear and concise documentation exists to support the evaluation of the real estate note. Be sure to keep your clients informed of the importance of keeping accurate records for any real estate notes that they are currently holding, as you never know when they may need them!

Realtors Take Note!

2006-05-05T13:23:00.000-05:00

Although a great many real estate agents have lost touch with their roots in the use of seller financing to structure real estate sales, the practice remains common enough, that the retail real estate industry is still considered a good source for finding privately held paper. Unfortunately, on the whole, these agents are generally viewed a great source for lousy notes! One owner financed formula that has held fast in the real estate industry, is the use of 80/10/10 financing where the buyer puts 10% down toward the purchase price, obtains a new 80% first mortgage, and property seller carries back a new 2nd mortgage for the balance. This type of lending program can be found in the lending industry as well.

So, let's take a closer look at the 80/10/10 deal. If the buyer makes all of his payments, then there is no problem. However, if the buyer does not make the payments, the seller must foreclose on the mortgage to try to salvage the deal, or loose the remaining equity currently in the real estate note. The foreclosure process can take up to 4 to 18 months depending on the circumstances and various state laws. In addition to the costs of foreclosure proceedings, the seller is usually faced with the making the payments on the underlying first mortgage, in order to protect his/her right to foreclose on their second mortgage. In the absence of a strong appreciation in the local market, or a substantial equity stockpile from the loan payments made by the buyer, the seller may end up loosing money on the deal. That is why there is a shortage of 2nd position notes that are carried back under 2nd position real estate notes.

Sellers can however protect themselves from this kind of a situation by giving themselves a safety net by taking the following steps. These are particularly important if the seller is being asked to carry junior financing, or anytime the buyer is offering less than 15% down. The first step is obtaining a financial statement or a detailed credit application along with two years proof of income (tax returns, W-2's or similar) and proof of current income (two most recent pay stubs, twelve months worth of bank statements, or similar) from a prospective buyer. Once such information is received, a tri-merge credit report should be obtained. With these two items in hand, the seller can evaluate the borrowers credit worthiness and risk characteristics.

Three areas are critical to evaluating the buyer. First, the buyer's credit score. While not perfect, credit scores have proven to be strong indicators of potential for default. Generally, scores above 700 are excellent, 660-669 very good, 640-659 good, 600-619 fair, below 600 poor. It is worth noting that both sub prime lenders and note buyers, are active and willing to deal with credit scores ranging from 550 to 619 because this is where most of their business comes from!

A second critical area is credit profile. Does the buyer show major derogatory items on the credit report, such as a previous foreclosure, automobile repossession, collection accounts, or charge offs? What about judgements? How about payment histories on existing accounts? Are they behind on any payments now? Do they have any accounts that have shown 60 days late over the past couple of years? Any combination of these is likely to indicate that this buyer is a serious default risk. On the other hand, perhaps there was situations beyond their control, such as medical or another disaster. Perhaps a job loss in their recent past has caused a temporary hardship. Such instances may explain a low credit score, and also indicate that a potential buyer may not be a credit risk.

A third critical area to watch is the debt to income ratio. How many debt obligations have six or more monthly payments remaining? What is the total monthly debt service obligation? What is the buyer's gross monthly income? While no investigation can absolutely prevent a default, spending an hour or so to perform these steps can go a long way in preventing the likelihood of default. If you or your client would like to get more information on real estate notes please click here.

It Pays Not Being Partial!

2006-05-05T10:13:00.000-05:00

A tremendous benefit offered by the private note industry, is that most note buyers are much more flexible than most institutional lenders, which brings a great deal of options to the table for a property seller that are not available through traditional lending sources. This is especially true for sellers of smaller commercial and investment real estate; sellers of special use properties such as churches, nurseries, movie theaters, RV parks, nursing homes, as well as sellers of mobile homes and small businesses and any other paper that is weak in risk evaluation. This flexibility allows note sellers the opportunity to custom tailer the sale of the note, to match up perfectly with his/her cash needs, and/or turn a relatively po-dog note into gold.

