Unseasoned buy and hold Notebuyers out there?

30 Replies

Besides all the brokers floating around claiming to be note buyers, does anyone know real buy and hold note buyers that will buy what would be HIGH YIELDING UNSEASONED NOTES? I do understand that the discount would be significantly high.

Well we buy NPLs are you referring to a reporforming note or non performing?

We buy these notes.

my notes are new notes, 2 weeks old. They are unseasoned. I am a note buyer that owner finc out my inventory.  

* I am a wholesaler that is offering owner finc on some of my houses. 

Originally posted by @Efrain Gallardo :

* I am a wholesaler that is offering owner finc on some of my houses. 

 This is a little confusing.  So you are wholesaling a property to a Buyer who does not have sufficient capital to give to you to pay off your Seller.   This sounds like a nightmare waiting to happen.  

How can you convey clear title when you don't have clear title?  Then you further cloud title by attempting to take back a mortgage on your Seller's property which you don't have enough capital nor does your Buyer have enough capital to complete the sale(s).  

If I am missing the operation plan here, please correct me.  If not, the issue here is far greater than a newly originated note.  I am having a hard time seeing how this mortgage would even be valid.  

@Dion DePaoli

@Efrain Gallardo

Dion not to answer for Efrain,,, however I think he is just doing seller carryback on homes he has bought wholesale.. seems to be a lot of that lately in Texas and other place's.. and then is trying to sell this newly minted subprime note to a note buyer.. So Efrain can get his cash back and profit back so he can buy another wholesale deal and rinse repeat.

This model seems to be surfacing all over the US all of a sudden.. its an old sweat equity model that has been in play for years... however with all the new rules these notes are suspect in many ways.. form an origination standpoint etc.

One other thought there.  If my understanding is correct here.  You are probably on the verge of acting like a Mortgage Broker with no license.  Essentially, you expect the end investor to purchase the note from you, even if at the table, after you negotiating the loan between the investor who has capital and the buyer who needs to borrow the money.  You do not have capital to purchase the property out right so you are merely brokering.  Brokering a loan to a primary buyer requires a license.  Trying to skate past that idea under the guise of wholesale maneuvers is going to land you in more trouble than any of this is likely worth.

@Jay Hinrichs

 I struggle to use the word "buying" when in the same sentence as "wholesale".  A wholesaler generally does not capitalize the transaction.  That is where the issue lies.  Well, one of many I suppose.  

Seller agrees to sell for $10 to OP.  Until OP has $10 he can not close.  Limited interest is granted through contract however, OP does not have legal rights to offer financing to his end buyer.  Those rights are not granted through a contract the OP's bundle is limited.  

So while Seller and OP are in contract.  OP contracts with financing arrangements with new Buyer.  Now we have another contract that cannot close because there is still no capital here.  

So OP turns to the secondary looking for a Note Investor to table fund this deal.  The note investor is the only one here with capital.  I would presume OP simply attempts to accommodate any terms the note investor desires for the loan to the Buyer since that is what it takes to get the capital to the table.  Also, a loan arrangement in any other manner really means having to hunt for an investor who is interested in any pre-negotiated terms.  So all that is really happening here then is note investor is the actual Lender.  And it starts to push OP into a position to negotiate terms between the two parties since they are the two that matter.   A savvy note investor might even demand more of the deal cutting back on any type of wholesale margin.  So the wholesale margin looks more like a commission.  

This convoluted manner in which it all comes together is just window dressing on ultimately acting without a license as an RMLO.

What am I missing?

@Dion DePaoli

  and in states with the no deficiency judgment rule on purchase money DT for owner occ the note investor has absolutely no recourse except the property.

I was assuming this wholesaler actually closed on the deal rehabbed it then sold it on contract.. If he is indeed bringing the note buy to the table and doing one all inclusive closing then that's another matter.. @Efrain Gallardo

 maybe Efrain can better illustrate what his transaction looks like in detail.

OK enough BP for today I have to go make some money !!!

