What do you want Mr. Notebuyer?

Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes

I'm going to sell a condo down in Palm Desert California that I fully remodeled. I want to sell it with owner financing to facilitate a fast sale (lot of inventory in the desert and market time is VERY slow). Asking price will be around 300k (which is at or a bit above the FMV). Then I want to sell the note. Before doing so I'd like to know exactly what notebuyers are looking for so that I know how to structure the note.
This is what I'm considering: 20% down, carry the paper on 240k; 6% interest; principle/interest loan; 8 year term/amortized for 30 years with balloon payment at the end; 2 year prepayment penalty; will season note for 6 months.

Is this desireable? Acceptable? If not, please give me your feedback so that I can create the optimum note to facilitate a quick sale.

Also would a note like this be bought at par or is a discount expected? If discount expected what would be the approximate discount required?

Thank you in advance.

Alfred

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Dion DePaoliPro Member

Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes

14y

We are buyers of performing, sub/re performing and non performing notes on a nationwide basis. Here is some insight from our wheel house.

It was only briefly mentioned and I want to put more of an emphasis. The collateral (real property) will be re-evaluated and a conservative value will be used. We and most of the pro's we work with use 30 day quick sale value from national BPO companies. No buyer is going to "push" the value up. The down payment on the loan is good and I would not lower it since this is a private loan.

The interest rate is pretty low for the loan being private. A common theme I see sometimes from REI folks is they think they have to compete with banks/lenders. Don't do it, your loan in its nature is riskier, you are not experienced at this and the borrower will be lesser grade more often then not. As I think Bill mentioned 9.0% is a nicer number, I would not go lower than 7.25%. You can write the loan with an interest only feature to it as well. A higher interest rate will reduce the new buyer discount in the event the borrower goes delinquent by missing a payment or two whether consecutive or in the life of your ownership.

Don't confuse yourself with a bank nor should you assume you should write a loan that looks conventional with its terms. Any borrower who can be approved for a conventional loan will just go get one. That should be fine with you, your paid in full and don't have to mess with a loan. This also provides an incentive for a borrower to look to refinance if rates persist over the next two or three years. As such, I would not put a pre-payment.

As far as credit goes. Everyone knows the better the credit the better. This also goes hand in hand with my point, a borrower with a higher credit score say 680+ should be talking to a bank/lender, not you. I would presume your borrower is more of a lower credit score. This could be "OK". We buy low FICOs all the time. Folks who recently came out of a foreclosure and need a new start or divorce or other life situations which given some time and rehabilitation should be able to get their score back up and go to a bank/lender. I would try to keep the minimum to 600+ but you never know if someone comes in and wants to put more money down or some other compensating factor. Be prepared to weigh all of the parameters.

The balloon is a tool that you need to use as safety net. I would set the balloon somewhere in the ballpark of 24 to 36 months. I think this ties back in with the borrower profile you will end up with. Help push them to get you refinanced out. This will also help keep some value in the loan if you sell later in the loan life. Some buyers will buy this for the chance of default by maturity and it should help you reduce the discount on UPB if he is performing. In example, if he is paying and you sell with 12 months left a 5.0% UPB discount on a 7.25% interest going to put a little less then 12.0% IRR on the table for an investor/buyer if he refinances out. The maturity time will attract some folks to jump in and see if he goes into default and take a gain on the foreclosure.

Regarding pricing. In general being a private loan you will most likely never see anything close to par or 100% of UPB. 6 months is probably close to 82% to 85% of UPB, 12 months plus you should be able to find 85% to 92% of UPB. (UPB = Unpaid Principal Balance) In the event he goes delinquent one or two times you can discount those numbers by an additional 5% to 10%. If he has more delinquencies or ends up in default you can expect to see a much deeper discounts. The good news is California non-performing bids tend to still be on the higher side of the rest of the nation because of the non-judicial foreclosure practice.

None of that is an offer to buy your loan or is meant to be any formal offer. It is meant to give you general market insight. As Bill mentioned, get some experienced folks on your side to help originate and not a bad idea to continue to find note investors to bounce the loan terms and structure off of as you move forward.

