Let’s say you have a $100,000 note for 360 months at 6.0% with a payment of $599.55 monthly. You need some cash and are willing to sell this note if the price is right. In the current market, the odds are high the price won’t be right – not in your eyes, anyway. Why?

Because the issues in examining the structure of any particular note are pretty constant:

Low or no downpayment, unknown credit score or history of the payor, not enough payments made, too many payments till note is paid off, little or no equity in the property.

But, if you want to sell, how can you get some cash and how can the note buyer minimize his concern for risk?

Let’s say you really need $30,000. One option would be for the note buyer to purchase the next 72 payments on your note for $30,000. Look at what this accomplishes. First, you get the cash you need. Second, the note buyer minimizes the capital he invests in your note, and consequently the risk as well. Plus, he gets an opportunity to see how the note performs during this period of time. When the 72 months is up, the note reverts to you. The current balance at that time is yours, and you now pick up the remaining 288 payments.

In the event of default, the note buyer has protected his downside by limiting his capital investment. If the note performs well, he may be interested in buying more of the note, perhaps all of it.

Selling part of your note may be the answer that will satisfy both parties as we weave our way through this difficult marketplace.

Ask about this when you are ready to sell.

You are selling your home. You are not selling your house – you are selling your home.

You raised your children here. Your grandchildren had sleepovers here. You celebrated anniversaries, birthdays, and holidays here. You hosted parties with family and friends. You cried as a family when your dog died and you held a burial ceremony in the rose garden of your backyard.

You worked hard your entire life and you have been rewarded for that work. You own your home free and clear. You are “downsizing” and ready to move into your new home just a few miles away.

Your realtor has brought you a potential buyer, a young family. They love your home. They want to buy your home. But, there is a problem.

They can’t get a bank loan!

They are solid citizens, with just a little glitch here and there, like a lot of people today. Enough for the bank to say “No”. As you talk to them, you see yourself many years ago. You like them. They like you. They “see” themselves in their new home – your home.

Your mind filters your thoughts: You know everything there is to know about this home. You don’t need the cash from the sale. You have no mortgage. The income would be nice. If the worse happened and you had to take back the home, you are comfortable simply because you know the home and neighborhood so well. Plus, you are not far away.

You fit the profile of a seller who is in the optimum position to offer a seller carryback. So, you tell them you will be the bank, and you would be proud to have them raise their family in your home.

You work out terms that are very protective for you, commit your young buyers, and are fair to both parties.

Thirty days later, the transaction closes. Soon, you are settled into your new home and the invitation arrives to attend your buyers’ housewarming. New friends, new life, 2 properties sold, and the cycle of real estate continues.

The question I get most frequently in my first conversation with a note seller goes something like this: “I’ve never sold a note before, can you tell me how this works?”

Most notes created today are by people who will never create another one. So, this is unchartered territory for many folks, and it is easy to understand why a person would be a little uncomfortable simply because the business of buying and selling notes is alien to them.

If you are one of those folks, let me say the process is low key. The goal is to determine if your note is marketable and then give you pricing options to consider. Here are the steps:

1. Send me a copy of your note and closing statement so I can verify the terms of the transaction.

2. I will then ask you questions about the property you sold, the people you sold it to, and the note itself.

3. Call you back in 1-2 days with one or more pricing options.

4. If you accept, we will do our due diligence, collect the necessary documents, and close the transaction.

5. In approximately 30 days, you will receive a check for the agreed upon price. You are out of the note.

6. The note terms usually stay the same, your buyer is now paying us instead of you.

Simple. In essence, cash is being exchanged for cash flow. You desire cash, the note buyer desires cash flow.

You can call me anytime to discuss your note situation, even if you are not ready to sell. Get yourself educated.

Watching our politicians in action is like watching a dysfunctional family disintegrate before your eyes. Are our elected officials actually intelligent, mature adults who care about the country’s problems and want to try to solve them?

A lot of us think the answer is a resounding “No.” 

One thing appears certain at this point – we still have a lot of uncertainty. Potential tax hikes, high unemployment, poor housing and jobs recovery in many cities, businesses unwilling or unable to commit to expansion, tighter lending standards hurting small business and individual consumers, etc., etc.