Originally posted by @Jay Hinrichs :

@Dion DePaoli

@Efrain Gallardo

Dion not to answer for Efrain,,, however I think he is just doing seller carry-back on homes he has bought wholesale.. seems to be a lot of that lately in Texas and other place's.. and then is trying to sell this newly minted subprime note to a note buyer.. So Efrain can get his cash back and profit back so he can buy another wholesale deal and rinse repeat.

This model seems to be surfacing all over the US all of a sudden.. its an old sweat equity model that has been in play for years... however with all the new rules these notes are suspect in many ways.. form an origination standpoint etc.

 According to the data I collect to market note holders, the number of rehabbers creating notes jumped almost 50% from 2013 to 2014. This data analysis has some flaws but indicates a definite trend.

Back in the 2000’s there were fairly sophisticated investors who would warehouse these notes and hope to package and resell them before anything blew up in their face. By 2009 they all imploded.

This niche was rife with inflated property values, covered up structural defects, phony down payments and fictitious loan applications. To be fair, there are good operators out there and the OP may be one of them, but you need to be very careful.

This niche pretty much disappeared for awhile. I am afraid inexperienced investors mesmerized by high yields have replaced the old investors and holding this paper until it explodes.

When I do owner finance I do buy the property take title,  plug in the owner finance buy and then sell the note the same day at the title company. Tricky but im already doing these. I do originate the loan with an RMLO.

avg. Yields are 14%-17%

@Efrain Gallardo the best way to sell these, in my mind, is to sell a partial with an option to buy the balance at a latter date.  That way if you buyer performs you will get top dollar between the first sale and the renewal, without the investor having to gamble on an unseasoned loan.

@Efrain Gallardo There are plenty of buyers of unseasoned notes. Sometimes seasoning is the least of the concern/risks. What about the other variables? LTV? How much documentation for ATR? How much down? What kind of borrower (investor v. owner occupant)? What condition?

Dollars to doughnuts it's over priced to the buyer/maker.

Yes, the OP is brokering, the RMLO is irrelevant to the sales transaction, but good for the origination. I'd really check the RMLO for due diligence.

As most of you know, there are Texas RMLOs who have no prior finance experience other than the 20 hour course, seller financing isn't secondary market and they usually don't have a clue as to what to look at.

Speaking of Texas, check the area, municipalities have their own predatory dealing ordinances/laws. Not saying our OP is predatory, it's due diligence.

Folks, buying notes that are not seasoned or shortly after origination is considered "funding at the table" under Dodd-Frank and  lending/brokering laws. An "investor" that buys in that manner isn't acting as an investor but is then considered the lender, doing one then puts you in harm's way as to compliance as a lender.

My you know what meter is going off, due diligence can turn that off. 

Better to use the note as collateral and borrow under a commercial note arrangement allowing the SF note to season with its originator. Perhaps at 75% of the scheduled pmts would bring up an acceptable PV to base a deal on. :)

  

Originally posted by @Bob E. :

@Efrain Gallardo the best way to sell these, in my mind, is to sell a partial with an option to buy the balance at a latter date.  That way if you buyer performs you will get top dollar between the first sale and the renewal, without the investor having to gamble on an unseasoned loan.

Be very careful when you give your note buyer an option to buy more of the note at a later date. Every contract I have seen are always very one sided favoring the note buyer. There will be plenty of conditions that will give the note buyer a reason to opt out. Meanwhile you will likely give the note buyer an exclusive option to buy the remaining payments where you cannot shop around for better offer.

If there is a willing note buyer, you will be better off selling a partial without any commitment to future deliveries. If the note performs and the note buyer’s yield requirements and risk appetite are the same, they will still offer the same pricing for more payments, usually no more than 5-7 years into the future.

If interest rates jump up, the note buyer’s pricing to you will move down (be less) from what their pricing is today. They will likely hold all of the cards when you need to sell more payments down the road.

Another play on this are offers buy your entire note but to pay $X now and $Y dollars in the future, usually 7 to 10 years down the road. The odds of the note buyer being around in 7 to 10 years in the future have been pretty low. There are only a small handful of SF note buyers that have stayed in business for the last 7 years. If the note buyer dies or sells the note to an unsuspecting note investor, you will be looking at some nice attorney fees to recover the back end payments from your note.

