2015 Looking Good for Note Buyers
For many of us in the mortgage note business, 2014 was a very good year, and 2015 should be too. Several elements have contributed to this success. First, rising home prices have made many note buyers more confident, as well as providing us with higher appraisal values. Second, low interest rates as prescribed by the Fed have meant lower yield requirements for the average note buyer. A lower yield means that we can give better prices to the holders of real estate notes. Third, the general perception of a rebounding and healthy U.S. economy has diminished the risks of buying and carrying notes.
Of course, there are still real risks out there. Housing price growth has slowed down and the economies structural issues are far from being fixed. However, for now, the perceived positives are outweighing the negatives.
Creating the Perfect Note
Even with the successes of the note industry over the last few years, we still turn down more notes than we buy. Usually, this is due to one or more of the factors below not being up to par. Real estate investors and homeowners alike should understand the critical elements of creating a good note in order to get the best price should they decide to sell it. There are a number of factors that mortgage note buyers consider, but below are some of the most important.
Property – Since the property itself is the collateral for the note (via the trust deed or mortgage), we want to be happy with that property. The structures on the property should be in good condition and be surrounded by a decent neighborhood. Property type is also important, as a note on an owner-occupied house will get a better price than will one on a commercial property or a parcel of bare land (all other things being equal).
Credit – Although we do not just look at the credit scores of payers when evaluating a note purchase, the score and credit history are important. When the payer has a credit score that is at least in the high 600’s, our offers are almost higher than with a lower credit score.
Terms – When setting up a note with a potential buyer, try to get as big of a down payment as possible and try to negotiate an interest rate in the high single digits. In addition, have the documents prepared by a competent title company or attorney, and have a term on the note that is no shorter than five years. If you are selling a house to someone who is planning to make it their primary residence, be aware that Dodd-Frank laws will affect how you set up your note.
Let’s hope for continued success in 2015 on both the real estate investing and note buying sides. Business is a lot more fun when you’re making good money!