The phone rings.

“California Note, this is Denny.”

“Yeah, you buy notes?”

( OH! OH!)

“Yes sir, that is what we do.”

“Yeah, I got a $100,000 note. How much you give me for it?”

“Well, I have no idea. I don’t know anything about your note so I can’t answer your question. Who am I talking to?”

“John.”

“Hi John. Why don’t you tell me a little about your situation.”

“I don’t have a lot of time, what do you want to know?”

“Understand. Tell me about the property – what type is it, when did you acquire it, what did you do with it, etc?”

“It’s a mobile home. You can get this information from the county, can’t you?”

“Of course, but you are the seller, so I prefer to get first hand information directly from you. You can understand that, can’t you?”

“Not really. I can give you the address and you can do all the checking you want. But, I inherited the property from my Grandma. I lived in it for about 5 years and sold it to my cousin for $100,000.”

( John gives me the address and I bring it up on my computer.)

“John, I am looking at the property online. Looks like this picture was taken about 8 months ago. Tell me about the condition of the property.”

“I fixed it up a little. Andrew is a slob, he just does not care.”

“The property seems to be isolated. There is an old bike laying on the ground and a car jacked up, missing 2 tires. Stuff laying around, no grass on the lawn. Is this accurate today?”

“Andrew is white trash.”

“Hey, I think I get it. What kind of work does Andrew do?”

“He doesn’t. He lives off Grandma’s inheritance, gets some disability from the state. He’s pretty worthless.”

“Looks like you two don’t get along real well, huh? How much down payment did you get?”

“He’s still family. I didn’t get a down payment. Don’t charge him interest either.”

“Okay, good deal for Andrew. How many payments have you received?”

“He paid for a few months and hasn’t paid since. I’m sick of it. How much you give me for my note?”

“Honestly, John, based on everything you are telling me and the condition of the property, I can’t see us making an offer to buy your note.”

“Click.”

“Hello? John? Are you there? Hello?”

He’s gone!

This is an approximation of a real phone call with a real note holder. Names have been changed to protect the guilty.

Have you watched the TV show Shark Tank?

If you are one of the few who answers “No”, here is what happens:

A business owner pitches a panel of investors, offering a stake in his company in exchange for a financial investment. The “sharks” ask pointed questions, and if they like what they hear, someone may make an offer. Sometimes, multiple sharks like it and a bidding war ensues. Many times though, the business owner hears “I’m out.”

Why?

Maybe the business is too new. Maybe the market is not there for his product or service. Maybe the market is too crowded and too competitive. Maybe the business owner appears to be too inexperienced or not dedicated enough. Maybe he is too cocky and could be difficult to work with. Whatever the reason, the “sharks” see a business that is not investable.

Essentially, this is what we do in the note business. Given what we are being told initially, does this situation appear to be investable? Will we get our money back? Would further investigation prove that this investment is a wise one?

A few years back, a note industry study revealed that about 70% of notes in the marketplace were not investable. My own experience has that number around 50%.

Why?

Every investor will have his own criteria based on his experience, risk tolerance, etc. For example, we won’t buy notes in 2nd position. We won’t buy notes that are not performing. We won’t buy a note where the property – home or commercial – is not occupied. We may not buy a note if the property has an environmental hazard, is in poor condition, or is located in an isolated area. Sporadic payments, bad credit history or unstable employment by the payor may all keep us away.

Just like the “sharks”, we will be living with this note if we buy it. We want to feel assured that the note payor can perform according to the terms he agreed to. If we conclude he can, we are all in.

Caveat Emptor is a Latin phrase meaning “let the buyer beware.”

According to Merriam-Webster.com, “caveat emptor” is a principle in commerce that says the buyer assumes the risk of the quality or condition of the goods or services without a warranty.

