The answer is absolutely Maybe!
Nine of ten times people will answer this question with a resounding Yes. However it is possible that you have created a note which nobody is willing to purchase. This factor may prevent you from selling your owner carry, or seller financed real estate note. Many times the seller of a property will prioritize the buyers needs over their own in order to make the sale. If you have any intention of possibly selling your note at a later date you must create a note that will be attractive to a buyer when this time comes.
Allowing your buyer to purchase with no money down, taking their word on their credit rating and not verifying this for yourself, offering a super low interest rate, or creating complicated terms are factors your buyer may enjoy but can also prevent you from selling your note or force you into taking a very steep discount. When you are selling property and you are planning to carry some of the financing you must take control of structuring the deal, especially if you are planning to sell this note. Keep in mind that when you sell a note you will take a discount off of the the face value of the note.
Why must you take a discount? The investors who buy mortgage notes or trust deeds are purchasing risk. Therefore buying at a discounted price counters the amount of risk they are taking on with the purchase of your note. There is no way around you taking a discount, however if you have created a quality note to sell you can limit the amount of this discount.
5 Key Factors to Creating a Quality Note, and Why:
1) Get the highest interest rate your buyer is willing to pay.
Reason: Investors expect a high yield when purchasing a note. This is part of their built in risk reduction.
A higher interest rate will allow for a smaller discount in order to build in the necessary security required
to purchase your note.
Tip: Start by requesting 10% or more and negotiate from there.
2) Know Your Buyers Credit Score:
Reason: Your buyers ability to pay is a key factor in determining risk. Bad credit means a buyer who has
difficulty meeting their financial obligations and therefore creates a high risk of default on the loan. Note
buyers are not interested in owning property, if they were they would be real estate investors not note
investors.Foreclosure is an expensive an complicated process note investors would prefer to avoid.
Tip: It is your right to ask for and review your potential buyers credit report and score, and it is strongly recommended you do so. Never take their word for it.
3) Always Get a Cash Down Payment:
Reason: The amount of Equity in a property is also a key factor in determining risk as this creates a
safety net for the note buyer. A lesser amount of equity will require a bigger discount in order to create
a false equity that lowers risk.
Tip: When you sell your note the sale price of the property will be considered as current market value, therefore the larger the down payment you get the greater amount of equity you will create. A 20% down payment will create the 80% LTV (Loan to Value) that note investors prefer, especially if you are planning to sell your note right away.
4) Season Your Note for Higher Return:
Reason: While a real estate or mortgage note can be sold right away the longer you hold onto it the better
you will make out on the overall deal. Collecting payments for a minimum 3 months will increase the
attractiveness of your note. Obviously the more the better but also consider that during the time you hold
your note you will be collecting monthly payments which are mostly interest and very little principle.
Tip:By holding your note for a year or two the principle balance your note purchase price is based on will reduce very little. While at the same time your note will become safer allowing for a smaller discount at the time of sale. When you then calculate the down payment received, the note sale price, and the total amount
collected in monthly payments over this time period you may actually increase your original sale and the
overall net into your pocket.
5) Create Simple and Short Terms:
Reason: Crazy terms create high risk. Longer terms mean a longer period of time for the buyer to collect their money--increased risk.
Tip: Fully amortized loans are best. When shortening the term of payoff to 20 years or even less you increase the monthly payment and reduce overall risk. Balloon payments for sooner payoff are good, but do not accompany them with interest only payments, amortize it out.
If you are having a tough time trying to sell a property in these difficult times you may want to consider offering seller financing to help you attract a whole new group of potential buyers. At PSR Note-Ability are always willing to help people with deal structuring and note creation so they that they may later sell their mortgage. We do not charge for this assistance and only ask you bring your note to us for a price quote when the time comes.
Visit the website at www.psrnote-ability.com or call me direct at 530-318-2662. I answer my own phone and will happy to assist you any way I can. Even if you just a question, my door is always open.
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Monday, January 31, 2011
Thursday, January 27, 2011
What is the Time Value of Money?
For those of you who have never heard this term before, the "Time Value of Money" simply states that dollars have more value today than they do tomorrow.
For a simple example of what I mean answer this question. Would you rather have $50 in your hand today or $100 five years from today? Sure it would be great to know that five years from today you will have $100, but you cannot do anything with now. Whereas having $50 in your hand today can benefit you immediately. You can pay bill, make an important purchase, or possibly invest that fifty dollars so you will have $500 five years from today.
