Need Expert(s) to help write a great note - Posted by Doug

Posted by David Butler on January 12, 2001 at 12:56:22:

Also available at: http://notenetwork.com/at.cgi?a=118510&e=Products/Owner.Will.Carry.html

Need Expert(s) to help write a great note - Posted by Doug

Posted by Doug on January 10, 2001 at 04:17:20:

Hello,

I have read in several articles that there are experts
that will help you to write a great saleable note on a private home sale.
They are located at the companies who purchase or invest in notes. I heard that they will answer your questions and walk you through the process.

I want real experts who can tell me exactly what clauses
and statements to place in the note…OR send me a form note that I can have the payor sign. I know that one small
mistake (fatal flaw) can ruin a note.

How/where can I get in touch with these people?

Thanks,

Doug

Re: Need Expert(s) to help write a great note - Posted by Rick Roberts - KC

Posted by Rick Roberts - KC on January 10, 2001 at 21:25:48:

Doug,

I agree with Mike on this. The “standard” FNMA note is available on Fannie Mae’s website.

http://www.fanniemae.com

This and a reputable attorney’s review to assuage any lingering worries that you may have should do you just fine.

Hope this helps.

Rick

Paralysis by Analysis … - Posted by Michael Morrongiello

Posted by Michael Morrongiello on January 10, 2001 at 20:03:58:

Doug:
With all due respect, Your over analyzing and giving too much attention to the importance of clauses in a mortgage or trust deed security instrument. Are certain clauses valuable to include? Sure,

Things like:

  • Non assumability
  • A due on sale clause
  • 30 day default
  • Rights to accelerate (in the event of default]
  • A late fee penalty
  • Requirements to pay taxes and insurance
  • Perhaps an assignments of rents & leases clause
  • Perhaps an estoppel clause
  • No prepayment penalty

All of these clauses are beneficial to include in a security instrument that you are going to hold resulting from the sale of a property, however if you insist that a multi state or specific state approved FNMA mortgage or trust deed and note instrument is used then like they say in the PREGO tomato sauce commerical… “its in there…”

The FNMA mortgage & note, along with an assignment of rents and leases rider are well thought out, well drafted, easily accessible, and covers all those issues and more.

To your success,

Michael Morrongiello

Re: Need Expert(s) to help write a great note - Posted by David Butler

Posted by David Butler on January 10, 2001 at 12:24:04:

Hello Doug,

Hey… you are on the right track. The better the note is structured, the more marketability it has ? and the less discount a Seller will have to take when converting the paper to cash. Many of these structural issues also work to the Seller?s advantage, by providing the Seller with a higher degree of safety when carrying back notes.

First things first though… before you get to clauses and forms, the most important consideration when contemplating seller carryback financing, is the relationship between down payment, credit rating, credit profile, and debt-to-income ratio of the Payor. Keep in mind that:

· HARD equity (down payment) is always king. 5% is poor, 10% is fair, 15% good, 20%+ is excellent.

· A credit score of 650 or higher is generally considered excellent for carryback notes, 620 to 649 is good, 600 to 619 is average, 550 to 599 is fair, and 500 to 549 is poor. Below 500? ? don?t ask!

· Credit profile and debt-to-income ratio are often more important than pure credit score. A careful review of the credit report will provide details of the Payor?s account histories and potential character elements critical to determining creditworthiness. Also, by comparing this information to the Payor?s completed credit application, and measuring income history and debt-load obligations, a clear picture will usually emerge, demonstrating that Payor?s capability for making the payments according to the terms of the note. And including the payments that will be due on the note, a strong rule of thumb is to avoid a situation where the Payor will have a debt load greater than 45% of his monthly income (40% or less is much, much safer).

Understanding these relationships help provide the guidance in dealing with several of the clauses you’ll want to consider using. You might want to review our FREE report, NOTE GRADING/PRICING GUIDELINES to gain a better feel for that end of it, at:
http://notenetwork.com/at.cgi?a=118510&e=Reports/Note.Pricing.Guidelines.html

As to clauses, the following are some of the basics for writing a good 1st position note:

  1. Keep the LTV at 75% or less, based on the LOWER of appraised value or purchase price ? when the down payment is 10% or less, try to obtain additional collateral to secure the note (or notes) being created, whenever possible;

  2. include the highest interest rate, and the shortest repayment term that you can get the Payor to legitimately (what he can reasonably pay) agree to;

  3. use a balloon payment structure when practical, to cut the long-term discount on the backend of the payment schedule. But structure it to make sense. Always be sure to have a clearly defined exit strategy documented in your package… for example ? a fellow with a 575 FICO, showing a 45%/50% DTI, isn’t really a valid candidate for a three year balloon, or even a five year balloon, in most cases. If you write a balloon note on a buyer like that, you want to have solid evidence in file that would indicate that the probability of timely payment is high, despite this Payor?s poor current financial condition. Otherwise, the likelihood of timely balloon payoff is remote, and investors will want a deep discount - knowing they are either going to have to extend the note past the balloon date (voluntarily - or possibly involuntarily in the case of Payor’s bankruptcy), or foreclose.

  4. Annual payment increases (interest rate increases can work in some instances, but the laws on these are pretty sticky, so be careful) are another good alternative ? but again, only if it makes sense with regard to your Payor?s capabilities.

  5. include a substantial late payment penalty provision subject to whatever your state law allows; (you might want to track down a copy of Jon Richards’ NoteWorthy newsletter, January 2001 issue - there is an excellent discussion by John Moren of NoteSmith, about late payment clauses in there)

  6. include a prepayment penalty, subject to whatever your state law allows;

  7. Assignment of Rents clause - always include that in the security agreement;

  8. Military Personnel - be aware of the Soldier & Sailors Civil Relief Act. This Act provides that no property owned by a serviceman can be foreclosed upon without the consent of the court, if the serviceman: (1) incurred the obligation BEFORE he entered the military, AND (2) foreclosure is attempted while he is on “active duty”, or within three months after discharge from the military. This exemption rarely affects too many foreclosure actions - on the other hand, it seems like we have seen a lot of “active duty” firefights going on around the globe since 1990. Title companies and foreclosure attorneys (or trustees) don’t always get it right. So, you?ll want to have the Payors sign a Declaration of Non-Military Service, with clauses stipulating that the note was created AFTER the Payor entered into military service, or that each of the debtor parties to the note is not now, nor was s/he at any time in the three months prior to the creation of the note, a person in military service as defined in the Act.

By the way, even if this is the one and only note you are ever going to be involved in during your lifetime, I strongly suggest that you invest $30 in William Broadbent’s OWNER WILL CARRY… it is chock full of information related to your questions.

Finally, if you would like to work with experienced note investors in your area, feel free to email me with your city and state location, and I’ll try to hook you up with one of our members out in your area.

Hope this helps, and Happy note writing;-)

David P. Butler

William Broadbent’s OWNER WILL CARRY - Posted by george from raleigh

Posted by george from raleigh on January 10, 2001 at 15:03:52:

Where is this book available?

george