The origins of the caveat emptor principle in law lie in a 1603 case, known as Chandelor v Lopus in England. A man bought a bezoar stone ( a lump of undigested material found in the gastro intestinal tract of some animals believed to be a cure for poisons) that was supposed to have healing properties. He realized later that the stone did not work as it was supposed to and sued the seller, asking for his money back. The courts ruled that “the bare affirmation that it was a bezoar stone, without warranting it to be so, is no cause of action.” In other words, the seller did not make warranties the product was a bezoar stone(financestrategists.com).

However, modern legal systems and market economies have provisions in place to ensure that buyer interests are protected during a purchase.

This principle certainly applies to the note business. I became very aware of this fact on one of the very first note transactions I worked on.

I was talking to a note holder who told me he sold a “home” and got $100,000 in a down payment. I was so naive at the time that I just asked a bunch of questions but asked for NO documentation to back up what he was telling me. I was working with an investor who lived close to the property, as I did. We decided to visit the property together, but before leaving, the investor looked at the property on line – I did not – and discovered it was an old “mobile home” – not a house. We canceled our visit and called the seller asking for a clarification. He explained that he used the term “home” to mean where a person lived, whether a house, apartment, etc. I then asked for a copy of the closing statement. The statement showed no down payment – the sales price and promissory amount note were identical. No $100,000 down payment. The note holder explained that he received the money directly from his buyer. The closing statement made no mention of $100,000 being received outside escrow. When I asked for proof he received this payment by providing a copy of a bank deposit statement, the phone went silent. He gathered himself and explained he used the cash to pay off debts, buy a car with cash, etc. My investor did not buy it and backed off.

Big lesson learned. Caveat Emptor. buyer Beware.

Remember Picasso? Pablo Picasso was a 20th Century Spanish painter and sculptor who became world famous with some of his artwork selling for millions of dollars.

A young man by the name of Austin Allison became inspired by him as he was searching for a new business venture after leaving Zillow.

He and his wife were looking to buy a vacation home in Lake Tahoe. They found one and bought it. But the process made him realize how difficult it is for most people to afford a 2nd home, especially in an upscale community.

This led him to conversations with a fellow entrepreneur from Zillow, Spencer Raskoff. In 2020, they founded the firm Pacaso with the goal of allowing people to afford to buy 2nd homes in affluent communities. It works this way.

Friends or family members can join together in co-ownership and purchase anywhere from a 1/8th to a 1/2 interest in a luxury 2nd home. Typically, Allison says, if a person has a budget for a $500,000 2nd home, he is priced out of the market. With 7 friends or family members, he can purchase a 1/8th interest and buy a $4 million dollar home.

Allison says it works one of two ways. Either Pacaso finds and buys the home, finds the co-owners and sells to them. Or, the home seller approaches Pacaso who finds the co-owners. Pacaso acts as a full service property manager and handles all the negotiation, maintenance, etc. Allison says they charge a fee for their service and NEVER have co-ownership with the co-owners. Short term rentals are NOT allowed. The home is for the exclusive use by the co-owners and their guests.

Allison says one of the big problems with 2nd homes is underutilization. He claims the average 2nd home is occupied 5-6 weeks per year. Empty homes create community issues. So, the key to any start-up is to have “a product market fit.” Is there a need? Is there a fit? Pacaso solves the affordability issue and the utilization issue. Pacaso has 40 luxury markets around the world. See his 90 second video at www.pacaso.com/blog/our-story. Browse their website to learn more and answer your questions.

No matter what business any of us are in, no matter how experienced we are, no matter how smart we are – sometimes we find ourselves in a circumstance where we say “I was wrong.” My gut betrayed me.

