Selling Your Note

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What Discount Will I Take if I Sell My Note, and Does it Need to Be Seasoned?

January 5th, 2012 categories: Selling Your Note, The Note Business

This recent email represents fairly common questions that people have when they start thinking about selling a note they now have, or may soon carry back, or who newly stumble upon “the note business”:

Dear Purchasers of Notes/Mtgs.,

1. Does it have to be seasoned? If yes, for how long or how many payments?

Usually some, but not always. It greatly depends on the other factors in the transaction, and whether you’re trying to sell a full, or simply a partial. I occasionally buy notes without any seasoning, while on the other extreme I may need to see 24+ months of seasoning before considering any type of purchase.

2. Do you have minimums and maximums on the dollar value of the note/mtg.?

No.

3. What type of discounts are required and how do they work?

Once in a very rare while, I can pay as much as .90 cents on the dollar, most are in the .60 – .75 range, with some I wouldn’t pay a penny for. There is no standard discount. It all depends on the variety of unique circumstances attending each transaction. The overall discount will be minimized if you choose to only sell a partial, and keep the tail end of the note for yourself.

4. What is the process if I have a note to sell?

Send me the note and security instrument (mortgage or deed of trust) and let’s have a brief phone chat. A brief overview of the transaction is also extremely relevant:

Type of property securing the note

Location of the property securing the note

How long you owned the property before selling it

Sale date

Sale price

Amount of down payment

Credit score of buyer/payor

I’m guessing you’re asking about this because in your real estate investing business, you may need or want to use owner financing (with the subsequent sale of the real estate note) for either acquisition or disposition strategies, or both? I can usually help structure these types of transactions for maximum financial benefit when I am brought in as a consultant before negotiations are finalized.

For professionals… real estate agents, new note brokers, or investor/rehabbers in the business of doing multiple deals, I provide limited email and phone support to members of Owner Financing Club. People who want in-depth coaching or consulting can arrange that as well.

At Owner Financing Club there are many training videos and some downloadable documents that will help you understand notes and more deeply answer many of the questions you have posed above. You may want to avail yourself of this affordable education (and support) as a way to increase the number of tools at your disposal for investing in real estate.

There is also a fairly new (and free) one-hour video that will help simplify much of this conversation for you: Why Notes, Why Now?

To your success,

Dawn

Spoken by Dawn Rickabaugh | Discussion: 1 Comment »

Is This a Really Bad Time to Sell a Note?

March 23rd, 2011 categories: Seller Financing, Selling Your Note

Don’t we all wish we had a crystal ball? When to buy, when to sell properties, paper, stocks, bonds, Potassium Iodide… the list goes on. And the answer is… it depends. What is your personal situation?

What are your highest priorities and financial objectives? What are the particulars of your property or paper (note)? What helps you sleep best at night?

I believe that further depreciation in real estate prices is likely in most areas, and I believe that interest rates and inflation could climb rapidly, potentially changing the market overnight. It just might be a bit of a wild ride yet, so what’s most important to you?

Here’s a recent email conversation talking about this very topic…

Hi Dawn,

How are you and thanks in advance for your website!

I am presently carrying a note on a townhouse. It’s not a huge note – $65K original loan amount – and it is performing. I was hoping to run a few questions by you, before I send you a huge lump o’ papers via FAX:

1) I appreciate your candor. Would I do better using a local note buyer?

Maybe and maybe not. If you know someone personally that would be comfortable with this type of investment and its inherent risks at less than a 12% return, then you should strike up a conversation. However, I have seen some of the national players pay more (require smaller discounts) than many private local investors that I know. Many private note buyers are looking to make at least 12% on their money… usually more.

2) While the note itself is only 4 months old, the payor was previously my tenant and she had a perfect rent payment history (12 mos) as well. Can this improve the value of the note?

The tenant’s rental history will not help you, and 4 months is not a lot of seasoning. How much of a down payment did she come up with? Her credit score and the amount of her down payment (as well as the true value of the property) will be the most important factors in determining the value of your note.

