Selling notes--need help with a few details - Posted by Kristine

Real Estate Investing Notes
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Posted by David Butler America’s Note Network on June 08, 2000 at 14:28:41:

Hey Kristine,

You are right… many Lonnie dealers face that same challenge. That’s where note brokers come in. Two things…

In California, it is awfully difficult to find many $10,000 mobilehomes - but that runs in cycles. In the wipe-out we had back in 1992-1994, cash strapped folks affected by the massive defense contractor layoffs found themselves having to sell homes they paid $50,000 for one or two years earlier, for $10,000 to $15,000, UNLESS they were willing to carry paper.

But, assuming for a moment you found one, and could come up with the $10,000 (either by yourself or with a partner who split it with you), and then resell it for $20,000. Say you got $5,000 down, and carried back the $15,000 note with 8 yr amortization at 13%. It will take a little under two years to recapture the other $5,000 out of the deal, so you can do another.

However, you can sell that note, and possibly pocket anywhere from $9,000 to $13,000, depending on the quality of the home and the Payor. Or better yet, as Lonnie himself suggests, you only sell part of that note, to get your cash back out. In this case, to recover your $5,000, you may only need to sell somewhere between 24 to 28 of your 96 monthly payments, leaving you with almost all of your profits plus interest, yet recapturing your $5,000 now, so you and your partner now have your $10,000 back in your pocket to work with… along with a note that is worth another $12,000 to $12,500 to you when the remaining payments revert back to you. Then you do it again… and again… and again… until you build up the bankroll to just carry all of your paper full term.

Meanwhile, you are building up substantial paper profits with large future returns… which is what you are setting out to do as a Lonnnie dealer in the first place, right?!

Now, from the other side. Yes, if you go in as the note investor, you put up your $5,000 to purchase 24 to 28 months of the Lonnie dealers’ paper. Here, you would be recapturing the money at the rate of $252 per month (at a yield ranging from 18% to 30% in the example I used for this discussion). As each payment comes in, you put it in a money market account (paying 4% to 5.5% currently), so that money stays working, while you are waiting for the remainder to come back in.

At 19 months, you have fully recaptured your $5,000, so now you go invest it again… meanwhile, you still have 5 to 9 months of payments coming to you on the first deal. With that coming in, and the cash flow off the 2nd note investment kicking in, your recovery time drops to 15 months… the third time, it’s down to 10 months, and the fourth time, its down to only four months… and each time, as you can see, your residual payment stream is growing longer and longer!!! After a bit, you are fully recovered, and just turning your own capital over.

Is there a way to speed that up… yes. If you are in a position to obtain a working line of credit from your bank, use home equity, or other reliable sources, (even credit cards - IF YOU KNOW HOW TO MANAGE THAT KIND OF BORROWING AND RISK) or borrow money from friends or relatives at a lower yield than you are generating off of your note deals. If you operate prudently and in a businesslike manner, you will effectively leverage your $5,000 to where you can turn it two or three times every 12 months. At that rate, you are working your bankroll up much faster.

One last thing… putting all of this together still leaves one important part - a lot of work, especially in locating and negotiating your deals. That’s why you are able to earn these types of returns. Anybody can do it. But that’s not to say everybody can do it. If everybody could do it, everybody would be doing it.

Hope this helps, and best wishes for your success :wink:

David P. Butler America’s Note Network

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Selling notes–need help with a few details - Posted by Kristine

Posted by Kristine on June 06, 2000 at 15:46:25:

Hi All,

I have been learning most of what I know about notes on the mobile home message board and from Lonnie’s books. I have a few questions and hope someone can answer them clearly. Please excuse my ignorance.

In addition to trying to get my own mobile home deals off the ground in my area (central coast California), I am also interested in investing in other Lonnie dealers out there, since my area is very challenging in regards to mobile homes.

My question is this: If I invest cash upfront to fund someone’s Lonnie deal, the buyer is the original note holder and I get a promissory note. I would like to know if my promissory note is something that I can borrow against anywhere, or if it is something I can sell a partial on (in order to get more funds for other deals). I have the opportunity to invest in some mobile homes that have a very highy yield, but I am unclear what my “status” is when I am an investor, getting paid by the note holder. I am embarrassed not to know this, but I really want to understand it. My understanding is that my promissory note is secured by the mobile home. Is this enough collateral for any kind of loans? Can partials be sold on this kind of note?

