If you are in the mortgage, note or real estate business, you probably have heard of the Consumer Financial Protection Bureau – CFPB. This agency was created as part of the Dodd-Frank Act after the 2008 financial crisis, purportedly to be a watchdog and keep consumers safe from scrupulous mortgage lenders.

The issue to many in the broad mortgage and real estate field was that this agency operated unchecked and was accountable to no-one – not even the President of the United States. This unanimous decision by a Washington D.C. appeals court changes this.

To read this article and understand why the judges ruled as they did, go to:

www.housingwire.com/articles/38252-phh-wins-landmark-victory-cfpb-ruled-unconstitutional.

Here are some common questions I get from note holders who are considering selling their note:

1. I live in a different city and/or state than you. How do you handle the closing when I am so far away? We will close at the same Title Company you used when you sold this property. Or, we can overnight the closing documents directly to you with an instruction cover letter. You sign the documents in front of a notary and overnight them back to us with the original note and deed of trust.
2. How do I receive my funds? Your funds will be wired to the Title Company we are using or directly to your account if we are not using the Title Company.
3. How is my buyer affected when I sell my note? He isn’t. The terms stay the same. The only change is where your buyer sends his monthly payment.
4. Do you talk to my buyer during the process? Yes. Before closing, a courtesy phone call is made to your buyer, introducing ourselves and explaining that we are buying the note. The buyer is assured that nothing is changing and we want to ensure that he agrees with the note terms, note balance, etc.
5. I like my buyer and monthly income, but I have a small cash crunch. Can I use my note to get the cash I need? Yes. You can sell part of your note only. Let’s say your note is 240 months and you have received 10 timely payments so far. You could sell, for example, 50 of the remaining 230 payments, retaining the contractual right to receive the last 180 payments. You would compare this option to other cash sources you have, then make the best decision for you.

Another frequent comment/question I get is this: “I like the interest and monthly payment from my note. I don’t really need the cash. Why should I sell at a discount, makes no sense to me?” The answer is you do not sell. You don’t sell until you have better use of the cash and can get a better return with that cash. Then, you call me and get some pricing for your note.

Small-business owners aren’t very upbeat about the economy, but they’re also not particularly pessimistic. That’s the finding of a semi-annual survey of owners taken in July and August and released last week by the advocacy group National Small Business Association.

Owners’ view of the economy has changed little from a similar survey taken in December. When asked to compare the economy now versus a year ago, 32% said it was improved, the same as in December. A third said it was worse, up slightly from 29%. And 35% described it as about the same, down from 39%. Only 44% felt the economy is better than it was five years ago, although it’s actually greatly improved since 2011.

LA Times Staff Report, September 2016.

In early 2015, a guy called me and gave me a mini lecture on why he would be a fool to sell his promissory note. He said he was getting 7% whereas the bank would give him 1%. His buyer was well known in his town, ran a successful small business, deposited 15% as a down payment, and has made every monthly payment on time. He would be a fool, he said, to sell his note at a discount when he had such a great deal. He would be nuts, he told me.

He finally took a breath and I calmly said “I understand and I agree – you should not sell your note.”

This phone call got me thinking. Why do people sell their notes? So I reviewed every closed transaction for the year prior to this conversation. Here is what some sellers told me as to why they wanted to sell their note:

1. Buy an investment property.
2. Buy a new home.
3. Pay a big income tax bill.
4. Pay off medical bills for a family member.
5. Pay expenses for elderly parents in a Living Care facility.
6. Change of life – selling a business, moving out of state, liquidating assets after a death, etc.
7. Pay off mortgage on an investment property.
8. Have a cash cushion – waiting for an opportunity.
9. Buy a new SUV.

We all want options in life. Normally, carrying back a note is not people’s first option – cashing out is the first option. But when that note is performing and cash opportunities/problems present themselves, it can be a blessing to have that note as an option to consider for the cash source.

It’s all about options!

When a seller agrees to carry back a note in order to sell a property he owns, he should make certain demands in order to be compensated for the fact he is not cashing out in the transaction. These demands would typically fall in four main areas –  the sales price,  the down payment, the note term or the interest rate. There could be others of course, but the emphasis will probably be on one or more of these four.

I want to talk about the interest rate. I speak to hundreds of note holders every year, most of whom have carried back a note for the first time in their lives. Some of these folks received little or no guidance as they worked their way through something that was brand new to them. Some of them made serious mistakes and made themselves too vulnerable to the possibility of a foreclosure. If a person sells a property, gets no down payment and agrees to a “0%” interest rate, the seller has a tenant, who may be willing to move on at the first sign of some financial difficulty.( Yes  I have seen notes with no down payment and no interest!). I would call this a serious mistake!

It appears to me that many “new” note holders decide upon the interest rate they charge like this: “Well, if my buyer could get a bank loan, the bank would charge him about 3% for his mortgage. So I feel I should charge him 3%, or maybe just a little more than that – 4% perhaps, 5% tops.”

Here is the issue: Your buyer can’t get a bank loan, so what the bank would charge him is irrelevant. You are now the bank, so it is up to you to determine the rules – ethically and within the law. When the bank grants a mortgage loan at 3%, they know everything about the borrower. When our note holder agrees to 3%, or 4% or 5% – he knows almost nothing. Typically, he has no idea what his buyer’s credit score or history is; he may not know how long his buyer has lived in the area; he may know what kind of work he does, but does not know his employer or how long he has worked for him. Sometimes, he is not sure who and how many people will be living in the home he is selling. Maybe he likes the buyer or got a decent down payment and so he agrees to sell his home.

This is the reality of a sizeable segment of the seller finance community!