Over the years, I have had two situations in particular where my initial feeling was way off. Let me share them with you:

1. I was talking to a man who held a note on a beautiful home. It’s market value at the time was high six figures. The buyer was living in the home and had a successful business. He made a HUGE down payment. The terms were favorable for the seller. This was a very nice deal. The seller was co-operative, answered all my questions and provided the documents I requested. I looked at the home online and found a very nice, very well manicured property in a great neighborhood. Property taxes were current. We made an offer and the seller accepted. We checked the buyer’s credit and it was excellent. The property appraisal was above the sales price. The seller provided proof of payments made. The transaction is moving quickly and smoothly. I am thinking this is one of the cleanest and easiest deals I have ever worked on. Wrong! The last step before we close is to speak to the buyer. We introduce ourselves, reassure him that the note terms will not change, and just confirm that he is happy with his purchase. The noteholder provides a phone number. We call, get voicemail, leave a message. No response. We wait a few days, call again. Voicemail. Leave a message. No return call. Then, we get a letter from the buyer’s attorney. He says his client will not co-operate with the note sale. Why? The attorney claims that during the home purchase negotiations, the seller made verbal commitments to make certain improvements to the property. The buyer, trusting the seller’s promise, closed the transaction prior to the improvements being made. Now, all these months later, the seller has reneged on his promise. The next step is legal action. The noteholder never shared any of this information. When I confronted him with the attorney letter, he just shrugged it off. I was stunned by his demeanor. I never had a clue that anything was amiss. I was wrong. the note sale fell apart.
2. It was during the housing recession. I was talking to a lady who sold a home in the mid six figures. She agreed to a 360 month term with a fair interest rate. She did receive a nice down payment. The property online appeared to be in okay condition. She had received only a few payments. The seller knew very little about her buyer. She agreed to sell because of the down payment. I did not feel good about this transaction. Home prices were dropping everywhere, and in this particular area, dropping like a rock. Note buyers were being cautious. If it turned out the buyer had sketchy credit or an uneven work history, this note sale would probably not happen. I shared my feelings with the seller, she understood, and said let’s see what happens. I requested her documents and proof of payments. I looked online again and services like Zillow, Redfin, etc. had the current home value 15%-20% below the sales price. My investor and I drove to the property. The neighborhood was nice, but our seller’s home was not one of the best on the street. However, my investor said that if his conversation with the buyer went well, he would buy the note and make an aggressive offer. I was stunned. In this market? We presented an offer to the seller contingent on the conversation with the buyer. That call went better than expected. We closed the transaction. Who knew?  I was wrong.

It’s Spring. In real estate, that means it is selling time. Home sellers are sprucing things up, doing a little rehab and trying their best to get the highest price possible for their home.

Here in the note business, we have two things happening. Some noteholders want to raise cash and are looking to sell their note. And, some folks are looking to sell their property and carry the note, maybe for the first time.

Here are three thoughts I have for each of them:

Existing Noteholder

1. Where are your documents? You might be surprised to learn the number of people we deal with who don’t have all their documents or don’t even know where some of them are. Any note buyer will want to review the signed promissory note, recorded deed of trust, final closing statement, proof of insurance and payments received, title policy, etc. You should have a clean PDF file. If not, your Escrow Company should help a little.
2. Are property taxes current? We have dealt with note sellers who we inform that the property taxes are delinquent and they appear to have no clue this is the case. Develop the habit of checking with your County and making sure they are paid.
3. Hire a third party note servicer. Some note sellers are very good at managing their accounts personally. But most noteholders are better off with a 3rd party servicer. They will charge a small fee and you can have your buyer pay it or share the cost with him. The servicer will collect the monthly payments, escrow taxes and insurance, keep an accurate amortization schedule, etc. and when you sell, you simply email this schedule to your buyer. Clean and professional.

New Noteholder

1. Know your buyer. Again, you would be surprised at the number of sellers who agree to carry a note for 10-20-30 years and know very little about the person they just tied themselves to. Find out his job history, who will be living in the property, will others be on the note, do a credit check and maybe background check. You want to be as comfortable as possible that you are doing business with the right person. If you don’t feel that way, move on.
2. Sell terms – not price. Most potential buyers are concerned about 2 things – how much down payment does he want and how much is my monthly payment. So focus on the dollar amount you want upfront and a monthly payment you expect. Negotiate from there.
3. Hire a note servicer. See #3 above.

If I can help answer questions or provide guidance, please reach out to me.

CNBC recently reported on an interesting study by Zillow.