In the 1990s a life insurance company was buying SF notes and offering staged payouts like above and described them as being like an annuity. They pointed to their “billion dollars of assets” financial strength and 50 years of being in business as guarantees they would deliver on their future commitment. They collapsed in 2003 or so leaving many note sellers with no recourse to collect promised future payments. I don’t know if any of the effected note sellers received anything when the company was liquidated.

Originally posted by @Bill Gulley :
Folks, buying notes that are not seasoned or shortly after origination is considered "funding at the table" under Dodd-Frank and  lending/brokering laws. An "investor" that buys in that manner isn't acting as an investor but is then considered the lender, doing one then puts you in harm's way as to compliance as a lender.

My you know what meter is going off, due diligence can turn that off. 

Bill- Are there specific federal rules for seasoning before buying a note is note considered outside of table funding? Would the amount of seasoning matter if the note was being created with the intent to sell to the investor ASAP versus a mom and pop type seller who carried a note one time without the thought to sell it then decided they wanted to sell it a month after closing?

Thanks

@Efrain Gallardo what kind of $ are you talking about? Is this a $30k note or $30MM? What's the LTV? Owner-occ borrower or investor? Nobody's trying to get you in trouble here. I am learning, too.

Originally posted by @Scott Arpan :
Originally posted by @Bill G.:
Folks, buying notes that are not seasoned or shortly after origination is considered "funding at the table" under Dodd-Frank and  lending/brokering laws. An "investor" that buys in that manner isn't acting as an investor but is then considered the lender, doing one then puts you in harm's way as to compliance as a lender.

My you know what meter is going off, due diligence can turn that off. 

Bill- Are there specific federal rules for seasoning before buying a note is note considered outside of table funding? Would the amount of seasoning matter if the note was being created with the intent to sell to the investor ASAP versus a mom and pop type seller who carried a note one time without the thought to sell it then decided they wanted to sell it a month after closing?

Thanks

A note buyer can be seen as funding at the table when the originator doesn't have the ability to fund that note in cash, it also goes to the intent of the lender/originator to sell. There is no time limit mentioned to season a note, but not collecting any payment certainly shows the intent. As to a buyer of such notes, your past activities can show intentions as well, if you have 70% (arbitrary %) of newly originated notes, you'll be seen as a lender over being a note investor. It is the buyer, not the originator who will be considered to be lending on a wholesale basis. The originator is only concerned with creating the transaction and origination.

I'd say that if mom and pop decided to sell after 30 days or after collecting a payment, that would probably fly. Reason is, pop may not have considered the long term servicing issues, tax requirements, notices required, etc. and says "Oh my, what did I do?" The guy in the business doing RE, selling homes with SF won't be seen in the same light. Any pre arranged pattern may apply as well. If the RE guy sells after the 3rd payment, that again goes to intent IMO.  Why I suggest simply borrowing under another note pledging the note created and holding it, arbitrage.

"Churning" your note inventory, buying and then shortly thereafter selling, you'll be in the brokerage business. Notes are not considered to be "liquid assets" as securities as in a short holding period the note is not turned into its PAR amount or the same discount in a few days, not like stripping coupons from a bond or trading stocks.

Dodd-Frank covers the funding at the table aspect, the loans mentioned by the OP are likely going to be covered at some point, residential, owner occupied. Commercial notes may be viewed the same way but will not be subject to the Act.

The IRS also has an opinion when a seller financed note is sold, the taxes will be due from that seller as if the sale was completed. The FMV of the transaction may be considered for tax purposes. Per a very sharp CPA when we were clearing notes from new home sales, basically doing just what the OP is intending to do. You are selling a note with a premium rather than at a discount if there was no intention of holding the note, so a seller of such notes needs to consult with a good tax advisor as well. I'm not a tax guy anymore. :)


  

@Steve Vaughan

   what this OP is talking about is.. simply this..

1. buy a distressed asset  maybe rehab maybe not.  In Joe Picketts model NOT.

