HIGHLIGHTS CREATIVE FINANCING JOURNAL * How to turn seller-financed notes into cash the holder wants * Exploding the myths surrounding seller-financing * An easy overview of the pricing factors in the note buyer's market * Create cash flows that will sell by understanding the note buyers' parameters Smart Seller Financing Strategies: Make The Sale, Keep The Money When sellers offer financing,it doesn't mean they will be stuck carrying payments for years to come. In fact, a professional Note Finder can show them how to increase the value of a note before it's created, by offering guidelines an attorney can use to create a note with qualities Note Buyers look for. This results in a note that can be liquidated for cash, quickly and safely. The sellers' misconception Many property sellers avoid seller financing because they believe it's not a viable solution for selling a home. After all, if they can't walk away with enough cash to provide the down payment on another property, they'll be powerless to replace the property they selling. But in actually, many notes created through seller financing are quickly sold for cash. Even better, if the note is created with the buyers' purchasing criteria in mind, the seller could walk away from the closing table with cash in hand! This means that the net result is almost exactly the same as with a conventional real estate sale. In the cases where Note Holders do encounter difficulty in selling their monthly payments, it's typically because the note was note created with the Note Buyer in mind. This is why it's a good idea to involve a professional Note Finder even before the note is created. Planning ahead to make a note a good deal : Creating notes with the Note Buyer's needs in mind If the seller of a private note needs a large amount of cash immediately, she will want to sell the note as soon as it has been created. And to quickly find a buyer, the note must meet the general buying parameters: * A substantial down payment * An excellence credit score (to minimize risk of default)
* An interest rate of 8 % or more * A term that comes due in ten to fifteen years If there is no down payment collected and the interest rate is low, the note would be great for the new property owner, but not to a potential Note Buyer. A down payment of at least 10% is a good minimum figure when creating a note. In a no money down real estate sale, lenders worry that the buyer could walk away and lose almost nothing financially. So to offset this risk, lenders generally set higher interest rates so they get more money per payment. Unfortunately, Note Buyers do not have the ability to change the terms on the note. So when there is little or no equity in the property, all offers to purchase the secured note must be discounted substantially in order to compensate for the buyer's chances of default. The downside is that a heavily discounted buyout offer often means the seller can't get the money she needs from her note. Creating notes that can be sold Every Note Buyer's criteria vary, but in the current market, the home buyer's down payment immediately creates equity in the property to serve as the buyer's safety net in the event of a foreclosure. A competitive interest rate is important because it will make it easy for the buyer to purchase the note and yield the desired profit without much of a discount to the Note Holder. Finally, keep in mind that people typically prefer notes that follow a traditional term (amortized over 120 months, 180 months, etc). A two-year, interest-only balloon term is a perfect example of a note that many buyers would avoid. But remember, all notes are good notes at the right price. Of course, there are no absolute guarantees of a quick sale. But it is always easier to obtain an attractive offer for the Note Holder when the note is written with the buyers' needs in mind. The points described here are only a rudimentary starting point for note creation; buyers often examine many other factors. Please contact me directly with specific note information so that I may suggest a private finance solution that will be optimal for your needs. Notable Four most important factors of note value When liquidating a note, it's important to get the biggest lump sum of cash possible. To do that you must understand the four most important factors in determining the value. The four criteria are equity, the Payor's credit score, the number of payments made, and the note payment history.
Equity is created in three ways: 1. When a down payment is made 2. As monthly payments are made 3. As the property appreciates Generally speaking, Note Buyers look for at least 20- percent equity in the property. This minimum level of equity serves to help protect their investment. Many Note Buyers will consider the Payor's credit score closely because it can help predict the note's potential for foreclosure. Credit scores are indicative of performance with past and current debts, so it make sense to assume that a Payor who has been responsible in consistently paying back other debts will be a good note Payor as well. With seller-financed debts most Payors will not have stellar credit, but most buyers still prefer Payor credit score above 575. A note's seasoning describes the number of payments that have been made overall. The more payments that have been made, the more money the Payor has invested in the property; therefore, default is less likely. Most Note Buyers look for 12 or more completed payments, but exceptions are made for notes with a large amount of equity or a Payor with a high credit score. The note payment history takes any late payment into consideration. Understandably, most buyers prefer a consistent on-time payment history. Perfection isn't required or expected-one isolated occurrence of a missed payments a few years ago won't necessarily dissuade a potential Note Buyer. Sufficient equity also serves to counterbalance a history of occasional slow payment. Market Pricing For Real Estate Notes How risk determines the discount Financial institutions and banks purchase prime, secured mortgages on a regular basis. Theses payment streams are often purchased at a price on par with or slightly less than the note's current balance. The transfer of ownership of these cash flows is usually completely to the Payor or new home owner. When banks sell and buy cash flows they're typically working with institutions with similar lending parameters. This means that the buyers are familiar and comfortable with the credit rating and demographic of the Payor, as well as the structure and critical metrics of the mortgages. That's why when a bank sells a note it doesn't require deep discounting. But consider that most note deals involve limited equity or a Payor with a low credit score. As a result, banks and lending institutions aren't comfortable with purchasing private notes because they consider these cash flows to be loans with a greater potential for default. The Note Buyer market The good news is that there are plenty of other buyers looking to purchase private note payment. They