233 cities in the United States have “starter homes” valued at a minimum of $1 million dollars. These are homes that rank at the bottom third in value in their city. This is 3x the number of homes just 5 years ago. 25 states now have cities at this price point.

Here are the top 10 states with the most “starter homes” at $1 million dollars or more:

California          113

New York          32

New Jersey       20

Florida               11

Massachusetts  11

Washington       8

Texas                  7

Connecticut      4

Hawaii              4

Maryland         4

Home prices are up roughly 45% since 2020. The mean age for 1st time home buyers is now 38, the highest on record.

If you enjoy comedy and are old enough, you probably remember Jeff Foxworthy. He grew up in Georgia and made a career with his hilarious routine “You Might Be a Redneck If…”

If you don’t remember, here are 2 examples:

“You might be a redneck if your wife is also your cousin.”

“You might be a redneck if your front porch Christmas lights are on – in August.”

I think you get the picture.

This got me thinking about the bad notes I have seen over the years. With a touch of reality – and some foolishness – here is a flavor:

You Might Have a Bad Note If….

• The downpayment checked bounced.
• Your note is 6 months old and you have received NO monthly payments.
• The property you sold burned down and you forgot to get fire insurance.
• There are more cars on the front lawn than in the driveway.
• Your buyer said only he and his wife will live there. Neighbors say at least 10 people are there.
• You have no documentation and no proof of payments received. You are shocked no-one will buy your note.

We are here to help you avoid creating a bad note. Feel free to contact me with your questions and concerns.

Since 2008 I have been asking noteholders who are interested in selling, “why do you want to sell your note?” The simple answer is that the noteholder wants or needs the cash. But, why does he want or need the cash? How does selling this note solve a problem for him? Most folks are eager and happy to tell me what is going on in their life that leads them to this conversation. Some folks are not as open, and feel it is none of my business.

When I know what his motivation is, I tend to get excited. Because if he has a desirable note, I now want to help him achieve his goal.

Over the years, I have always highlighted in my personal notes the reason a noteholder is selling. If you are a noteholder, you may find it interesting why folks like you choose their note asset as the best source for the cash they need. Here are the key reasons I have been given:

• Buy a business
• Pay off a mortgage
• Help elderly parents
• Pay a big tax bill
• Buy a new home
• Move out of state, start a new life chapter
• Simplify life and lower risk
• Make a better investment with a higher return
• Pay cash for a new, expensive car
• Pay college expenses for a child or grandchild

I have noticed for noteholders over age 60, the “simplify my life” motivation is a big one. Some of these folks have a business or multiple properties and their children have no interest in working with or succeeding dad. So, dad starts asking himself “why am I doing this? Who am i doing this for?” If the answer is he is doing it for himself, he then may reach the point where it is not worth doing anymore. Time to move on.

On the other end of the spectrum is the noteholder who has no interest in selling his note. What is his situation? In talking to folks like this over the years, a handful of reasons surface:

• He had no idea a market existed where people like me bought notes like his
• He likes – or needs – the note income
• He has no need for a lump sum of cash
• He does not like the price offered for his note
• He wants to “protect” his buyer, who may be a friend or family member. He does not want a stranger holding the note.

If you are a noteholder, I hope this information will give you some insight as to the marketplace and how it fits into your own situation. Feel free to contact me with your questions or pricing options for your note.

WalletHub did a study of rent costs in 180 cities throughout the United States. Real Estate News reported the results on April 16. If you are looking to move – and rent – here is some data that may be of interest:

5 cheapest cities to rent as a percentage of median income:

1. Bismarck, ND      15.34%
2. Sioux Falls, SD    15.95%
3. Cheyenne, WY     16.09%
4. Cedar Falls, IA    16.36%
5. Fargo, ND            16.65%

5 most expensive cities as a percentage of median income:

1. Miami, FL             33.48%
2. Newark, NJ          32.96%
3. New Haven, CT   32.18%
4. Detroit, MI           31.35%
5. Glendale, CA       29.84%