3) I’d like to get an assessment of the note’s value without the payor knowing. Since you request the payor’s social security number, will she know that something is up by the presence of a new inquiry on her credit report?

I usually quote notes without running credit, but any offer to purchase would be ‘subject to’ the credit coming in at, or above, a certain number. If you purport that the payor’s credit is higher than it turns out to be, then we’ll have to renegotiate the contract. Credit will definitely be run after we have a signed purchase agreement in place. If you just want to know the ballpark of what your note is worth, and don’t want a lot of digging around by a lot of potential note buyers, just pay for an appraisal.

4) Last item… generally speaking, with the real estate market in its’ current state, is right now a “really bad time” to sell a note?

Well, it depends. In general, we will probably see more depreciation, and once a buyer/payor is upside down (the note balance is higher than the value of the property) it is very difficult to sell a note at all (at least at a price you can stomach). Additionally, most of us expect inflation to kick in some time in the next few years, and when it does, that will make discounts much steeper/higher than they are now.

For both property and paper… if you want or need to sell, then sooner is probably better. You may want to let your note season a few more months and take your chances that market conditions won’t change significantly in the meantime. A lot depends on your payor and how you put your deal together.

I am in the middle of helping a woman from Louisiana coordinate the sale of her free and clear rental to a tenant… helping engineer the transaction to give her the best possible chances of liquidity if she ever wants to sell all or part of the note in the future.

My hunch is that the best you’ll be able to do is sell a partial, but if you want to discuss your overall needs in the context of all that is going on to make a sensible plan, I do offer private consultation services.

Best wishes,

Dawn

Check out the Note Queen Store!

Spoken by Dawn Rickabaugh | Discussion: 1 Comment »

Should I Pay My Agent a Full Commission When I’m Offering Owner Financing?

March 3rd, 2011 categories: Seller Financing, Selling Your Note

[youtube]http://www.youtube.com/watch?v=5k-eoLTeSsc[/youtube]

[watch video]

Whether or not real estate professionals should be paid their full commission at the close of a transaction where the seller extended terms (seller financing) to the buyer, is often a topic of some confusion. While there is always room for negotiation for almost everything related to real estate transactions, it’s good to be clear about the fact that regardless of who provides the financing, (a bank, a hard money lender or the seller) a sale is a sale is a sale, and the agent/broker has indeed earned their commission according to the terms of the listing agreement.

Here is a recent email that I received, as well as my response:

Subject: Owner Finance commission pay out

Hi Dawn, I’ve been doing some reading on your site to try and figure out several things. I’m a cash investor and all of my said properties have an owner financing option. I’ve closed one owner finance without a Realtor involved – and just closed another where I had it listed through a Realtor, and paid full commission at closing. Which after the buyers down payment it still meant I came out of pocket around $3k just to sell the house.

I began thinking – what happens if this deal doesn’t turn into a regular mortgage within 3 years like its supposed to, or the guy defaults, or bankrupts. I not only will be out a sale but also around $7k that was paid in commission. Therefore I wouldn’t be able to make up the cost through another sale and would take a loss on the house b/c of commission paid.

The risk is extreme for the investor, seller, owner financier – yet only time for the listing agent. Is it not usual to pay a Realtor half commission upon the owner finance “sale”, and then the remainder once its turned into a “regular” mortgage?

I know this is a little long and scatter brained, just trying to make sense of the matter, I’m fairly new to all this.

Dear Investor,

I can totally feel you on this. The short answer on commissions is…. it depends. There are many ways to structure deals, including how commissions are paid.

The bigger question is your overall underwriting in general. The out of pocket commissions will only be a small percentage of your potential losses if you are not putting these deals together a little more aggressively. It doesn’t sound like your buyers so far have much “skin in the game,” which means it won’t be that hard for them to walk away if things get a little bit sideways, so you are potentially setting yourself up for bigger headaches than just being a landlord.