Another example of the "Time Value of Money" works like this.
Consider buying a sack of groceries or gasoline for your car. Put an imaginary twenty dollar bill in your hand and travel back 30 years to 1981. Think of how many loaves of bread or gallons of gas you could buy with that twenty dollar bill. If memory serves correctly a loaf of bread was about was about $0.59 and gas was about a $1.00 a gallon. This would equal 33 loaves bread or 20 gallons of gas. Wow, I could fill my gas tank, And buy about 5 loaves of bread on twenty dollars.
Now travel back to today and go buy some bread or gasoline with this same twenty dollar bill. At approximately $1.59 for a loaf of bread and over $3.00 per gallon for gas your looking at 12 loaves of bread Or, about 6+ gallons of gas. Guess I'll only get 5 gallons of gas and 2 loaves of bread today.
Lets take it one step further and travel just 20 years into the future. Now what can I get with my twenty dollar bill? Just enough gas to get to the store and back for a loaf of bread... I hope.
When you have a mortgage note and you are scheduled to collect monthly payments over long period of time you are subjecting your money to the effects of Time Value. What benefit does $100,000 over 30 years have over $50,000 today? I am not denying the fact that money spread out over time can be very beneficial to many. But keep in mind that when you collect that last "small monthly payment" your $100,000 will be gone, and what will you have to show for it?
Consider the ways you can put $50,000 to work for you today and what it could look like in 30 years. A well invested $50,000 today could be a quarter million in 30 years, who knows. One thing is for sure, you can create whatever benefit you wish to, starting right now rather than many years from now. That is if you can manage to save those monthly payments until they amount to something you can use.
One answer that always disturbs me a bit when I present these ideas to a note holder comes from the older folks. While it is a noble idea to hold onto a note so that when you pass your children can enjoy the benefits of an additional monthly income, I don't see the logic.
This is your hard earned money and you should be able to enjoy it anyway you see fit. If that enjoyment comes from allowing your children to benefit from it, then why not do it now while your still alive so you can actually reap the enjoyment of seeing their lives enhanced. Besides that, think of how much greater benefit they can enjoy now opposed later when Time Value has diminished what your gift is worth.
What if you took that $50,000 and paid off or paid down their mortgage. If they refinanced for a much smaller monthly payment or suddenly had no payment all can you imagine being around to watch their quality of life skyrocket.Who knows maybe they would even bring the grand kids to visit more often now that they wouldn't have to work so many hours to make ends meet. Now that is some quality enjoyment I would prefer to have as I get older.What fun do I have if they only benefit after I'm gone.
Seller financing is a great way to sell property. Carrying the note is a great way to increase your profit through interest payments. Selling your note is a great way to improve quality of life today.
Here at PSR Note-Ability we enjoy helping people to realize their dreams, improve their quality of life, and better their futures by creating win/win situations for all parties involved.
We may even be able to help you out of a bad situation if you have a mortgage note that your buyer has stopped making payments on. Yes we do buy defaulted notes as well as quality performing notes.
Visit www.psrnote-ability.com or call direct at 530-318-2662 for a no obligation quote on today's market value of your owner carry mortgage note.
For a simple example of what I mean answer this question. Would you rather have $50 in your hand today or $100 five years from today? Sure it would be great to know that five years from today you will have $100, but you cannot do anything with now. Whereas having $50 in your hand today can benefit you immediately. You can pay bill, make an important purchase, or possibly invest that fifty dollars so you will have $500 five years from today.
Another example of the "Time Value of Money" works like this.
Consider buying a sack of groceries or gasoline for your car. Put an imaginary twenty dollar bill in your hand and travel back 30 years to 1981. Think of how many loaves of bread or gallons of gas you could buy with that twenty dollar bill. If memory serves correctly a loaf of bread was about was about $0.59 and gas was about a $1.00 a gallon. This would equal 33 loaves bread or 20 gallons of gas. Wow, I could fill my gas tank, And buy about 5 loaves of bread on twenty dollars.
Now travel back to today and go buy some bread or gasoline with this same twenty dollar bill. At approximately $1.59 for a loaf of bread and over $3.00 per gallon for gas your looking at 12 loaves of bread Or, about 6+ gallons of gas. Guess I'll only get 5 gallons of gas and 2 loaves of bread today.