2. Sell on contract to owner occ with low down and seller carry back.. Sweat equity deal is what we called them back in the early 2000's prior to dodd frank qualified mortgage etc.

3. hold paper and make principal and interest income as opposed to rental income..

4. Idea being the new owner will do all fix up pay tax's insurance etc.

Its nice in theory but in practice this type of paper has a huge default rate bordering on 50 to 70% over first 5 years.. So If your a note buyer in this model you probably paid more than the property is worth as a wholesale property and you have stepped into what is now an owner occ transaction which is highly complicated these days  ( as per Bill Gully laying out chapter and verse on the risk reward)...

And were Bill is coming from on the predatory side of this is that at least with Joe Picketts admission most of the buyers of these homes are working class Hispanics with limited knowledge of RE.

So for you in your neck of the woods you take a beat up shack in Ephrata sell it to a Hispanic farm worker for double what you paid for it  get a small down from the.. ( there was a lady hawking some of these were the down payments were 500 dollars) and hope for the best.

NOw if your using this model on non owner occ and in states were no license is required for commercial loans for commercial purposes this works much better.. But its still a very risky note in this scenario for the average note buyer.. and any note buyer with any type of experience will not buy this paper or if they do it would be at a HUGE discount.

Originally posted by @Bill Gulley :

Bill- Are there specific federal rules for seasoning before buying a note is note considered outside of table funding? Would the amount of seasoning matter if the note was being created with the intent to sell to the investor ASAP versus a mom and pop type seller who carried a note one time without the thought to sell it then decided they wanted to sell it a month after closing?

Thanks

A note buyer can be seen as funding at the table when the originator doesn't have the ability to fund that note in cash, it also goes to the intent of the lender/originator to sell. There is no time limit mentioned to season a note, but not collecting any payment certainly shows the intent. As to a buyer of such notes, your past activities can show intentions as well, if you have 70% (arbitrary %) of newly originated notes, you'll be seen as a lender over being a note investor. It is the buyer, not the originator who will be considered to be lending on a wholesale basis. The originator is only concerned with creating the transaction and origination.


  

My understanding is that OP is creating paper on the resale of properties that he already owns. Since seller financing isn't purchase money, the OP wouldn't need to have the ability to fund the note in cash. Selling your own seller carry back note, unseasoned or seasoned, isn't brokering, is it?

Kristine Marie Poe

  I think most states have exemptions to do 1 to 3 or 4 in anyone year then you need an rmlo to run the paper work after that.

Originally posted by @Jay Hinrichs :

@K. Marie Poe

  I think most states have exemptions to do 1 to 3 or 4 in anyone year then you need an rmlo to run the paper work after that.

I clear on origination requirements (clear, as in I know there are origination regs).  My question is the "brokering" of seller finance notes.  My question: is selling your own seller financing note, either at the closing table upon origination or after seasoning, considered brokering?

Kristine Marie Poe

  ya know that is a good question... but if your past your exemption and the rmlo is originating it he can also be the broker of record who does what ever a state may require on the brokering end of the transaction. since these are table funded deals and the note is contemplated being sold in the same escrow or transaction. Dion probably can answer this one as he is in the trench's with owner occ notes.

But yes that is a good question and with all states being different I think there are quite a few different answers to the questions depending on jurisdiction.

I personally do nothing and have really never done anything post 08 with Owner occ.. so not really up to speed as I don't work in that arena only non owner occ. And only in states were commercial loans are exempt.

Although I am firing my NMLS license back up here in Oregon to do some very targeted HML in the PDX market but again it will all be none owner occ.. and in Oregon non owner occ 1 to 4 has the same safe act rules except they are abbreviated.. ERGO no tila is required only rate lock agreement, agreement not to share personal info and 1003 that can be a custom form. And of course the biggest hassle having to do the quarterly mortgage call reports on the NMLS system and track your loan submissions and turn downs, report the loans that closed, total dollar amount funded or brokered in the quarter, and what your income was for the quarter, along with annual financial statement.. That's whats required for non owner occ in Oregon.

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