Not to mention, the notes you are holding are probably not marketable, but they could be with a little strategic planning, which would give you greater liquidity… the ability to sell all or part of the note for cash.

I offer a book on my site that I don’t know if you’ve seen: http://notequeen.com/free-book-offer/.

Best wishes,

Dawn

So, back to the conversation…

When the buyer doesn’t have enough of a down payment to cover all of the closing costs, and the seller understands the risks and is willing to do the deal anyway, is it reasonable to ask the real estate professionals involved to delay part of their commissions?

I believe it’s always reasonable to ask questions to see how we can help transactions close for the benefit of all concerned.

Like I said in the beginning, the broker is not obligated to take less than the full commission at closing, but may be willing to if that’s what it takes to get the deal done. Something is better than nothing. Sometimes agents take their commissions in the form of a note that is payable in installments out of the buyer’s mortgage payment to the seller each month.

And… I don’t believe that seller’s should relate to their agents like Private Mortgage Insurance.

An agent’s job is to extract the best possible offer from the marketplace for you… it is not their job to be your underwriting department, or to guarantee that the buyer will continue making their payments as agreed and be able to refinance when that 3 year balloon comes due. Just like it’s not an agent’s job to guarantee that your real estate acquisition will only go up in value after you buy it, and only down in value after you sell it.

They’ve done their job… they helped get you the best possible buyer for your property. That’s what you hired them for.

You, the seller, are the bank… you need to hire your own underwriting department, and be responsible for the risk and reward potentials inherent in the way you put your transaction together. This is your investment.

Some agents understand financing, many don’t… it’s beyond the scope of their expertise to know how the secondary market will view the seller carry back note you are creating, or to help you accurately assess the risks and steps you might take to mitigate them. Do I think agents need to learn more about these things?

Absolutely!

Agents need to get a feel for the basics, and know when it’s time to bring in other experts to help protect and support their clients. I have agents that bring me in as a consultant before they close on their owner carry transactions, because they understand that I possess a level of expertise they lack when it comes to engineering seller carry transactions in a way that preserves the value of the note/paper in the secondary market.

I’ve had sellers-become-note-holders bring me notes a few months after they’ve created them, and be shocked when I couldn’t offer anything at all, or could only buy a small partial, or required a MASSIVE discount in order to cash them out.

After the shock wore off, they were angry at the professionals involved in helping them put together their owner-financed transaction in the first place. One note holder was so exasperated:

“I asked my agent if they knew anyone who could help us structure the seller carry back note, and they said they didn’t. Now I’m finding I can’t sell my note at all, and I am REALLY upset.”

Even attorneys, while they usually know how to put the mechanics of a note together (sorry, but I’ve seen basic math errors on notes put together by attorneys), they don’t know how to structure a note for minimum discount in the secondary trust deed market unless they regularly buy and sell notes themselves, because the market is changing all the time.

When I’m involved in helping owner financing transactions come together, I help sellers create the kind of paper that I’d be willing to buy at a price that makes sense for the seller.

It’s my “Bake It and Buy It” program.

I will make an offer to purchase the notes that I help to create, in whole or in part, depending upon the unique aspects of each transaction. And I’m often bringing techniques to the table that are generally only understood by savvy investors that have been studying creative real estate for years… strategies that are simple, but beyond what the retail market seems to think about for some reason.

But yes… those commissions… if there’s enough cash from the buyer’s down payment to cover them, then I believe it’s your responsibility as a seller to pay them in full, even if it means you are only netting $15.98 at closing, with the rest of your equity coming in monthly installments.

If the buyer’s down payment is small, and you really don’t have the cash to bring to the table to close, then I think it makes sense for everyone concerned to be flexible. If I had a listing and I had the option of taking a partial commission up front with the rest of it in monthly installments (plus interest), or nothing… I think I’d probably choose the former… unless I was low on my girl scout credits for the month. Then I’d just do it all for free.