“Create a Note”… Important - Posted by Michael Morrongiello
Posted by Michael Morrongiello on January 29, 2001 at 09:50:29:
Always happy to assist.
My firm, Sunvest has been purchasing real estate secured paper on a Nationwide basis for over 17+ years. We have purchased thousands of notes in almost every state in the Union, including Alaska and Hawaii. We invest primarily as a portfolio investor.
The terminology “create a note” is often misused;
We will purchase Real Estate secured notes that are “created” as the result of the SALE of a property. This is commonly called a “purchase money mortgage” or PMM (or a Purchase money Deed of Trust, etc.). These privately held or created security instruments and the promissory notes that they secure are typically exempt from state and federal disclosure requirements, (truth in lending, Good faith estimates, REG Z, etc.) and RESPA (Real Estate Settlement and Procedures Act).
These type of notes are VERY marketable and certainly can be easily liquidated for cash, often at a minimal discount if structured correctly. Sunvest purchases these notes whether they are newly created (sometimes called a “Simultaneous closing”) or where they are “seasoned” and a payment history has already been established.
The term “Create a note” is often misused in the following context and example: You own a home free and clear of any debt or liens that is worth $100K. You now want to “extract” some of your equity in that property in cash. So you consider “creating a note” that would be in 1st lien posistion, perhaps for $65K, that you would now like to sell and convert to cash.
This type of “created note” is akin to what a refinancing might do, it is NOT resulting from the sale of the property (remember the PMM referenced above), it is also not considered a “squeaky clean” scenario, or arrangement, under the circumstances of how and why the note is being created. It begs the question; WHY not simply refinance the property and pull out your cash?..
Bottom line: A “Created note” under these circumstances is generally not considered in the secondary mortgage market as being a very marketable. It will present a lot of problems for one to create the liquidity they desire.
So if you are going to “create notes” - try to create them as the result of a genuine arms length SALE of a property.
Hope this helps
To your success,