1. So far this year, I have seen several of “you” who are selling properties and carrying back a note agree to a “0%” interest rate! Why?  The answer is ” I am helping a friend”, or, “I like the buyer”, or, “I want the terms to be good for the buyer.” Fine, but “you” are potentially hurting yourself. We have bought some of these notes, and the pricing to “you” suffered as a consequence. If you want to offer 0% and feel you do not want to sell the note eventually, then require the biggest down payment possible and the shortest amortization period.

2. Who is a good candidate to offer a seller carry back to?

a. First time buyers wanting to get into the housing market but need financing options.

b. Buyers with “credit ding” but are otherwise in good financial shape.

c. Buyers who usually pay cash, resulting in little or no credit history.

d. Buyers who just want “in” on a real estate transaction but can’t get a bank loan.

Good buyers are out there. If you are a seller, you can help them.

The U.S. housing market is heating up. So says the National Association of Realtors.

Lawrence Yun, chief economist for N.A.R., says “an improved job market and low mortgage rates are boosting buyer confidence and finally releasing some of the sizable pent-up demand that accumulated in recent years.”

Existing home sales rose 6.1% in March, and climbed 6.3% in the West. The national median price for an existing home was $212,100, up 7.8% from last year.

At the same time, the National Association of Home Builders  “sentiment index” rose four points to 56, highest level since January. Anything over 50 indicates more builders view sales conditions are good, rather than poor.

I know in my county, as I drive around, I see a fair amount of  new residential construction going on, along with a tremendous amount of freeway upgrades/construction.

This should instill confidence in all of us. The note industry is having a fantastic year and helping lots of sellers get very competitive prices for their notes. Most of these sellers are buying another property with the cash proceeds, helping our housing market even further.

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.