To those of us in the real estate industry, commerce must continue. No matter the economic conditions,  somebody will always want to sell their property. Somebody will always want to buy that property. If the buyer can’t get the money from a lender, what are his options?  Family, friends, private money, seller carryback.

If seller carryback is chosen, both parties must protect themselves. What do I mean? The buyer must commit to the purchase – make a sizeable downpayment, live in and take care of the property, make timely payments, exhibit pride of ownership. The seller must demand a sizeable downpayment, a higher than market interest rate, shorter rather than longer amortization period. He must know what his buyer does for a living and his credit score and history. Just because the world of seller carryback is referred to as “The Wild, Wild West” does not mean the parties should be careless and reckless in their agreement. They need to be businesslike, prudent and smart.

Call me if you have questions. Check me out on Linkedin. If you are learning something, tell your friends.

Thank you.

According to Advanced Seller Data Services, note creation is up 37.1% from this time in 2011 to 2012. It is up 57.7% from 2009 to 2012. Over 90% of these seller carryback notes are now created by sellers who create only one note.

My experience in talking with hundreds of sellers every year confirms the 90% figure. With tough lending standards expected to tighten further because of increased capital requirements for all banks, more and more seller carryback and private money transactions will take place. This is good news because  it allows people to buy and sell homes.

But there is a lot of bad news as well. Many sellers don’t know what they are doing when they sell a property using a seller carryback. Or even worse, they get bad advice. What I mean is that many of these transactions have very weak terms, terms that do not protect the seller. Terms that hurt the seller should he later decide to sell his note. Wish I could talk to every one of them before they create their note. I can’t, it’s impossible. So, I write a blog like this one, write a Newsletter, and try my best to help educate people.

If you or someone you know is contemplating the use of a seller carryback, call me before you sit down with your buyer. I will try to give you good, sound information that will protect you. You can decide what to do with that information.

For several years now, real estate website Zillow.com has allowed us to visit their site and find out how much our home is worth. As of last week, it is also telling the world if we are in foreclosure.

Zillow has launched a free feature that allows anybody searching for a home to view those homes that are in distress, in some stage of pre-foreclosure or foreclosure.

I just left the site. I registered, entered my home zip code, and a map popped up showing me all the homes in distress. When I clicked on a particular home, I could scan the details of when the home went into default, how much the owner owes, whether the lender has taken the property back, date of foreclosure auction, etc.

I had mixed feelings. Part of me felt I was being invasive, snooping around and getting detailed information on a neighbor’s financial plight. Another part of me felt this was a natural progression in making more information available to the public as we shop for homes. Is this right? Is it wrong?

 Advocates and critics will be lining up against each other, and only time will tell how this will play out. For the moment, if you are looking for a home to live in or as an investment, you might as well check it out and determine for yourself.

What is the BIGGEST mistake sellers make when they carry back a note in order to sell their property?

They accept little or no downpayment!

This is extremely dangerous. This is very poor business. Why? Because the seller usually makes some kind of assumption about his buyer – an assumption not based on fact – that somehow his situation will improve and everything will work out. This can prove devastating if the assumption proves to be false. The seller accepts all the risk, the buyer has none, and if the transaction ultimately falls apart – default – the real answer is the transaction never should have happened. Not with this particular buyer, or not with the particular terms agreed upon.

Here is a simple idea. If the bottom line is the buyer can not come up with a decent downpayment, say at least 10%, try this. Let’s say you have a $100,000 note at 8% amortized over 30 years. The monthly payment is $733.76. The buyer can handle this payment.

Suppose the seller asks the buyer to increase his monthly payment by $50 beginning in month 13. The new payment will be $783.76. Every year thereafter the payment increases $50. Instead of making 360 payments, the buyer will make 168. If the increase is $100, the buyer makes only 131 payments. If $50 or $100 is too much, how about a 5% increase beginning year 2 and each year thereafter? The year 2 payment is $770.45, and the total payments made stretch over 174 months.

Here is the point. The seller must protect himself against possible default, and seek commitment from his buyer. The buyer should expect and desire increasing equity in his purchase. Stepping up the payments is good for both parties.

Play with the numbers. Make the transaction as sound and business like as possible.

Both parties deserve it.

