Buying Mortgage Notes
The realtor searched online looking for someone buying mortgage notes. The clients she had represented had not lived in the house for four years, and had, in fact, moved to Arizona to get away from the dark atmosphere that pervaded the area. The area of the county in which the house was located was a vast wasteland of unsold property, due to three large manufacturing plants closing in just the past ten years. They had sold the house on a land contract to a supervisor who had moved into the area from the South. Now the guy had tripped up on a few monthly payments and the couple was getting very antsy. The question was, "Would anyone want to buy real estate notes in this barren economy when seemingly nothing was moving?" Surprisingly, the couple knew nothing about selling a property note to a broker, so when the real estate agent started sharing the information with the couple, they began becoming more and more interested. "For the word of the Lord is right; and all his works are done in truth." (Psalm33:4) Here is some of the information the realtor gave this husband and wife:
The realtor began by sharing that there are businesses and individuals who made a living buying mortgage notes on a regular basis all across the country. The woman explained that there were a number of factors going in to deciding how much the two of them would receive for the note. The couple had bought the house ten years ago with a thirty thousand dollar down payment fixed rate loan for thirty years. They had purchased the house for one hundred and fifty thousand dollars, and had put ten thousand dollars on the mortgage principle during that time. They were now holding a note for about one hundred and ten thousand dollars. The couple allowed the land contract owner to pay a nine hundred and twenty-five dollar a month mortgage payment, not including real estate taxes. But now the couple was paying two mortgages in two very distantly separated states.
The realtor continued to share that in order to buy real estate notes, a broker leaves nothing to chance. This professional is out to make money and in order to do that, many things would have to go into the formula. Buying mortgage notes is a bit of an art form, with the bottom line really being the time cost of money. What this term means is the length of time the broker will have to hold the note before it is paid in full. So the further out the pay off date is, the less value the note is to the broker because the note will have to be held for a longer period of time, when markets and money might become tighter and more expensive. In the land contract, the couple had also offered the supervisor the same interest rate they had gotten originally, even though real estate interest rates had actually risen a point and a half. This surprised the original owners to learn that because of the lower interest rate, their note was worth less to the broker.
If there had been a balloon payment in the land contract, the realtor explained that the note would be very interesting to a person or business buying mortgage notes. If the payment is a long way off in its due date, there is not much value to the broker, and if the payment is coming due soon, and it appears the holder of the mortgage will not be able to pay the large payment, again not much value to the one who wants to buy real estate notes. When the couple sold the house on land contract to the supervisor, the contract stipulated that the note could be assumed by another buyer, leading to another problem for the broker. The supervisor had been a pretty good payer of the mortgage until recently, but with an assumable note, the next holder of the note might be a slow poke or even a deadbeat when it would come to paying. Another risk for the broker.
One of the strongest factors in favor of the couple was the fact that the property was a residential single family dwelling. However, this has a downside also because it is in an area of the country where there appear to be a lot of decay, or at least stagnation. But the realtor also explained that to a business buying mortgage notes, the loan to debt ratio is huge. Because the house was appraised recently at one hundred and forty one thousand dollars, and the remaining debt was at about one hundred ten thousand dollars, the interest to the business or the person that would buy real estate notes is marginal. The broker will consider that a person assuming the Arizona couple's mortgage note will be at a loan to value ratio of seventy eight percent, not a bad figure. This means that the new buyer of the mortgage may, in fact, stick around because of an investment of at least twenty two percent in the transaction.
It turns out that for the couple's situation, if the twosome sold their note to a broker, the duo would receive about sixty percent of the appraised value of the house, or eighty-four thousand, six hundred dollars. The couple would have to make up the rest of the twenty-six thousand dollar deficit to make the deal fly. In the end, it was decided that Arizona was more important than twenty-six thousand dollars. The couple could handle a ten year loan for twenty six thousand dollars. Another time when quality of life wins over the accumulation of things.
Buy Real Estate NotesThe decision to buy real estate notes is often made by an individual who has investment money that is free and clear and ready to be put to use. Oftentimes companies or firms are developed to only do this kind of buying and investing, and that makes the job of finding real estate notes more difficult for the individual investor. Real estate notes are actually non-formal mortgages that owners of property are holding for buyers not qualifying for traditional bank loans. For example, a person owns a house and cannot sell it because of the high price or because those buyers interested in the property cannot qualify under a bank's tough credit scrutiny. So in order to get the price he wants for the house, the owner decides to offer a rent to buy transaction to a motivated buyer who understands that his rent will go into paying for the house he wants. The owner then holds the real estate note for that property. Things are going along fine for all parties for a few years until the holder of the mortgage note goes through a divorce and has to have immediate access to the entire house's value.
The note holder must now quickly find someone who is willing to buy real estate notes. In this process, he begins to look on line both at those resources that buy real estate notes only and those who buy all structured settlements which would include annuities, lottery winnings and other insurance payments that pay each month or once a year. There are some things to remember in choosing someone who will buy a note, beginning with their reputation. If the seller has any kind of personal relationship with the person "renting to own " there may be great concern over the reputation of the one buying that agreement, but if is strictly business, then the reputation of the buyer will not matter except in the receiving of one's money. All advice can be summed in two sentences. Check the buyer's background thoroughly and ask for a number of references. Secondly, get you attorney involved to go over every word in the sales contract.
A person who is going to buy real estate notes is out to make a profit, so know right away that when selling notes, there will be a significant loss of equity that will occur in the deal. In many real estate note situations, the one purchasing the property through a rent to own or land contract may very well be on shaky financial ground. This spells trouble for the one buying the note. The one making payment may default, property values may take a tremendous tumble, and world events could shake everything up in terms of employment and the lack thereof. The buyer is assuming tremendous risk, so he takes tremendous profit from the sale. It is possible to only receive between 40 and 60% of the actual value of the property. This is true for any structured settlement purchase, and its reality may give a seller pause before going through with the agreement.
Before ever agreeing to sell notes, a person should bring their attorney into the discussion. But even before paying an attorney, an agreement can be quickly evaluated in terms of genuineness and being a good deal. If a buyer of notes asks for upfront money, "Run Forrest, run!" Buyers can check one's credit without having any upfront money and so continue looking before deciding. Perhaps title insurance and an appraisal fee are the only two legitimate fees that a seller should have to pay in the transaction to buy real estate notes. Then take the agreement to the attorney and have her look it over with that fine tooth comb. Sign nothing until every question is cleared up.
There is plenty of money to be made in the structured settlement financial business. Sadly, some of it can be made in unethical ways. Some people who may choose to pursue the vocation to buy real estate notes do it with an eye to cheat others. There are situations in which a buyer will promise the holder of the note that a certain amount will be paid for the property. Then, once the agreement has been made orally, the buyer will come back with a much lower number because of the seller's credit rating. That kind of business tactic may not be unlawful, but it is certainly immoral and unethical. Again, it is important to know with whom you are doing business. "For the Lord God is a sun and shield: the Lord will give grace and glory: no good thing will he withhold from them that walk uprightly." (Psalm 84:11)
A person can learn how to buy real estate notes by taking classes from online websites or by taking some finance and real estate classes from a community college. The resources will cost money, but the investment in the education will pay off nicely in the years to come with a career in buying bank notes. It is often advisable to try and get a position with a company that specializes in the buy real estate notes business. These companies have such strong investigative abilities that locating single sellers of a bank note are becoming extremely hard if not impossible to find. A strong background in bank finance, real estate, or financial management will be the best keys to getting in the door to the world of note buying. Courses offered online by so called experts who teach how to buy bank notes can be quite expensive, so the advice is to consider all options before enrolling.