Also, is there a term or specific language for what I’ve described above? Thanks for a great message board.–Kristine

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Re: Selling notes–need help with a few details - Posted by David Butler America’s Note Network

Posted by David Butler America’s Note Network on June 06, 2000 at 18:59:55:

Hello Kristine,

Sounds like you have the right idea on a tremendous paper niche here in California. You are right on track with the idea of funding other folks Lonnie’s deals as well, although I practice it bit differently. First, I want to be clear on one confusing point you made.

The buyer is not a noteholder in the deal. The Seller is a note holder. With mobilehomes, he is holding a note secured by a Security Agreement (i.e. conditional sales agreement, retail installment contract, chattel mortgage, or similar - here in California all forms are commonly known now as Security Agreements). This is similar to a real estate transaction (including mobilehomes WITH land… where the notes are secured by a mortgage or deed of trust. The promissory note is evidence of the debt, the security interest (mortgage with real estate, Security Agreement with personal property) is evidence of a legal interest in the collateral property as security for the promise to pay represented by the note.

When a seller carrys back all or part of the financing on a mobilehome without land, he will hold a note AND a security agreement (best to record with HCD in California to perfect the lien).

So, a Lonnie dealer buys a home and resells it, carrying back the paper over and above any down payment received. I step in and purchase all or part of his note, so he can recover at least the balance of his invested capital (a partial), so he can go do another deal and still keep most of his profits. If he needs more cash, I may be able to purchase the whole note, in which case, he recaptures all of his invested capital, and that portion of his profits not eaten up by my discount. He receives the cash, and I receive both the note endorsed over to me, and the Assignment of Lien (in California), which gives me the seller’s interest in the Security Agreement. When the Assignment is recorded at HCD (in California), I am added as the new lien holder in place of the Seller on the title documents related to that property.

Hope this helps, and feel free to contact me if I confused you more than pushed you forward.

David P. Butler Vice President, Broker Relations

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Re: Selling notes–need help with a few details - Posted by Kristine

Posted by Kristine on June 07, 2000 at 24:45:36:

Dear David Butler,

Thank you for your reply. I am afraid that, being new to note terminology, I did not express myself very clearly. What I meant by the “buyer being the noteholder” was the buyer and seller in a Lonnie deal–the person working the deal to whom I would give money to invest who buys the home. That person then sells it, manages the deal, with me getting paid for my investment. I am unclear how to make sure that my investment is secured. Is there a standard form for Security Agreements that stipulates the collateral? I can see how someone new to the note business could invest in a note and not know if their investment was secure. Thank you so much for your time and reply. Sincerely–Kristine

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How do you perfect a lien? - Posted by Sean

Posted by Sean on June 06, 2000 at 22:22:21:

Did you want to elaborate on how to perfect your lien in California? I live here but I am not sure what all is involved.

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Re: Selling notes–need help with a few details - Posted by David Butler America’s Note Network

Posted by David Butler America’s Note Network on June 07, 2000 at 11:37:03:

Hey Kristine,

Well, that’s easy enough, and part of the discussion I made yesterday can cover that. There are several ways to do your “joint venture”. You can be a lender, and loan money to a joint venture, which your other venture partner spends to purchase the property. Your joint venture agreement is your security interest, and you can take title in the name of the venture. This would be cleaner than the next method, which is to make an agreement to supply the funds as a lender. He makes an agreement to purchase the home, you fund it at closing, and you are give a note and Security Agreement as evidence of the debt, much as I reviewed in my previous post. In this scenario, you have to make sure that you are in compliance with various consumer protection laws, though they will be minor, because you are lending against investment property rather than your “partner’s” personal residence.

Or you can go into a joint venture agreement as an equity partner, where you have a vested stake in the profits of the venture. You can set that up as a loan with an equity “kicker”, or as a straight equity particpation. Your security again can be either a title in the name of the joint venture, or in the names of the individual partners.

Then when you guys resell the property, you carry back the note too, as a joint venture, or as individual’s with respect to your individual vested percentage of the deals.

Security Agreements themselves are a standardized form that is available at most office stationery stores (again, this is the agreement securing a note). There are various simple outlines of different partnership and joint venture agreements in various publications, many of which are likely available in various books on this site. These things are highly individualized, even in there simplest form, and it is a matter of comfort level as to how thorough you need to be in using the “boilerplate” clauses found in the multitude of possible formats you might choose.

