Where's the benefit of using note buyers/brokers? - Posted by TP

Posted by David Butler on April 05, 2007 at 12:03:48:

Hello Jan,

I just spotted this thread in the process of doing some research. My apologies for not responding sooner, but I do note that you originally posted right during the time I was fully engaged in staging my Note Smart Marketing Workshop with Roberta Standen. Boy… how the time flies! :wink:

Anyway… interestingly enough, though the already relatively small “simo” niche has shrunken further since 2000 (retracted to pre-1996 parameters might be a more appropriate observation), some of the basic guidelines have apparently changed with regard to the steps of doing a simo closing. Though I am not personally comfortable with some of them, my two compatriots, Mike Morrongiello and Eddie Speed, seem to be - and they are two of the most active institutional simo buyers.

For much of the more redundant aspects of the topic, I’ll refer you to Mike’s recent discussion on the topic made in his reply Steps to putting it together… at:

To that I wish to add that in my own experience and from legal consultation over the years, I have shared some observations in many previous discussions here regarding “creating notes”, “simultaneous closings”, “table funding”, “safe-harbours”, etc) that I believe are prudent. As a result, in my view, it is not possible to “presale” a note per se in terms of gaining a firm commitment. As suggested in George Coates’s seminal (though no longer in print) “Smart Trust Deed Investing In California”, I have suggested that the purchase contract contain language to the effect that “this Agreement is contingent upon Seller selling the note, and upon Seller’s election, the Agreement may be rescinded within _____ days of closing in the event that Seller is unable to sell note at a price that is satisfactory to Seller”.

My belief is that to avoid “arranger of credit” status for third parties, a signed purchase contract, credit report, appraisal, and income history should be presented to a note investor for review. The investor then would offer a verbal (though written is now given by several buyers) notice of their interest in purchasing such a note upon its creation, along with their opinion of what they would pay for it.

How to allay the seller’s fears is best accomplished by knowing ahead of time what basic generic terms would be for creating a note in the first place. In the current market, 580+ credit is the best bet, and at least 10% down at close. If credit is 620 or better, 5% down can work. Senior position note secured by residential property of 4 units or less; 30 years or less fully amortized, with balloon payment due somewhere between five years to 15 years (seven years is my preference). Payor debt to income ratio 45% or less. And for better pricing, seller also taking back a small 2nd to hold, for 10% to 15% of purchase price (optional).

Again… the above is just me. I know Mike Morrongiello and Eddie Speed have both indicated over the past year that they are more lenient in their parameters these days with regard to providing assurances. Since they are both highly credible individuals with much success as note buyers, and particularly active in doing simo purchases, you can’t go wrong contacting them for their current parameters.

But won’t hurt to consider the above views as well in determining how to best approach your seller financing presentations - and I am sure that both Mike and Eddie will echo much of it.

Best wishes for your continued success, and

Have Fun For A Living!

David P. Butler

Where’s the benefit of using note buyers/brokers? - Posted by TP

Posted by TP on August 12, 2006 at 06:55:22:

I’m reading this board and trying to understand where the money is in this game. What I"m reading here is, note buyers want to see all the same creidtworthiness, seasoning, etc. as a traditional lender, but they also want a higher rate of return. Other than MHs where note buyers are expecting higher risk, where are the note holder that can bring a note to the table to meet an investor’s criteria? If I’m a real estate investor with a property to sell, why wouldn’t I just send Jane Buyer right to Lending Tree so I get my cash TODAY? If I want a higher price for my proeprty in a slow market, what note buyer is going to buy my note either without the 70% LTV in their favor? I’d do better to offer “seller assist” and get rid of the thing by taking the discount off the sale price, woudln’t I?

The words “seller financing” might get a buyer in the door, but won’t work on buyers who know what today’s rates are, etc., and if I just take a 10% note to help them buy, that’s not marketable to notebuyers… Can someone explain where the money is here in notes? Finding the 1 in 1,000 desperate sellers who just want out? THanks i’m just trying to udnestand here.


