The note business can seem quite complex for investors as well as sellers. Below are several questions and answers that can help you better understand the industry.
When a seller allows a buyer to make payments over time for the purchase of a property, it is called owner financing or seller financing. This type of financing may seem like a risky proposition for sellers. However, it can benefit buyers as well as sellers. This type of transaction has been on the rise. Below are topseller financing benefits:
- Provides a monthly income stream with a higher rate of return than other types of investments.
- Includes a lump sum option if you sell your note to an investor on the secondary market.
- Results in a property sale that is quicker and with fewer hassles because the rules and regulations of lending institutions are bypassed.
- Retains your title so if the buyer defaults you not only keep the down payment and any payments received, but also the property.
Most of us have had real estate appraisals done. A note appraisal or note analysis is very similar, but instead of reflecting the current market value of your property, it indicates the current value of your mortgage payments. It demonstrates what your future note payments are worth in today’s dollars.
It is key that your note is evaluated every year because market conditions may affect its pricing.
The value of your note is based on many factors, such as the amount of the down payment, the interest rate, the monthly payment amount, and the term length. However, other factors, such as the buyer’s credit rating and payment history, are considered too.
Also, the time value of money (TVM) is taken into account. This concept states that money available at the present time is worth more than the identical sum in the future due to its potential earning capacity. Payments due now are more valuable than those due in 20 to 30 years in the future. Inflation plays a key factor in this evaluation too.
When a property is sold many items that affect a note’s value have been determined already. However, you can still increase a note’s value by doing the following:
- Maintain good records and copies of received payments. This is simpler today with online banking. Documents can be downloaded and easily saved on your computer.
- Each year request an up-to-date insurance policy from the buyer, which now is quickly available via email.
- Verify payment of property taxes, which are usually paid in two installments each year.You caneasily confirmthis online if you know the property’s parcel number.
This will not only ensure the value of your note, but it will also help avoid any unpleasant surprises.
Yes, Associates in Real Estate Holdings can just purchase a portion of your remaining payments. With this partial note sale, you will receive a lump sum of cash now. When this portion is completed, then the payments will revert to you. Another option includes us paying cash for a portion of every monthly payment right now.
Depending upon your current situation, you can sell just enough payments to satisfy your current cash flow issues. Future payments can be an investment or used for a future fund reserve. Associates in Real Estate Holdings will work with you to accommodate whatever your needs may be.
The first step is to complete the information requested in our online form (link to be added). Next, gather the following key documents:
- Note and mortgage (Deed of Trust or contract)
- Closing statement
- Buyer information
- Payment history
- Current outstanding balance
- Previous title insurance policy
- Current hazard insurance policy
After careful evaluation, we will provide you an offer based on the standard title, appraisal and the buyer’s credit review. Our process is much quicker than that of traditional lending institutions, usually taking only 10-15 business days.
One of the often-forgotten questions to ask when thinking about investing in a note is how much equity the borrower has in the property.Obviously, the larger the down payment (skin in the game), the better. We recommend considering properties with at least 15 percent equity.
It is also useful to know the payment history.The longer the verified payment history, the higher the likelihood the borrower will continue to make the mortgage payments. This is often referred to as “emotional equity”.
Yes, “location is everything”; therefore, it is important to understand collateral values and state laws in your designated investment area. It is critical to take advantage of the powerful information at your fingers on the internet. Search and become acquainted with the foreclosure laws in the states where you are considering launching your note investing campaign.
An asset’s market value is the price the asset fetches in the marketplace, or the value that the investment community gives it. Researching comparable values by neighborhood, recent sales, current listings, rental values, BPOs (broker price opinion), title reports, etc., are some of the most important pieces of information to help determine an asset’s market value. These are just a few of the prudent steps in the due diligence process you should consider when evaluating the collateral securing a loan and deciding how much you are willing to pay for a given note.
It is critical to minimize your investment risk by ensuring that the size of the loan is proportioned appropriately to the value of the property, known as loan-to-value (LTV) ratio. This ratio will gage the safety of the investment in the event of default. Also, it will help to determine the amount you can sell the property for beyond the balance of the defaulted loan.You can calculate the loan-to-value by dividing the amount of the loan by the market value of the property and multiplying that number by 100 to get a percentage. This will help you to determine whether a real estate note is a safe investment.
The primary risk in a real estate note investment is that the borrower will fail to make payments, thus interrupting your cash flow.This way, if the buyer defaults you can sell the property for more than the balance of the loan.
Before investing in a note, consider your exit strategies in the event the borrower stops making his/her mortgage payments and faces foreclosure. Some strategies may include:
- Modifying the loan. This may include reducing the balance or the rate on the loan. The other option is to extend the term and backload the late payments to the end of the note.
- Obtaining a Deed in Lieu, also known as “cash for keys”.
- Foreclosing and taking possession of the property to place it back on the market after repairs, if applicable, are completed.