Personally, I would be tempted to focus more on finding a few Lonnie dealers and funding their deals by buying their paper (or partial purchases). Lonnie covers this material in his courses, and you have the added advantage of having taken the courses yourself. Just buying the paper won’t put you in for as much profit, but you will make ENOUGH… and a lot less work.

Hope this helps, and best of luck to you. Feel free to email me if you have further questions.

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Re: How do you perfect a lien? - Posted by David Butler America’s Note Network

Posted by David Butler America’s Note Network on June 07, 2000 at 24:00:57:

Hello Sean,

Well, it depends on the lien, and how it originated. I will assume you are talking about mobilehome paper, secured by a home without land. If you were the seller, you should have a promissory note AND a Security Agreement (the basic California term). The lien should have been perfected at the same time a new registered owner was put on the title certificate, showing you on the title certificate as the legal owner. Both of these acts would have taken place either through an escrow processor, or your own legwork through your local HCD (housing and community development) office. It can be done by mail, but following my old friend Terry Vaughan’s lead, I like to do it in person.

If you purchased the note, you should have the original note and Security Agreement, along with the HCD Lien Assignment Form. The note seller endorses the note, and fills out the Lien Assignment form. You then send these to HCD, to be recorded as the new legal owner. Again, I prefer to go there in person to get these things handled. The recording at the HCD office is the act the perfects your interest in the lien.

Hope this helps, and feel free to contact me if you need any more guidance.

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Along those lines… - Posted by Drew

Posted by Drew on June 07, 2000 at 18:09:26:

Hi David,

In addition to buying notes from Lonnie deal investors, there is another tact that was suggested to me sometime ago. That is to work directly with the original seller, have them offer financing (using your forms, criteria, etc.), and buy the note from them. Same as the Simultaneous Close with SFHs. I’ve read Lonnie’s books, but don’t recall this strategy being addressed. I could be wrong, my wife can certainly attest to that! :wink:

You’d have to get a good discount on the note to make it worthwhile since these notes are riskier than those secured by SFHs, but this would still avoid some of the hassles of actually buying and reselling the home yourself.

I guess a good approach would be to give the seller two choices: 1) low-ball offer 2) they seller finance, I buy the note and they keep the down payment, therefore receiving more than the low-ball offer.

This yeilds would be lower than doing a Lonnie, but you wouldn’t have to schmooze the park manager, fix anything, wait around to show buyers the home (and not show up!), or pay lot rent while it is on the market.

As far as marketing to the sellers, I guess a combination of cruising the parks and letting MH dealers know you buy seller-financed notes would bring in some business.

What are your thoughts on this approach?

Thanks,
Drew

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Re: Selling notes–need help with a few details - Posted by Kristine

Posted by Kristine on June 07, 2000 at 12:51:10:

Dear David:

Thank you for your comments on Security Agreements. I now understand that there are numerous ways to invest in Lonnie deals, without actually going out there and making the deal happen myself. My biggest concern, however, is that I want to be the note holder as I want to be able to use that note to borrow against or partially cash out in order to do more deals. But I now I hear your suggestion to focus on Lonnie deals by buying their paper (not funding up front, but after the deal/note has been created) and I think you are right. I would make enough profit–with less work. While I have read both of Lonnie’s books, I haven’t taken any courses, yet. Seems like there are a lot of courses that I need to take… Thanks again for your time.

Sincerely,

Kristine

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Re: Along those lines… - Posted by Kristine

Posted by Kristine on June 07, 2000 at 21:03:26:

Drew–I think this is a great idea, financially. But I cannot, I repeat, cannot imagine the sellers I have been trying to deal with even beginning to understand the deal. I work really hard to remember that people just are where they are, emotionally, mentally, whatever. But some of these people have very limited experience with financial instruments, period. I mean credit cards and checking accounts are a mystery for some. Most of the people I’ve been talking to paid cash for their homes and want cash for them now. I guess, if they move, and they’re still paying lot rent, it might be a motivator to listen to someone else’s idea, but it seems like a long shot. The park managers in my area don’t even know what notes are, which explains why they are not doing any of these deals themselves.

I am going to think on this one for awhile. There are two mobile homes I’ve been looking at where the sellers don’t have a buyer because they need cash. I lack the kind of cash (7 - 10K each) that I can tie up in a five year note. If I find a buyer for the home (not a problem) for the current sellers and arrange to buy the note, I might be able to get in at the right price for me.

