What is the most common question sellers ask me about creating a note?

Answer: What interest rate should I charge?

This question typically comes from someone who perhaps has done or will do 1 or 2 owner carry back transactions in their lifetime. Many times, it comes after a transaction has closed, and the seller is telling me his logic for agreeing to the terms in the note.

My experience in this area finds sellers giving 1 of 2 reasons for agreeing to the “too low” interest rate in the note. One, they would look at the current mortgage rates lenders are charging. If a person can qualify for a mortgage loan and get a 3%-4% interest rate, the seller will use a similar rate for their note transaction. The logic is that if a bank is charging that rate, that’s what they should charge. The fact their buyer does not qualify for a loan from that bank is irrelevant.

The second most common logic for agreeing to a very preferential rate goes like this: “The buyer is a friend”, or, “The buyer is a family member”, or, “I’ve known the people for a long time and they are very good people.”  So, there is no business logic behind the agreed to interest rate.

Interest rates of 3%-5% are commonly seen in note transactions. This year, I have closed 2 transactions where the interest rate was 0%. That’s right – 0% ! In each case, the buyer was a friend, and the seller wanted to accommodate his friend and make it easier for him to purchase the property. I understand the motivation. But, the reality is this – the buyer would not have been able to purchase the property unless the seller was willing to carry the paper. The seller allowed the transaction to happen. In return, the seller needs to be rewarded, if you will, for making this accommodation. And, one of the key ways for this to happen, is in the interest rate. A reasonable rate would be in the 6%-9% range – not a bank rate which the buyer does not qualify for, nor a 0% rate which offers the seller nothing for his acceptance of the inherent risk in owner carry back.

Plus, when the seller decides to sell his note in the secondary market, he now faces this reality: The industry is driven by discounting. Note buyers demand an interest rate return that is consistent with the risk assumed. If a note buyer seeks a double digit rate return and the note has a 0% interest rate, the seller is about to have a rude awakening when he receives the price offer for his note.

The bottom line is simple: If you are selling a property and creating a note to allow the deal to happen, you must be compensated for the risk you are taking, whether you keep the note to term or whether you decide to sell. Your key areas of compensation are a satisfactory down payment, a short amortization period, and an above market interest rate. This is a business transaction, and friendship aside, the parties must approach it as such.

Americans are buying vacation homes like never before!

According to the National Association of Realtors (N.A.R.), Americans bought more than 1.1 million vacation homes in 2014, up a whopping 57% from 2013, and the most since N.A.R. started tracking these sales in 2003.

By contrast, investors bought about 1 million homes and owner-occupants purchased 3.2 million homes – a 13% decline from 2013.

The Realtor group said the median vacation home price fell 11.1% to $150,000, attributing this trend to higher sales of condos and town homes versus single family homes. Purchases also increased for distressed properties and for homes in the relatively affordable South.

If you have an interest in learning more about the note business – creating, buying, selling or brokering notes – you may want to be in Las Vegas from April 30 to May 2, 2015.

The Paper Source Note Symposium, put together each year by Bill Mencarow, founder and owner of The Paper Source, is a great way to meet people who are in our business. It’s a couple days of easy networking with nobody selling you anything. Who attends? The key buyers of notes in our industry. Note brokers from all over the USA. Real Estate Investors looking to learn how they can use seller carry back notes in their business. Curious folks who just want to find out what this business is all about. Industry professionals teaching us about performing notes, non-performing notes, structured settlements, lotteries, factoring, business notes, running a successful note broker business, etc.

I have attended every symposium that Bill Mencarow has sponsored and always look forward even more to the next one. Time is running out because hotel rooms are filling fast due to the Manny/Floyd fight on May 2.

Check it out at www.PaperSourceSeminars.com.

This light message is quoted directly from the February 2015 issue of The Paper Source Journal, www.PaperSourceOnline.com.

The following short quiz consists of 4 questions and tells whether you are qualified to be a “professional.”

1. How do you put a giraffe into a refrigerator?

2. How do you put an elephant into a refrigerator?

3. The Lion King is hosting an animal conference. All the animals attend except one. Which animal does not attend?

4. There is a river you must cross. But it is inhabited by crocodiles. How do you manage it?

Answers:

1. Open the refrigerator, put in the giraffe and close the door. This question tests whether you tend to do simple things in an overly complicated way.

2. Wrong answer: Open the refrigerator, put in the elephant and close the door. Correct answer: Open the refrigerator, take out the giraffe, put in the elephant and close the door. This tests your ability to think through the repercussions of your actions.