Lets take it one step further and travel just 20 years into the future. Now what can I get with my twenty dollar bill? Just enough gas to get to the store and back for a loaf of bread... I hope.
When you have a mortgage note and you are scheduled to collect monthly payments over long period of time you are subjecting your money to the effects of Time Value. What benefit does $100,000 over 30 years have over $50,000 today? I am not denying the fact that money spread out over time can be very beneficial to many. But keep in mind that when you collect that last "small monthly payment" your $100,000 will be gone, and what will you have to show for it?
Consider the ways you can put $50,000 to work for you today and what it could look like in 30 years. A well invested $50,000 today could be a quarter million in 30 years, who knows. One thing is for sure, you can create whatever benefit you wish to, starting right now rather than many years from now. That is if you can manage to save those monthly payments until they amount to something you can use.
One answer that always disturbs me a bit when I present these ideas to a note holder comes from the older folks. While it is a noble idea to hold onto a note so that when you pass your children can enjoy the benefits of an additional monthly income, I don't see the logic.
This is your hard earned money and you should be able to enjoy it anyway you see fit. If that enjoyment comes from allowing your children to benefit from it, then why not do it now while your still alive so you can actually reap the enjoyment of seeing their lives enhanced. Besides that, think of how much greater benefit they can enjoy now opposed later when Time Value has diminished what your gift is worth.
What if you took that $50,000 and paid off or paid down their mortgage. If they refinanced for a much smaller monthly payment or suddenly had no payment all can you imagine being around to watch their quality of life skyrocket.Who knows maybe they would even bring the grand kids to visit more often now that they wouldn't have to work so many hours to make ends meet. Now that is some quality enjoyment I would prefer to have as I get older.What fun do I have if they only benefit after I'm gone.
Seller financing is a great way to sell property. Carrying the note is a great way to increase your profit through interest payments. Selling your note is a great way to improve quality of life today.
Here at PSR Note-Ability we enjoy helping people to realize their dreams, improve their quality of life, and better their futures by creating win/win situations for all parties involved.
We may even be able to help you out of a bad situation if you have a mortgage note that your buyer has stopped making payments on. Yes we do buy defaulted notes as well as quality performing notes.
Visit www.psrnote-ability.com or call direct at 530-318-2662 for a no obligation quote on today's market value of your owner carry mortgage note.
12 Tips for the Investor Selling Property and Carrying Financing
When you create the note that declares the terms of a sale there are many variables in the creation that can later affect the sale of your note. The following are 12 tips that can enhance the resale value of your note, and why:
1) Always shoot for the highest interest rate you can get
a. Note investors seek high yield on their investment therefore a low interest rate constitutes a larger discount in order to create the high yield they seek.
2) Fully amortized with shorter pay off terms are best
a. Keep it simple. Crazy terms equal higher risk. Lower risk equals smaller discounts.
3) Balloon Payments due on the note are good additions
a. Balloons equal a shorter time frame for the investor to receive their money in full. Shorter payoff time equals smaller discounts.
4) Plan to hold your note a minimum of 3,6,9,or even 12 months prior to sale
a. Minimum seasoning is an unavoidable requirement.
b. If you are flipping the property (selling with less than 12 months ownership) the longer you can hold your note the smaller the discount will be. 12 or more months is best, 6 is good, 3 is tough. (Personal note- I do note understand why flipping is viewed as a negative and demands steeper discounts. I believe it should be the opposite as most of the people you are flipping to are some of today’s most financially stable buyers - I am lobbying for investors to realize this but mindsets are not easily changed)
c. If you cannot afford to have your investment capital floating this long seller financing may not be your best exit strategy (even so please read on)
d. The longer you hold your note the larger your overall profit can become when you calculate in the payments collected during this time, along with the down payment collected, and the note sale price.
5) Minimum 20% down payment is a must have
a. In today’s market investors are requiring a maximum 80% LTV on a note purchase
b. When you sell your property below market value this new sale price will be viewed as “current market value” at the time when you sell the note
c. With a sale price well below market value you can enhance the value of your note buy paying for a current property appraisal when are going to sell.
i. Comparing the Appraised value with the sale price can create a smaller LTV which will enhance the value of your note and lessen the discount offered. However use caution on when to pay for an appraisal. Be sure the property value increase will improve the percent of value offered on your note enough to substantially offset the cost of the appraisal. A few hundred dollar appraisal for a few thousand dollar increase in sale price of your note is what you seek.
ii. Lowering LTV by 5% or less may not achieve the results you seek. Shoot for a 10% or greater decrease in LTV when choosing to pay for an appraisal.
iii. Keep in mind the full value of the appraisal still may not be the number the investor chooses to apply as current market value. They may determine it to be somewhere in the middle as property values in most areas continue to decline. Until we experience full, solid and confirmed reversal of this trend “current market value” is subjective.