One of the best techniques a note buyer might employ is the partial purchase. The partial purchase technique is a particularly powerful way for note sellers to “Have their cake and eat it too” and is especially useful in the mobile home and business note sales, as this method allows investors to offset a huge amount of risk that are inherent in these two type of properties.

Some other techniques a note buyer might try is to construct a real estate note sale that is agreeable to all parties including split-funding, split-purchase, additional collateral, substituted collateral, and cross collateralization. Each of these partial sale alternatives offers it's own advantages that outweigh the potential disadvantages. In certain situations, a combination of several of these techniques on occasion can also bring tax advantages to your clients as mentioned in my previous blogs. If you or one of your clients would like more information on real estate note and business partials, please contact us.

Business and Mobile Home Notes For Sale?

2006-05-05T07:50:00.000-05:00

One of the primary beneficiaries of this burgeoning secondary market are mobile home or manufactured homes, and those holding paper resulting from the sale of small businesses. In the past, these two note sectors have been tremendously under served by traditional lending markets, especially in the instances where real estate was not a part of the selling transaction. In fact, sellers of used mobile homes located in parks, and small businesses operating out of leased spaces, often have no other way to sell their properties except by way of seller financing. In both instances, risk factors, inability to quantify collateral value, and to some degree, misguided perceptions have created an unreliable funding pipeline in the lending industry, for these property types.

As a result, over the past five years, approximately 46% of all used mobile home sales transactions were owner financed, which represents about $5 Billion Dollars a year in new real estate notes. At the same time, 90% of small business owners have been forced to carry back approximately 180,000 1st position lien notes from the sale of their businesses, which tied up approximately $24 Billion Dollars a year!

One group in particular is mobile home dealers who must finance the sale of their used traded in mobile home inventory. Small business sellers had to do the same in order to purchase a new and often larger businesses. For mobile home dealers, the private cash flow secondary markets like Fast Cash Funding offer an opportunity to free up working capital and maintain the smooth operation of their dealerships. And for small business sellers that are looking to move up to larger business, the ability to convert their notes to cash is often the only way they are able to purchase another business.

Fast Cash Funding has opened a huge pipeline for real estate and business notes sellers who are aware that we exist. Professional advisors who are savvy can also benefit their clients as well. This in turn opens up a viable network for their clients financial problems and gain the edge on their own patrons. Please fell free to contact us if you would like to discuss this any further.

Real Estate Notes Are Nothing New?

2006-05-05T07:07:00.000-05:00

Did you know that Seller financed transactions have existed since biblical times. However, sellers who wanted, or needed, to convert their paper assets into cash, didn’t have many options in those days. What market there was for selling paper, was almost exclusively entertained on the local level. And the farther away the property was from a metropolitan area, the less chance of finding a buyer for the real estate note. Essentially, Sellers and their advisors (attorneys, cpa’s, real estate brokers, financial planners) were on their own.

For decades, the most active participants in the local arena were local real estate brokers. As the local broker ran out of money, private investors were brought in to purchase the real estate notes and when that money dried up deals were simply not getting done. At this point, existing Seller held real estate notes became unsaleable until funds were once again available from the limited buyer pool. In the case of note sellers desperate for cash, this limited buyer pool frequently led to extreme hardship. In the scheme of life, such circumstances create a vacuum, but sooner or later the money will follow the path of least resistance.

However, it wasn't until the past 20 years that an effective secondary market developed for real estate notes as the grand daddy of the private cash flow industry. Until modern times, there was no structured networking that could quickly move money where it was needed, as there was no broker network that could create a liquid market for real estate notes or owner financed real estate properties. There just wasn't any framework developed to underwrite and purchase these paper assets on a permanent, reliable basis and there was simply no method for marketing or directing these notes up a nonexistent funding pipeline.