know that there is a high potential for default, and they are comfortable with the risk in exchange for a good rate of return. To offset some of this risk buyers look for high yields- 10%, 15%, 20% or sometimes greater-and then focus on what's securing the note. In order to achieve a yield comparable to the risk involved, Note Buyers will often offer less than the remaining balance on the note. The discount involved with private note purchasing counterbalances the risk to the buyer of possible foreclosure. If a Payor defaults on his payments, the Note Buyer typically has to foot the bill for legal actions and than resell the property at auction. Ideally, the buyer of a secured note should be able to foreclose on the property and re-sell the house to re-sell the house to recoup the entire note balance and then some. Although there are unpredictable expenses involved with foreclosure, the discount should make up for these extra costs. Most notes must be discounted due to factors like a no-credit buyer or a limited amount of money to put as the down payment amount. There are exceptions, though. For instance, in some cases, prime notes with equity and an interest rate higher than the market average will also bring high price. BRAINSTORM Understanding the logic of note discounting When the owners of real estate notes liquidate their investments the resulting sales will almost always require some kind of discount. Here's an easy explanation of the Investment to Value (ITV) method that many Note Buyers use to determine their pricing. Most experienced Note Buyers have predetermined guidelines in mind that serve to narrow their focus to the notes that are likely to fit their buying preferences. Still, many buyers will purchase almost any note if the price is right- in other words, if the financial rewards are in line with the associated risk. To compensate for added exposure buyers adjust their pricing guidelines downward, which results in a higher yield. Many buyers gauge their risk in a deal by considering their Investment to Values (ITV) percentage. ITV measures the amount of protective equity the Note Buyer has by comparing her purchase price to the property value. The amount of protective equity in the property is calculated by subtracting the ITV from 100. The lower the number or percentage the safer it is for the Note Holder. When a Note Buyer thinks that acquiring a note may be risky one potential solution is to make a lower offer that decreases the ITV. A lowered ITV result in more protective equity for the Note Buyer. An ITV- based buying example Consider a house valued at $100,000 that secures a $95,000 note. If the Payor in this situation had poor credit or a history of missing payments this would be considered a risky situation. Since there is only $5,000 in equity any Note Buyer would want a mitigating factor to offset the risk involved in this purchase. A logical way to improve this deal from the buyer's perspective is to make a discounted offer. If a buyer offer only $60,000, the ITV wold be 60 percent, giving him 40 percent of protective equity. The
$40,000 of protective equity could help her to make a profit, even in a foreclosure situation. If the buyer incurs extra costs when foreclosing and reselling the house, than $40,000 of protective equity should more than cover the extra expenses. Note Buyer always have to look after their own interests. Consequently, notes with little equity and a poor payment history are likely to see deeper discounts in order to create protective equity for the buyer. This protective equity will help ensure that Note Buyers can recoup their funds if Payor default leads to foreclosure. Market Pricing For Real Estate Notes Note Buyers' priorities Typically, buyers consider their risks in three general ways. #1. Equity. A small amount of equity creates an insignificant safety net for buyers should the note go to foreclosure. So, many will offer lower prices to create equity and a lower Investment to Value (ITV). Take a look at the Brainstorms article in this issue for an ITV- based pricing example. #2. Payor quality. Most buyers will look at the Payor and the potential for default objectively. Does the Payor shows a good recent history for steady payments and a consistent job history, despite a poor credit rating? If so, a Note Buyer might still make an attractive offer if there is plenty of equity to protect the Note Buyer capital. #3. Time- Value of Money. The Note Buyers' primary concern comes from the principle regarding the time- value of money- the factor that determines the amount of time it will take to get her investment back. Money is worth more today than in the future, so the longer the term or time frame, the less the note is worth. Providing solutions for Note Holders For Note Holders who are looking to sell their note payments, the details about the factors that control note discounting aren't important. Their objective is simply to sell quickly and get the cash they need now for the monthly payments they've agreed to receive of a long- term. As a Note Finder, I understand what Note Holders want. I specialize in helping them obtain the most cash possible for their secured payments. Also, property sellers who work with me when creating a note can optimize their situation and maximize the value of the note. In the next installment of the Creative Financing Journal, I'll discuss specific strategies that property sellers can use in order to create a note that will sell quickly and required minimal discounting.
Greeting, My name is Deterion Woods. As a professional note finder, I specialize in developing creative cash solutions; namely, I help note holders receive a lump sum of money in exchange for their secured real estate notes. I can also show home owners how to sell their property with seller finance. Once a real estate note is created, it can be sold for cash shortly after the close of escrow. Existing notes can also be sold to achieve each liquidity. Additionally, if you are looking to purchase a paper asset for your own portfolio, I have the resources to show you many viable opportunities. If you are an attorney, CPA, real estate agent, mortgage broker, title agent or escrow officer, I can assist you in helping your clients realize quick sales of hard-to-sell properties through the use of private financing. If you would like to learn more about the creation and/ or sale of secured private notes, please contact me directly. Join my mailing list or subscribe to this publication by leaving me your contact information. I can be reach at 1-305-634-0761 or via email at timenmoney9@gmail.com Sincerely, Deterion Woods Next Issue * SELL QUICK... AND WALK AWAY WITH YOUR NEXT DOWN PAYMENT * SUMMARY OF SELLER FINANCING * NOTABLE * BRAINSTORM DETERION WOODS TIME-N-MONEY INVESTMENTS 1(305)634-0761 www.timenmoneyinvestments.com timenmoney9@gmail.com