Re: A Place In Time?! - Posted by David P. Butler

Posted by David P. Butler on August 12, 2006 at 11:38:35:

Hello Tanya,

Not sure where in this board you ran across enough information to come to the sophistic conclusion you somehow managed to reach with regard to seller carryback financing. And unfortunately… the issues presented in your several questions will take a great deal of writing what has already been written - no small undertaking!

But I’ll try to address a bit of the landscape, and let others add to it if so inclined. Hopefully, this will put things back into their proper perspective.

First basic thing… the money in the game is generated purely through the buy/sell spreads. This includes both the profits taken by note brokers, and the increased yields demanded by note buyers. In its present form, this marketplace has thrived for about 65 years now. And it will likely continue, particularly as the CREI segment has grown significantly - as is already being reflected across the country, in owership profile records.

Second basic thing… as has been mentioned here by many of us - seller financing is not a panacea for all real estate deals. It is simply another tool in the box for creative deal makers to make deals. Like many things, being creative merely for the sake of being creative is often both a waste of time, and a precursor to disaster. Instead, the simplest, cleanest solution to any situation is also usually the most direct and profitable.

In a strong market, with plentiful cheap money, and lots of favorable demographics, seller financing is seldom used. The reasons are obvious, and you have mentioned two of them. But that doesn’t mean they are completely eliminated in such areas either. Some of the reasons are given in the discussion below.

Third basic reason… though note buyers will gladly purchase prime paper, prime paper is not the bailiwick of the private side of the marketplace. A large part of the private real estate paper market is made up of notes secured by “nonconforming” properties - real estate that for one reason or another does not qualify for prime, or conventional financing.

Briefly, this can include many older properties not built to current code specifications; or properties that are afflicted with functional obsolescence but still usable.

Fourth basic reason… the private paper marketplace far and away is primarily the domain of subprime payors. In fact, the somewhat slower markets we’ve seen the past 10 years in the SFR sector of the note industry, is a reflection of the growth of subprime lending markets. So, not sure at all how you came to a different conclusion?

However, while subprime lenders have sopped up a great deal of business that would otherwise have shown up as seller-financed paper - the other side of the coin is that it has also created incentive for more informed buyers to look at demanding seller financing as a way to get around the significantly costs that go along wit obtaining subprime loans.

Subprime loans tend to generally run about 1.5% to 2% higher at the baseline. And the worse the credit profile and score, the higher the spread. Over the years we’ve seen borrows taking subprime loans that were up to 5% higher than the current prime conventional loan rates. At the same time, subprime loan fees tend to run in the neighborhood of 4 to six points, versus 1.5 to 2 points on the typical market-rate conventional credit driven loan.

So… if I am looking to purchase an $100,000 home as a subprime borrower, even at “A” grade, I am likely looking at paying perhaps an 8.5% best rate, versus the roughly 6.625%, for a 30 yr. fixed rate conventional loan I can’t qualify for. The difference in my monthly interest cost is $768.91 vs $640.31 or $128.60 per month. At the same time, I am looking at probably 4 points in origination fees, versus 2 points for conventional financing. That equates to $2,000 more.

Depending on these numbers, and related factors, seller-financing can offer a very attractive alternative.

These same cost factors, and/or other financial requirements, also come into play with regard to creative real estate investing. As mentioned above, CREI has shown dramatic growth over the past 10 years, due in no small part I am sure, to the launching of CREOnline back in 1995.

A huge part of CREI involves the strategic use of seller carryback financing, for all of the reasons suggested above. Keep in mind too that CREI is practiced by investors - then go research your local marketplace to find out how easy it is to obtain “investor” financing for SFR; NOO multi-family properties of four units or less; NOO multi-family of five or more units; a broad range of various commercial properties; and vacant land loans.

Spending a week or two at that exercise should make it abundantly clear that cheap money for investors is not that plentiful, nor that simple to get.

Okay… just a starting point for understanding why the private paper markets function, at least in the real estate segment of the game. I am sure Mike Morrongiello, John Behle, Terry Vaughan, and several others can add more specific enlightenment.

But hope this helps as a beginning frame of reference!
Many Happy Returns and

Have Fun For A Living!