6) Never create a second position note. First position notes only.
a. There once was a market for 2nd position notes, but not today.
b. ONLY if it is for yourself to hold to full maturity do you want to create a 2nd. For future sale of the note…1st position only.
7) Credit Score is Key
a. ALWAYS know your buyers score (Do Not take their word for it) Get the report!
b. 620 is the break to receive an average discount.
c. Under 600 is a sellable note but the discount is very steep
d. Below 540 and you are holding this note until your buyer can improve their score.
8) Always be sure to keep good records
a. Specific documentation is required to sell your note and having everything in one location and easily accessible will make your sale go smoothly and close quickly.
9) Always include a due on sale clause. (self explanatory)
10) Always include late fee provisions
11) Including Tax and Insurance impounds is a great addition that lowers risk
a. This may be a bit of a headache for record keeping but it does make your note more attractive.
12) Always remember that you will take a discount when selling your note. Increasing your sale price may be required in order to realize the bottom line you seek.
a. When offering seller financing you will need to wear different hats. You must not only be the seller of real estate but also an investigator and a salesman.
i. As an investigator you must dig deep into your buyer’s situation and determine their level of urgency or desire to buy this particular property, their inability to get financing and the reasons why, the amount of cash for down payment, and their willingness to make concessions. All this information will help you to determine whether or not they are willing to make the concessions that you will require in order for you to realize your bottom line.
ii. As a salesman you must sell your buyer on the fact that carrying financing is a huge risk on your behalf and They Will have to make certain concessions in order for the deal to work for both of you. Pointing out that without their acceptance of these concessions they may not otherwise be able to make a purchase at all. How their acceptance can buy then the time they need to improve their situation so they can later refinance the terms for greater savings. Or in some cases (as to an investor opposed to an owner occupant buyer) by making these concessions they may be able to spread their investment capital further, possibly enabling them to make multiple purchases rather than just one and increase their net worth more quickly.
iii. Work the numbers in advance so you can show them the overall savings, and or profit and equity they can accumulate over time. Improving their current status and buying property today can prove to be a financially sound decision when compared to waiting and watching as prices and interest rates climb.
As with any phase of real estate and real estate investment we are all well aware that the market place is ever changing, especially today with distressed property and government intervention having unknown affects on the future of everything real estate.
Seller financing as an exit strategy can increase your potential buyers pool and help you to sell more property. This strategy right now is best for those who have the capital base to sit on notes for an extended period of time, if need be. Current market conditions make this a high risk proposition for the small time investor who must regenerate their working capital in order to progress their business. I wish I could say create your notes like this today and you will sell them for X amount tomorrow but, our volatile market will not allow for anything even resembling stability.
The biggest factor affecting note sales, as with anything real estate, is of course the market value of property. Fear that LTV will increase to an unacceptable level with property value decline is cause for note investor concern. Unfortunately the attractive note you create today may not look so good if the value of the property declines before the required seasoning requirements are met.
On the bright side we are hopefully very close to actually reaching the rock bottom. Once this occurs and we are pointed in the right direction with no looking back all markets should experience more stability and maybe then we can today’s note IS good tomorrow.
I do encourage seller financing as an additional tool for you to sell your real estate, but I must also encourage caution in determining whether or not it is right for you. I do want you to utilize this strategy and then call me to sell your note (of course I do this is how I earn my living), but I do not want for anyone to engage in activity that is going to have negative results for their business. We must all grow stronger together if we are going to improve our real estate business and the real estate market as a whole.
I thank you for taking the time to review this information and hope this will benefit you, your business, and your families as you move forward with your real estate investments.
PSR Note-Ability is available to assist you in any way we can at any time you need us. I look forward to helping you advance your business combining seller financing with mortgage note sales and will gladly answer any questions you may have. Feel free call or email anytime.
In closing I would like to add that there is a growing market for defaulted notes. If you are holding any notes your buyer has stopped paying on, no matter how old they may be, we would be very interested to evaluate what you have and possibly cash you out of a dead end situation.
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