Note Holder Tips (2)

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How Getting a Professional Note Appraisal Can Save You $Thousands$

May 19th, 2008 categories: Note Holder Tips, Selling Your Note

Not long ago an attorney was representing an estate that held several real estate notes worth a total of about $8,000,000. Needless to say, the estate taxes were very high, so to reduce them, he hired me to do a Professional Note Appraisal to determine the actual market value of each of the notes.

This attorney knew that a note is almost never worth it’s face value. There is almost always a discount when the note is purchased, and this attorney wanted tax savings for his client based on the true market value of the note (just like an appraisal is done to determine the market value of any real estate).

The gentleman who had died had invested heavily in real estate (mostly commercial) and his exit strategy was to sell and carry back a note and first deed of trust using the installment sale. He successfully converted his real property assets into paper assets, which is what a lot of investors eventually do.

It’s just easier to collect note payments than it is to manage property.

Some of the notes ended up being worth substantially less than their remaining balance, some represented only a small discount, but working together, this attorney and I were able to save the estate about $250,000 in estate taxes!

The IRS has some funky guidelines about note valuation, but the Professional Note Appraisals gave the attorney a starting position from which to successfully negotiate. He feels that this issue is below the radar of most professionals and needs to be brought to the surface for the benefit of estates, like this one, that held a lot of real estate notes.

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Avoid a Critical Seller Financing Mistake - Insist on Insurance When You Create a Seller Carry Back Note

May 12th, 2008 categories: Note Holder Tips, Seller Financing

Question:

“How do you handle the homeowners insurance on a seller carry back? Whose name? Who pays? Thanks for always taking the time to answer all my ?’s!” – Snodgrass & Penelope, Realtors

(P.S. Ladies and gentlemen, this is why we make sure that the buyer/note payor carries fire insurance. If you’ve provided the financing on the sale of your own property and carried paper, do you want this happening to the collateral securing your note? There wouldn’t be much left to foreclose on, would there?)

Answer:

This is a great question, and brings up a very important aspect of holding a note that sellers need to be aware of. Sometimes it’s hard to get your head around how seller financing works. People are so accustomed to complicated financial situations that the simplicity of owner financing escapes them.

An easy way to understand it is just to realize that the only thing that is different on a seller carry back vs. a traditional sale is the identity of the “bank.” The seller (home owner) becomes the bank.

Obviously, there is no third party lender, but there is a lender. So, the insurance is handled the same way as it would normally be, it’s just that instead of “Wrote-Down-a-Billion-This-Month Financial” listed as the Loss Payee, it’s the name of the seller.

At the close of escrow, you would ideally want the buyer to pay a full years’ worth of insurance in advance, and make sure the seller (note holder) is listed as the Loss Payee so he gets notices if the coverage changes or goes unpaid. He would receive a copy of any cancellation or non-renewal notice that might be sent.

The note holder (seller of the property) should demand proof every year that insurance is kept current, is adequate to cover any loss, and that he is listed as loss payee. If he is named as a loss payee and keeps his address current with the insurance company, he should receive a certificate of insurance every year.

NOTE TIP: Never allow a policy to lapse for even a second!

If the Payor (buyer/owner of the property) refuses to maintain adequate coverage, then you can do one of two things (provided your note contains the proper language . . . another reason to consult a note professional):

“Force Place” a policy and include the premium in the remaining balance of the note. You will earn interest on the premium that you paid at the face rate of the note. When the note becomes due, you will include the insurance premiums in your pay-off demand.
Failure to maintain adequate fire insurance is always cause to proceed with foreclosure.

Sometimes people carry paper to get the deal done, but they end up wanting to sell their note because they just don’t like keeping track of insurance, making sure property taxes are kept up, etc. They think it’s just better to sell at a discount and get out and not worry about the security of the note.

If sellers carrying paper plan on selling their note at some point, they ABSOLUTELY need to consult with a note professional to set up the note in a way that protects its value. The secondary trust deed market is changing all the time, and sometimes sellers unwittingly take back a note that isn’t worth a dime in the secondary market.

Hope this helps!

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Read about other Note Holder Tips

You Must Document Payment History to Preserve the Value of Your Note

May 8th, 2008 categories: Note Holder Tips

You have to change your thinking. When you take back a note (carry paper, provide seller financing) on a property you already own, you need to put on a different hat. You’re not a property owner, or a property manager any more . . . you’re the bank, and you need to think like one.

On the deed of trust, you become the beneficiary. Perhaps you’re thinking, “Great! I like banker’s hours! And I’ll have the major holidays off!”

And you should be happy about collecting payments on a note rather than rent. It’s a very natural progression for investors to convert their real assets into paper assets at some point.

Because it’s just easier, that’s why. No more toilets, tenants or taxes. But when you’re the bank, you have to keep track of note payments instead of the rent roll.

Why is it important to keep an accurate and verifiable record of when you receive each note payment?

Because when you decide to sell your note, you’ll want it to be worth as much as possible. And the payment history is an important element. I’ll pay more for a note with a well-documented payment history, where there are no late or missing payments.

The reason is this: the better the payment history (and you need to prove it to me), the more confident I am that the payments will continue to come in as expected, (the less likely it is to go into default), which protects the yield, or return, that I expected when I purchased the note.

When note payments are continuously late, it makes me more nervous, and I need a higher return/yield/reward in order to justify the higher risk. When payments are late or missed, it seriously jeopardizes my original investment.

A great way to make sure your note payments are professionally documented is to use a note servicing company. If you want to service the note yourself, then get yourself an amortization schedule and keep track of the payments as they come in. Also, save all your bank statements proving when the note payments were deposited.

If you fax your note to me, I will be happy to provide you with an amortization schedule free of charge.

I want to carry paper, please help me create a valuable note.

If I Carry Paper, How Much Will I Get Each Month?

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