3. The elephant. He’s in the refrigerator, remember? This tests your memory.

4. You swim across. All the crocodiles are attending the animal meeting. This tests whether you learn quickly from your mistakes.

According to Andersen Consulting Worldwide, around 90% of the professionals they tested got all questions wrong. But many preschoolers got several correct answers. Andersen Consulting says this conclusively disproves the theory that most professionals have the brains of a four year old.

Everyone in the real estate industry knows Zillow. Zillow is the most popular on line real estate information site, with millions of us visiting it daily to find home listings and basic information on a particular property, such as square footage, number of bedrooms and baths, etc. Zillow will probably have a picture of the property as well, and might even have interior pictures.

I use Zillow every day – it’s a must in our business to get some idea of what this property looks like and it’s key features. It also can provide a brief “Price History” and “Tax History”.

One of the most controversial tools provided by Zillow is something called Zestimate. You plug in a property address and the site will give you a current Zestimate – or market value – of the property. Zillow uses a proprietary formula to determine its Zestimate value. This is an easy and convenient tool for all of us to use.

The problem – sometimes- is the relationship  between that Zestimate and the actual sales price. Some sellers will use the Zestimate as their “number” to sell their home, no matter what their real estate broker may tell them about the reality of their neighborhood – i.e.- your home is worth less!  If the seller remains stubborn, the broker may lose a deal.

I bring this up today because just maybe you are like me when you visit a website. I never learn about everything I could use on that site. I have certain things I am looking for, I get them, and I move on. But Zillow has an interesting tool that can provide a little more perspective to the Zestimate.

Next time you are on Zillow, on the Home Page scroll all the way down to the bottom. In small print you will see the word Zestimate. Click on it. Scroll down again until you see “How Accurate is the Zestimate?” Click on it. Move down to the “Zestimate Accuracy Table.” Look that over to get an understanding of error margins. Under the table you will see a sentence that says “click here to download an excel spreadsheet of this data.” You will now see a state by state, and county by county chart of “median Zestimates error margins.” So, if you have a house that Zestimate says is worth $200,000, and your county has a 15% error margin, that means the value estimate could be $30,000 off. It appears the more rural the property, or the less data Zillow has, the larger the margin error, some up in the 50-70% range. That would be a shocker for any potential seller relying on his Zestimate to convince a broker “this is my price.”

Zillow says their “median national error margin is 8%”, but as everyone tells me all the time, their market is “different”, “better”. Real estate is local! If like me, you did not know about this tool, check it out the next time you are on Zillow. You also may want to visit www.eppraisal.com or www.city-data.com. Then, once you get confused from the differing values, it’s time to call your local broker and let him/her own their money by telling you what your property is really worth.

These sites are a valuable starting point, no more, no less.

A few months ago Realty Trac published the results of some research they did that covered 512 counties in the U.S.

The median home price in those counties was $259,000, and a 20% down payment would require a home buyer to come up with $51,800. People entering the workforce start earning the national median salary at age 30. With the personal savings rate at 5.6% annually, this 30 year old would need 12 years – till age 42 – to accumulate the 20% down payment. This assumes no home price increases.

That’s a daunting task, which is why so many parents help their children with a home purchase. Also, Melvin Watt,  Director of the Federal Housing Finance Agency, has suggested lowering the down payment for a conventional loan to 3% from 20%, with safeguards intended to avoid the meltdown we experienced just a few years ago.

You can help too if you have a property to sell. If you are comfortable offering to carry the note, just protect yourself and your buyer with strong but fair terms. Ask for 20%, and if your buyer just can’t come up with that much cash, get the absolute most he can put down. Have an interest rate of 7%+ and amortize the note over the shortest period comfortable for your buyer.

Help your buyer get into home ownership and design terms that strengthen his commitment and safeguards your decision.

www.realtormag.realtor.org

When I talk to someone for the first time about the possibility of buying their note, I usually say something like “The note business is this small niche in the real estate industry.” Most folks don’t even know this business exists. Most folks who sell a property and carry back the note don’t know this business exists, even though they just became a part of it!

Those of us who make a living in the note business feel proud to be a part of this small “niche group.” We are all independent business people, doing our own thing, and trying to do it the best way we can.

One of the ways we stay connected to our industry is by meeting other folks who do what we do and face the same challenges and problems. And a man by the name of Bill Mencarow plays a vital role in helping us sort through these problems and challenges.

For years Bill has authored The Paper Source – The News of the Note Business. This is a monthly publication Bill writes that is filled with “stuff” we need to know – ideas from practitioners in our business, new rules/regulations that affect our business, and loads of information that is vital to running a successful note business.