By the late 1970's, a loose confederation of private note brokers and note investors began spreading across the country, and several large institutional funding sources emerged. So by the 1990's, a full blown secondary market developed, encompassing a wide spectrum of diversified privately originated cash flows. Today, the private cash flow industry or private real estate note industry has become a major source of liquidity for sellers holding a broad range of paper assets, delivering billions of dollars to cash seeking sellers, and offering creative problem solving avenues for their advisors! Hence, as we move into the 21st century Fast Cash Funding has developed an even better network to facilitate the sale of real estate notes and other cash flows for individuals and professionals alike.

Selling Structered Settlements

2006-05-03T14:39:00.000-05:00

The cash flow industry is a 4.7 trillion dollar marketplace, where as approximately there are 60 varieties of cash flow instruments are traded. Many such cash flows may currently be in the hands of your clients. Structured Settlements is a noteworthy category of cash flow instruments that is actively bought and sold in the private cash flow secondary marketplace. Structured Settlement- refers to a deferred payment obligation resulting from the settlement of a personal injury legal claim. In this case, rather than receiving a lump sum settlement, the plaintiff or injured party agrees to accept a settlement that is structured to be paid in installments over a specified time period. In most cases, the defendant, or the insurance company guarantees the settlement obligations by purchasing an annuity and naming the plaintiff/claimant as the payee.

The payment nature of structured settlements is often the best manner of compensating the victim and/or his family and is often a valuable tool for negotiating larger settlement amounts. The structured payout takes into account a set amount of funds for: ongoing medical care, education, retirement, family needs, and lifestyle adjustments or changes. A structured payout can be beneficial in protecting minors and others who may struggle with managing huge lump sum awards. However, one thing that structured settlements do not seem to anticipate is the change in the future financial needs of the beneficiary.

In life, many circumstances beyond our control can erupt no matter how well we try to anticipate future events. The same holds true with a structured settlement. The death in the family, debt consolidation, estate taxes, estate dissolutions, a business opportunity and so on. The need to convert some or perhaps all of the stream of income into cash becomes paramount. The problem is that Plaintiffs cannot circumvent their contracts to agreeing to periodic payments. Furthermore, the annuity is not assignable because the claimant does not own the annuity. And most annuity contracts contain non assign ability language, which the majority of insurance companies argue prohibits the transfer to third parties. But beneficiaries do own the absolute right to receive the payment benefits under the annuity contract and it is this right that can be transferred in secondary market transactions. And there is a strong market for them.

However, as viable as structured settlements may seem, there are legal risks to would be purchasers which must be properly addressed and priced accordingly. In July of 2000, the National Conference of Insurance Legislators known as NCOIL drafted a model act for state adoption that would allow the sale of structured settlement payments if the sale was in the best interest of the Seller. This would help accommodate Sellers who wanted cash to use as a down payment for a house, college tuition, or for other purposes of economic gain that would not construe a dire necessity.

For a discounted purchase price, investors could buy the right to receive the annuity payments. Typically, the Plaintiff would agree to sell all or a portion of the payment stream at a discount of 50% to 80% of the face value of the total payments purchased. For clients with immediate cash needs, the ability to sell all or part of their structured settlement offers a solution to potentially devastating problem. But the clients are not the only ones benefiting from selling there annuity payments. Attorneys who have accepted structured fee agreements as part of a client's settlement have found the ability to sell payments on a secondary market an extremely valuable commodity especially when the need for money arises, or a law firm partnership breaks up.

Real estate brokers as well as business brokers, too, have found the ability to sell off payment streams a valuable way to raise cash for clients who own structured settlement entitlements, but are currently short on cash necessary for the purchase of real estate or business ventures. If you, or one of your clients are the beneficiary of a structured settlement that may need to be converted to a lump sum of cash, feel free to contact me to learn what options are available for your situation.

4.7 Trillion Dollar Industry?

2006-05-03T14:37:00.000-05:00