Savvy note holders will negotiate a 7%-9% interest rate, which will also make their note more attractive to a potential note buyer, who, other things being equal, would be willing to pay more for this note.  But, I have come to accept the fact that many note holders will be stuck in comparing the local bank’s prime lending rate to the rate the note holder feels is fair or right for him to charge. And, in today’s climate, it looks like 5% is the maximum, psychologically acceptable interest rate.

Okay, I get it. So let’s charge 5% and get our demands elsewhere.

One of the easiest things for our new note holder to do is ask what his buyer is paying for rent, arrange a monthly payment that is comparable, and then get his money back as soon as possible.

Let’s say the note will be for $100,000 at 5%. Take a look:

30 years    $536.82

25 years    $584.59

20 years    $659.96

15 years     $790.79

10 years     $1060.66

If the buyer is paying $700+ monthly rent, maybe he can pay back the note in 15 years. If he is paying $1000 monthly rent, maybe he can pay the note down in 10 years. The seller does not have to automatically agree to 30 years because that is what the bank does. The seller is now the bank! So, if the buyer has a small down payment and unknown credit history – get the shortest term possible. Make this the demand to provide more security to the sale.

Seller financing is a wonderful tool, but it is loaded with risk for sellers who choose not to protect themselves.

Tom Henderson is a wise, old pro in the note business. He writes an interesting Newsletter, offering his observances about our industry and the economy that affects all of us. I want to quote briefly from his August 2016 Newsletter:

“It should also be noted that the food chain of a healthy housing market is starter homes. As a general rule, starter homes is the catalyst of a healthy housing market. For example, as a young couple purchases an existing home, the existing home owner will generally use the proceeds to purchase a more expensive home. Likewise, the more expensive home owner will also move up and so on.

The current real estate market demonstrates the contradiction of low interest rates vs. lending capital. While money is readily available to those with large down payments and high credit scores purchasing higher priced homes, credit is restricted when it comes to cheaper starter homes and no or little down payment. Without the capital necessary to finance starter homes, the food chain is broken.

With the restriction on the financing of starter homes, rentals have become a very viable investment. As of now, it appears investors, not home owners are filling the vacuum for starter homes.

However, I would be very aware of going deeply in debt to purchase any investment house. Should we go deeper into a credit crunch, an exit strategy will be greatly reduced. Be aware.”

Source: Tom Henderson, Note Professor Newsletter, August 2016, www.HPNotes.com.

Let’s take a break from business with Labor Day weekend beginning today. Here are some great quotes to ponder from Will Rogers:

1. Never kick a cow chip on a hot day.

2. There are two theories to arguing with a woman. Neither works.

3. Never miss a good chance to shut up.

4. The quickest way to double your money is to fold it and put it back into your pocket.

5. Good judgment comes from experience, and a lot of that comes from bad judgment.

6. If you’re riding ahead of the herd, take a look back every now and then to make sure it’s still there.

Happy Labor Day!

Existing home sales decreased 3.2% in July to 5.39 million, missing the consensus forecast that called for a 1% drop in sales by a wide margin. The issue here is that low inventory levels are pushing up prices and crowding out buyers. Despite the tailwind provided by near record low mortgage rates(which fell to 3.44% in July and have declined for five consecutive months), scarcity is taking its toll on buyer traffic.

Demographic forces are responsible for the trends we are witnessing. Older generations are behind the vast majority of the new home purchases, while younger generations(namely millenialls), are central to the weak existing home turnover. Home builders have focused on the high end of the home buyer market, which is more lucrative and accounts for the bulk of industry demand, and this has kept prices more affordable for wealthier demographics. Younger generations are not benefiting as much from low mortgage rates as many individuals are still struggling to pay off existing student loan debts, and putting off borrowing for a house until their credit conditions improve. Older generations, meanwhile, own the lion share of the stocks and bonds, which have appreciated to bubble-like levels thanks to Fed Policy and low interest rates. Thus, while low interest rates have been a key factor in propping up housing prices, the net worth of older generations has more-or-less grown in tandem. The increase in housing prices therefore, has had much less of an impact on demand from older demographics. Sales of homes costing less than $200,000 are trending down, while sales of homes priced above this level continue to increase.

Bottom line – home sales accelerate as the price range( read income bracket) increases.

What does all this mean for seller financing? Opportunity. Our market normally thrives in the lower to mid home price range. So, here we are.  As a consequence, a seller who does not need to cash out today needs to find a sound buyer and construct strong terms that are fair for both parties. He can always sell his note down the road if a cash opportunity presents itself.

Source: Quinn Foley, Seeking Alpha, August 25, 2016. See the graphs backing up his data at http://seekingalpha.com.

“The hot housing markets along the West Coast are growing quicker than owners realize, giving way to higher than expected prices for buyers and more home equity for existing owners. On the other hand, the housing markets are more balanced in the East and Midwest, leading owners to be slightly overenthusiastic about their home’s appreciation.”

“In May, Denver appraisals showed home values there averaged 3.28% higher than what home owners thought their home was worth.”

Source: Bob Walters, Quicken Loans Chief Economist.

See the 27 city table of home values at: http://realtormag.org/daily-news/2016/06/15western-home-values-higher-owners-realize.

The proportion of U.S. households that own homes has matched its lowest level in 51 years – evidence that rising property prices, high rents and stagnant pay have made it harder to buy.

Just 62.9% of households owned a home in the April through June quarter this year, down from 63.4% a year earlier. The share of home ownership now equals the rate in 1965, when the census began tracking data.

Home ownership peaked at 69.2% at the end of 2004.

Source: U.S. Census Bureau