This Is The End.
Published: Mon, 03/24/14
The final discount on The Paper Source Note Symposium expires
midnight tonight, Monday March 24, as does the hotel discount.
Go to http://tinyurl.com/2014notesymposium or call 800-542-2270.***
THE CASH FLOW EXPRESS
A Service of The Paper Source, Inc.
March 24, 2014
Hi ,
Create A Note -- And Sell It! That's what we'll be learning in this
issue of The Cash Flow Express from one of the real experts in this
business, John Merchant, J.D.
Cheers,
Bill
W. J. Mencarow
President, The Paper Source, Inc.
www.PaperSourceOnline.com
*************************************************************
Create A Note -- And Sell It!
by John J. Merchant, J.D, EMS
http://store.papersourceonline.com/your-ira-can-buy-notes-more/
Here is an outline of the elements that should be considered when
creating and structuring a note which the note holder/payee wishes
to sell at or shortly after closing.
Credit of the Property Buyer(s)
The better it is, the more valuable the carryback
note is going to be to a prospective note
buyer. Don't know what the property buyer's
credit is? Then don't bet the barn on a great
note sale, because the note buyer will want to
know the buyer's credit. And if the property
buyers are husband and wife, or more than
one buyer, demand credit and financial statements
from everyone. These days it's common for
the wife to earn more than the husband, and
you want to know all about both. If the noteholder
is not equipped to obtain a credit report,
ask your bank or local credit agency. They'll
help you get it.
Sales Price of the Property
This should be at or LESS than the provable/establishable
value of the property. Is it more than the
actual value of the property? Then expect
your note to sell for LESS than you want,
because the experienced note buyer wants the
property buyer to have some equity in the
property so the property buyer isn't likely
to default.
Provable Value of the Property
Don't know? And the property buyer hasn't
demanded an appraisal of any kind? Great,
if the property is selling for all cash --
but if you're taking back a note and you want
to sell that note simultaneously, be aware that the note
buyer is going to want to know the property
value. And many problems are created if your
note sale is AFTER the property sale, and
the property is now inaccessible to an appraiser.
Down Payment
Zero down deals are done all the time but
are not popular with note buyers. They want
to know that the buyer has immediate equity
in the property, something to protect, so
the less the down payment you're taking, the less the cash
you're going to be selling your note for.
Terms Of The Carry-Back Note
A. Interest Rate: The higher the better,
but not so high as to gamble with usury law
violations. Many states have usury laws that
govern personal, consumer loans (e.g. Washington
State has a 12% "do not exceed" rate); however, not all states
have usury laws. So check before you structure your deal.
Don't know what a good interest rate is for
your deal? Ask a mortgage person or residential
agent. They live with this on a daily basis
and they'll give you some good advice. The lower the rate, the
poorer the deal for the note buyer, and he'll
just make it up by charging you more of a
discount when he buys it.
B. Length of Note: Again, ask what is normal currently.
Probably the typical length is 5 years, or maybe 10 to 25 years
but with 3 to 5 year balloon. This is important
to the note buyer, because he doesn't want to wait forever to
get repaid. But not too short...I've seen
notes with 6-12 months go begging for a buyer
because the note buyers feared the property
buyer couldn't pay it off in that time period.
C. Balloon: Again, the note buyer wants
to have this on his books for no more than
3-5 years, so even if the new note has a 20-25
year amortization period, to keep the monthly
payments within reason, the note should have a 5 or
so year balloon for full payoff in that time.
D. Loan-To-Value Ratio (LTV): Total
loan-to-value, of both the first and new second,
must be considered, and typically not to exceed
75% of provable value, for the buyer of the
new second to be seriously interested. Also, many
second buyers want the ratio of the first
to the second to be no more than 4:1. Translation:
they don't want a little second that's behind
a huge first, which might have a much bigger
RATIO than 4:1. (e.g. $100,000 first and $10,000
second would be 10:1; but $30,000 first and
$10,000 second would be 3:1). Do some shopping
and learn what note buyers would accept before
you structure your property sale. Of all the
elements listed here, this is probably the
one most ignored by note buyers. If they like
everything else, they might not care at all
about the LTV.
E. Will the Lender on the First Permit
the Second You're Willing to Carry? Frequently,
the lender on a new institutional loan inserts
a clause to the effect that it is permitting
NO carryback loan by the seller, and you'd
better hammer this out up-front if you plan
to carry a second and are expecting to sell
it.
F. Security For Your Second: Normally
it should be a recordable deed of trust, or
mortgage in non-deed of trust states, drafted to comply
with laws of property situs (where it's at!)
to secure payment of the second. And to be recordable
in deed records it should normally be signed
and acknowledged by a notary. Further, it
should normally have provisions to the effect
that any default on buyer's part in payment of his
first note is also a default in the carryback
second. And, although frequently omitted,
it should contain explicit, written permission
for its holder to verify the current status of the first.
G. Buyer's Identity: If the payors
are husband and wife, make sure they ARE husband
and wife and have both executed the note and
deed of trust individually. Don't permit one
to sign for both. This is not permissible
or binding on the spouse in every state, and
you don't even know for sure they're still
married. If you're selling to a corporation
or LLC, make sure you're also getting the
buyers on the note and deed of trust INDIVIDUALLY.
I see too many notes where ONLY the corp/LLC
is on there, and the people signing, sign
ONLY as corporate officers -- this doesn't
bind them individually and your note isn't
going to sell.
One element that has not been addressed in
this article is "seasoning," or aging. While there is no doubt
that a note that has a few years successful seasoning
is a more valuable note, of course this element is completely
absent in a "simultaneous" sale, where the note is purchased as
the property sale is closed.
Finally, if you are in doubt about any of
these elements in your deal, e-mail me (jammer999@gmail.com)
and I'll help you structure a note you CAN
SELL. I stand ready to advise any note seller
on how to structure and create his or her
own sales transaction and/or an owner's carryback
note so it will be LEGALLY marketable and
sellable and not carry with it those explosive
qualities that stand ready to kill and maim
deals, note buyers or brokers.
John J Merchant, J.D., EMS, is a graduate
of SMU School of Law. He practiced law for
a number of years before leaving law practice
to devote his time to a variety of business
interests and investments. He has been very involved
in investment real estate since before graduating
from high school, and he has owned and managed
a plethora of properties in several states,
including ranches, oil leases, gas stations,
rentals, both single family and multiplexes,
office buildings, warehouses and even fast
food restaurants.
John is owner and broker of MesaRoya Properties,
in Tacoma, Washington, a commercial real estate
brokerage. He is a Gold Card member of National
Council of Exchangors, (EMS - Equity Management Specialist) and a
member of various other real estate exchange and
marketing groups. His articles appear often
in THE PAPER SOURCE JOURNAL
(http://papersourceonline.com/paper-source-journal/infosubscribe/).
He is the author of the guide, "HOW
TO USE YOUR IRA, 403b(TSA) OR PENSION PLAN
TO BUY REAL ESTATE, NOTES, JUDGMENTS... AND
OTHER THINGS." See
http://store.papersourceonline.com/your-ira-can-buy-notes-more/
*** The final discount on The Paper Source Note Symposium expires
midnight tonight, Monday March 24, as does the hotel discount.
Go to http://tinyurl.com/2014notesymposium or call 800-542-2270.***