David P. Butler

Re: A Place In Time?! - Posted by TP

Posted by TP on August 18, 2006 at 09:25:24:

David it was precisely after reading so much on this board that i asked my questions. There was consistently a response to questions about how to get these notes resold that said the note buyers will look at the payor’s credit, seasoning, LTV etc., and the requirements weren’t all that different from any C-D lender out there today.

So i understand that it’s another tool in the box but seems to me to be of very - VERY - limited use, and not another source of revenue or even a help to me as a RE investor esp. if I have trouble selling it to a note buyer except on discounts I don’t want to pay. Ex., i already have several creative lenders who work hard loans or other on commercial and multi NOO props, they will finance me or my buyers regardles of credit pretty much if the property value is there. I feel that in the professional NOO investor market that you describe, the terms “seller financing” don’t hold all that much more attraction, pros generally know the terms will be similar to that of lenders they use.

As for owner occupied - if the payor is signing a note to the property owner for a higher price in order to facilitate a discount the seller will have to take later, then i don’t see much difference between that and a couple extra points up front.

Just as an example, I would posisbly see a value in writing a note for a 2nd to an owner occupant who doesn’t have a lot of DP cash - but there again, the posts from the note buyers on this site show me that selling that note later will be problematic (that they don’t like 2nds, first liens only please was emphasized by some of your pros on this site). Maybe as the RE market keeps dropping as is likely, sellers will get desperate but i don’t think they are there yet, at least not in my market.

Re: A Place In Time?! - Posted by Jan

Posted by Jan on August 17, 2006 at 08:46:24:

I am new to the note business, though I have been working in the mortgage industry for over 10 years. My question regarding seller financing and especially simo’s is what assurances does the seller have that the note will be purchased. Would I be correct in assuming that all the payor info, 1003, etc is obtained prior to the sale, and the note is presold before the sales transaction? Is the real estate sale made subject to the 1st lien sale? When approaching home sellers regarding seller financing, what is the best way to allay their fears that they may set up seller financing and won’t be stuck with the first lien note?

Jan Rhodes

Re: A Place In Time?! Redux - Posted by David Butler

Posted by David Butler on April 05, 2007 at 10:31:07:

Hello TP,

I happened to bump into this as I was doing some research, and realized that now is as good a time as any to address it as best as I can.

I am not entirely sure what it is you are missing here… though I agree somewhat with your observation that seller carryback financing - solely with the intention of simultaneously selling the note right after closing the property sale - is of limited use overall. This is a point we have consistently made over the years, as my personal observation is that too much emphasis is frequently on this one aspect (simos) of seller financing.

But a couple of helpful points to keep in mind here. First, desperate sellers have little to do with the decision to use seller financing. Almost always, the decision to use seller financing is the result of effective counseling the seller has received from somewhere, and in a scenario where it presents the best option for his situation. Any study of creative real estate investing usually has some pointed discussion in this regard, and offers sample scenarios where seller financing has been a very welcome solution.

Secondly, as we have also discussed from time to time, is that subprime lending has been a relatively new trend in the lending markets - having not really taken root until the mid 1990’s. Since that time, there have now been two major crashes in the subprime lending niche over the past six years. Hard to say how things will shake out this time around… but it is relatively simple to assume that for at least the next several years, you will not find too many Wall Street types all that excited about jumping full bore into what has proven to be a catastrophic loser to the folks who put the money into these ill-fated loans.

The third aspect lies in understanding the historical perspective. The fact is, seller financing has been around since the beginning of civilized commerce. In terms of the private cash flow industry as we know it today, it has been approx. 70 years of proven value.

The thing is, understanding how and when it is used, and when it is a tool that will be of value to you, is the nexus. Seller financing has never been a pancea, and likely never will be. But if it helps me make even one more deal this year, then it is a fabulous tool. Same thing if it turns out to be my best option in a given deal, in comparison to my other options.

As a real estate investor, I am not sure why I care too much what a note holder will do with the note. And as a note investor, I look at many ways to utilize the value locked up in the note. (BTW… John Behle has written some very good material about this aspect of how to make the most out of your paper investing efforts, particularly in relation to being part of your overal real estate investing efforts as well).

As always, the best option is the one that works best for you in achieving your objectives. Hope this helps, and best wishes for your continued success! And…

Have Fun For A Living!

David P. Butler