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Can a Real Estate Investor Sell This Note for 90 Cents on the Dollar?

seller financing

Svetlana made a decision to invest in notes and moved across the country to do it. That’s an action taker for ya… no ‘paralysis of analysis’ for her! Fire, ready, aim!!

She’ll continue to evolve and tighten up her strategy and deepen her understanding, but she’s in the game, by golly! I admire that.

She buys property cash and then sells on “terms,” with seller financing, to create notes for cash flow. She’s not buying other people’s notes, she’s making her own.

She wants to know if she can sell a recent one she created for 90% of UPB (unpaid principal balance).

Licensing is a big issue that came up for us all to chew on. Check your state, but some states require that a beneficiary on a note and deed of trust be licensed in that state. It’s not enough to run the deal through an LMO (licensed mortgage originator).

Not saying it’s impossible, but the biggest challenges she would have in getting her price are:

  • She sold the property for $60,000 more than it was worth
  • So even though she took a respectable 10% down, the note balance is greater than the ’30 day as is value’ of the property by $40,000
  • With a note balance that is greater than the value of the property, she immediately excludes any institutional buyers for her note. They simply won’t deal with it.
  • To boot, credit is unknown… not available. That also takes the institutional note buyers out of the game

So, Svetlana is left with a couple of options:

  1. Create two notes: a 70% first note for selling and a 30% second note for holding – that will help, but many note buyers would still be leery knowing that the buyer is upside down and has no credit. The buyer/borrower thinks he’ll cash flow it because he plans to run it as an assisted living business… but what if the city shuts him down for some reason? Then the fact that he overpaid for the property and has a 10% interest rate just won’t make sense, and there would be a high likelihood of default.
  2. Cultivate a money partner that would like a nice secure 8% return, and bring them in with $110,000 or so. That way Svetlana would not only NOT take a discount on her note, but would make a PREMIUM instead.

You can create notes like Svetlana did, AND/OR…

The other side of the note business is cultivating your own private money partners. Both are equally powerful. If you’re a deal maker AND can easily cultivate your own investing partners, the world is your oyster.

No… I don’t think she’ll get 90 cents on the dollar for the note she was describing on our last Property & Paper Live, but I trust Svetlana will do very well… she’s got grit.

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