Once a year, Bill takes Paper Source on the road and presents The Paper Source Note Symposium. The key players in our business gather together and present/share what they are doing, how they are doing it, and essentially teach how to buy and broker seller financed notes and other cash flows. It is an invaluable opportunity for veterans and the curious to meet face to face with folks in our little niche business in a friendly, comfortable setting.

This year’s Symposium takes place April 30 – May 2 in Las Vegas. If you are curious about the note business or just want to learn more about what you already may be doing, you owe it to yourself to attend. You can call Bill at 800-542-2270, or register online at www.PaperSourceSeminars.com. It is a low key event, no-one will will ask you to buy anything, and you will learn a lot.

Check it out!

A mortgage research firm called HSH.com has analyzed the required salary to purchase a median priced home in several markets nationwide, assuming a 20% down payment.

One of the best cities to buy in is Pittsburgh, Pa. You need $32,373 of income to buy a home there. You need $50,000+ in Dallas, $60,000+ in Miami, $92,000+ in New York City, and over $145,000 in San Francisco.

If you live in one of these cities and you have a property for sale, you may meet a potential buyer who just can’t meet the criteria to purchase a home with a qualified bank loan. But this person may be a very qualified buyer in every other respect. If so, consider carrying back the note. Review this blog and my Newsletters so you understand the new rules for seller financing. Negotiate terms that are protective of you, but fair and protective of your buyer as well.

Help our economy and housing market.

Effective January 10, 2014 we have new rules for seller financed transactions. If you sell a property and your buyer will live in the property, you are now considered a loan originator. The rules do not apply if you sell vacant land, commercial property, multi-family and/or a home where the buyer does not live in the property

Like all rules, there are exceptions. If you do not want to become a loan originator, but you do want to sell a property using a seller carryback, then simply follow the exceptions and you will be fine:

Exclusion #1 – You intend to sell only one property in a 12 month period where the buyer will live in the home.

1. You must sell the property as a “natural person.” This is defined as an individual, estate or trust. An entity – LLC, Partnership, Corporation, etc., is not a natural person.

2. You have not constructed the property or acted as a contractor for the construction of the property in the ordinary course of your business.

3. The terms do not result in negative amortization.

4. You may have a balloon payment.

5. You use a fixed rate of interest or an adjustable rate that is adjustable after 5 years or more. The rate change must be based on a widely available index such as LIBOR or the US Treasury. The annual rate may increase up to 2% with a lifetime cap of 6%.

6. You do not have to determine if the buyer has a reasonable ability to repay.

Note: These are easy rules to abide by, most note rates are fixed. If you want to use an adjustable rate, the rules tell you how to do it.

Exclusion #2 – You intend to sell up to 3 properties in a 12 month period.

1. You can sell these properties as a natural person or entity.

2. Same as #2 above.

3. The financing must be fully amortized. No balloon payment allowed.

4. You determine in good faith that your buyer has a reasonable ability to repay.

5. The financing interest rate rules in #5 above apply as well.

Note: You can determine reasonable ability to repay by knowing how much your buyer paid for rent and comparing that amount to the note payment. You can ask for a copy of his last pay stub. You can use common sense.

If you think you may sell more than 3 properties in a 12 month period or feel you have a unique situation, check with the CFPB( Consumer Financial Protection Bureau). Call 202-435-7700. Email at CFPB_reginquiries@cfpb.gov.

Note: I have emailed them twice and an attorney called me each time. Very helpful.

My source for this information is Ric Thom, owner of Security Escrow in Albuquerque, NM and our industry’s point man who is working on our behalf with the CFPB. We do not know how these rules will be enforced. He continues to meet with them to get them to try to understand our business and how we differ from mortgage lenders. He continues to suggest rules modifications. You can help. Go to www.savesellerfinancing.org. Read Ric’s White Paper. Make a donation.

A mortgage research firm called HSH.com has analyzed the required salary to purchase a median priced home in several markets nationwide, assuming a 20% down payment.

If you live in Pittsburgh, Pa. you need to earn $32,373. If you live in Dallas, Tx you need to earn $50,283. If you live in Miami, Fl you need to earn $60,175. If you live in Seattle, Wa you need to earn $75,098. If you live in New York City it takes $92,271. In San Francisco you have to earn $145,361.

You may live in one of these cities. You may want to sell a property in one of these cities. You may have a potential buyer who just cannot qualify for a mortgage loan because of the tight restrictions that exist today. Consider offering a seller carry back. Construct terms that protect you and are fair to your buyer. Help our housing market.