I talk to hundreds of note holders each year. I see hundreds of notes. I see the mistakes that people make when they sell their property and carry back the note. The seller may not realize the mistakes he has made until he talks to someone like me about selling his note. Then, reality sets in.

So, what are these common mistakes? Here is the short list. The seller does not:

1. Verify his buyer’s employment.

2. Verify credit.

3. Ask who will be living in the property.

4. Ask specifically why the buyer can not get conventional financing.

5. Ask for a sizeable downpayment( 10%+).

6. Demand a higher interest rate( 8-10%).

7. Use a service company to collect and service the payments.

It is not unusual to see transactions that have the buyer paying 0%-5% downpayment. I see interest rates from 0%-5%. I see no downpayment with interest only payments. In other words, the buyer is a “renter” – he has no skin in the game. It is too easy for him to walk away if/when things get tough. The seller has set himself up for failure.

If you are a seller, your best defense against a possible foreclosure is “protective equity.” The more equity your buyer has, the more committed he is. He has skin in the game.

Notebuyers are looking for “cash flow” in exchange for their cash. We are not in the business of owning real estate. We don’t want to take back a property because the buyer can’t make payments.

Do this: Avoid mistakes 1-7 above. Do the opposite. Protect yourself upfront. Find out what kind of buyer you are dealing with and then use that information when you negotiate. If you do not have a “preferential buyer”, don’t give preferential terms.

If you decide to sell your note for cash, a stranger will review your transaction. Make it as businesslike as possible so your note is attractive to a potential buyer and you can receive the cash you need.

Hope this helps.

For the past month or so, Bank of America has been running television commercials telling us viewers how wonderful they are. B of A wants all of us to know that “decades “ago they loaned money to small family businesses when no one else would, and thanks to B of A, these businesses were able to grow and thrive. More importantly, the bank has a relationship with these businesses that continues to this day. All of us should feel warm and smile appreciatively.

This may well be true. But here is another truth. In the midst of a horrible business climate for many small businesses, Bank of America announced recently that it was severing lines of credit for some small business owners as the bank attempts to cut risk and raise capital. According to some newspaper reports, some small business owners with long term relationships with the bank received letters “calling” their loans by a certain date, or offering payment terms with substantially higher interest rates and monthly payments. Since most small businesses have been cutting costs and downsizing to stay afloat the past few years, losing their lifeblood – availability of credit – could be devastating. A doubling or tripling of payments could force a business into bankruptcy. Worse, some of these loans and lines of credit, according to the bank, were a part of some of the acquisitions the bank has made in recent years.( I guess they didn’t know if these loans were good or bad. Any due diligence?)

Question: Will Bank of America do a television commercial highlighting any of these small business owners and the bank’s role in their current plight?

Bank of America has reportedley received over $300 billion dollars in various bailout moneys. Apparently,the bank made questionable business decisions in acquiring Countrywide and Merrill Lynch, did not know the true condition of the “assets” it was purchasing, and tried to back out of the Merrill Lynch deal once it became obvious the losses were greater than expected. The government said no, the deal must go through. Previously, B of A was lending money to people buying a home who should not have been lent to, and using screening procedures that at best could be classified as inappropriate if not unethical.

The result of all these actions has caused Bank of America pain. Self inflicted pain. So, they lay off thousands of workers, try to charge a fee to their customers who use their debit cards, and go after a key customer base that is vital to getting our country revved up again – small business owners. While many large banks are beginning to loosen lending standards for small business owners, Bank of America pays for its sins by going after the “little guy.”

Shameless!

I have been a Bank of America customer for thirty years and will probably continue to be, but their actions anger me. If they had not made bad loans, if they had not acquired Countrywide, if they had not acquired Merrill Lynch, where would a prudent and industry leader find itself today? I can only wonder.

What does this have to do with notes? Everything. The lack of credit creates a larger need for individuals and small businesses to access capital thru the use of alternative funding sources. More and more people will sell their property or business by offering the buyer a seller carryback. The Archives of this newsletter are filled with ideas and suggestions on properly structuring a note transaction. Please take advantage. Please tell your friends.

Please call or email me with any questions or help in selling your note.

Sincerely,

Denny Stanz

CA Broker License # 01915404

760-245-5366
760-245-5367 fax
dennystanz@verizon.net
www.CaliforniaNoteBuyerLLC.com