Thanks for the brainfood.

Sincerely,

Kristine

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Re: Along those lines… Drew Too From David - Posted by David Butler America’s Note Network

Posted by David Butler America’s Note Network on June 08, 2000 at 01:16:59:

Hello Drew, I came here to answer you but saw Kristine’s reply to your post and thought I could deal with both in this one reply.

Drew, you are kind of on the right track for the most part, but I wouldn’t get to tied up in working with sellers up front. Make sure they know you are out there, and be ready to stand up when they come calling, and you should be pretty well off. Pricing, grading, property value, and credit history are what you want to focus on, and educate the Seller to, to some degree.

Kristine… I am a little confused. You had mentioned early about financing Lonnie dealers. Right now, it sounds like you are working with limited funds. You might be able to work one deal, either as a Lonnie dealer, or as a note investor, but then you are out of the game for a while. You might consider becoming a birddog for Lonnie dealers, and/or a note broker, and get experience while earning finder fees for bringing the deal to the investors, until you get a bankroll established. You may be able to use what you have now as seed money, if you can find deals small enough to cover with your existing nest egg. But remember, almost all deals of this nature are going to wind up with holding costs, so you need to factor in your ability to ride out any potential problems if things don’t work out exactly as you expect them do going in.

Also, don’t let yourself get trapped in myths. What you say may have a speckle of truth in it, and may even be prevalent in your immediate vicinity… but the used mobilehome marketplace has been almost 50% owner financed for years, and it will be getting tighter, as the mobilehome lending industry has again hit the skids. This year, nationwide, it is estimated that between 900,000 and 1,000,000 USED mobilehomes will be changing hands, with almost 60% being owner financed, about 25% (A paper borrowers) being lender financed, and the remaining 25% cash out. Surely, all the cash out folks can’t be buying exclusively in your area :wink:

California is the prevalent mobilehome marketplace, by a wide margin, followed by Florida and Texas. I rely heavily on park owners and personnel for doing deals, and managing my notes (take note of that Drew). I own some paper on pretty high end stuff in FIVE STAR parks here in Orange County and Riverside County. My pal Terry Vaughan of CREO has a lot of these notes, scattered all over southern California… purchased individually, with the exception of a couple of dealer notes sold to him. So, you’ll be able to do alright.
Don’t get to hung up on educating these folks. People carry paper. When they need cash, they will sell the paper. When they are just fishing, they won’t sell the paper. Usually, you need to see about 10 notes to find one that really works. With mobilehomes, I would say it is closer to one in six. Just don’t mislead folks early on into thinking the notes are worth more than they are. Be polite, but be realistic. If they tell you to get lost, smile, and press your card on them politely. Tell them you understand, you would want more too. But you can’t pay more than it’s worth, and if they ever change their mind or can’t get the deal they want somewhere else, to feel free to get back to you.

I’ve had some of these things go on for six months before they finally pulled the trigger. When they NEED the money, they will reenter Earth’s atmosphere.

Hope this helps and best wishes for your success!

David P. Butler Vice President, Broker Relations

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Re: Along those lines… Drew Too From David - Posted by Kristine

Posted by Kristine on June 08, 2000 at 12:55:35:

David: thank you for your input. All my questions are to help me gather info regarding how to make my investment money create the largest amount of cash flow. For my own interests, I would love nothing better than to do classic Lonnie deals–I would love to fix-up and sell. But I don’t live in Virginia, the South or rural Mid-West. I don’t know of any mobiles that have sold for under 10K within a 50-mile radius here–but I’m hoping to find them. So, if I can’t get Lonnie deals going, I’m hoping that I can invest in someone’s else’s deal or maybe buy a note. But you are right–I need to plan for holding costs and other unexpecteds. But it seems to me that there is a more creative way to be involved in Lonnie deals than doing one and waiting around for some more dollars for investing. If there is such a way, I will find it!

All your answers and information are really helping me to get clear about all the possibilities.

Thanks again. Sincerely–Kristine

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Thanks David…one more thing… - Posted by Drew

Posted by Drew on June 08, 2000 at 07:57:26:

David,

Thanks for your input on this discussion. Would you please share how, other than working with Lonnie dealers, you market to find these seller financed MH notes?

Just trying to figure out an efficient way to get these notes coming my way.

Thanks!
Drew