Good luck.

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Marc Faulkner
Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
14y
Don't over analyze this and forget to get this thing advertised using my suggestions. What are you waiting for? Are you locked up in a listing? You need some potential buyers with money and the ability to make payments. YOU want to finds folks YOU are comfortable working with. You have to get in front of some folks and see what your options are. You have nothing but negative cashflow on this unit until you get it gone! Are you going to bust a move?
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Alfred Bell
OP
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Got side tracked with other business emergencies (mainly wife has a legal threat from one this first time client). Ugh.

Gotta get to bed. Getting back to this condo project tomorrow. Will review it all.

Bit confusing. Started with the idea of getting what note buyers wanted and now ending up with "it is all negotiable". Not sitting right with me. I would like to find out what the ideal features of a note are for a note buyer and then at least have that to work towards in negotiations with a potential condo buyer.

Plan to get this all sorted out tomorrow. Hopefully you'll be available Marc for a little back and forth.
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Marc Faulkner
Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
14y
The ideal features for a note buyer would be a note that is underwritten and structured to your states current mortgage lending guidelines for what your condo and the borrower!!! What would the guidelines be for a local lender be for them to make on loan on your unit to an owner occupant? Make the effort to check with several local and reputable lenders and see.

That would be the ideal. The reality is that IF you were able to find a qualified buyer, then there would be no need for you to seller finance.

The borrowers you are looking for are going to be the ones that fall just under the conventional lenders guidelines. I am not sure if this is legal but, when I was getting the lowdown on your local lending guidelines for the unit, I would also be pressing the agents for turndowns and asking them if their company can handle seller financed closing and servicing after the fact. Remember that if the potential borrower qualifies for conventional financing, then they most likely don't need your deal. Sell the "Easy Financing" and sell the unit.

If the borrower has bad credit-see if they own anything else to put up as collateral. Also-see if they have a relative, or employer that would be willing to co-sign.

I am guessing that when you check locally that most lenders are going to want to see a hefty down payments. Because of your advertising you are going to get folks that don't have any money or any jobs. These are not the folks you are looking to make a deal with but, what do you care if they want to look at the place at the same time as the other potential buyers are looking at the place? You want people crawling over the top of each other at your showing if possible so that everyone thinks there is going to be a competition...

So what your borrower might not have 20% or whatever the bank is going to require as a down payment? Are you going to tell them there is just no way to make the deal work and push him away? Not if you want to sell the property using seller financing. You are going to need to be open, and reasonable and negotiable until you have reasoned and negotiated with enough potential buyers that you find one you can deal with:)

Maybe your potential borrower owns a boat or a rare muscle car or Harley or anything else you might want, free and clear. Could you get them to give you this in trade for part of the down payment and then turn the trade into cash? Could they also find a cosigner? The bank is not going to do this deal but, you can if you keep your eyes peeled-get the word out that the property is for sale with terms and stay reasonable and negotiable!!!

You are one of the few Americans that is willing to take the bull by the horn and get the job done whatever it takes. Yes you want to sell a property and you are willing to make it easy for a buyer to buy your property by offering terms with "no banks!" This is going to be the only thing that will make your property stand out amongst the competition. Your negotiation skills and ability to reason are what is going to seal your deal. Use what the local lender criteria is for your negotiations with your potential buyers, not a note buyers. You are going to have to kiss a few toads but, get them to the showing at the same time as the others at all cost. That just might be the guy that ends up getting an inheritance from his long lost uncle Joe the next day and offer to give you 50% down even though he has only been on the job for half a year!!!! I hope you are getting the idea here.
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Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
Wow, that's alot of reading and I gotta say, I began skimming.

I see you chose Marc for assistance, he can certainly help you, just a few comments....

The trustee on a deed of trust is not usually a title company, they usually don't service or act as trustee and the trustee can be changed down the road by the holder anyway. Call you local attorney and ask permoission if you can use them as the trustee and most all will say yes as if means possible future buisness for them. This is the person who acts in the foreclosure process for the holder of the note.

If you take trades, like a boat or bike, get a dealer to give a fair market value for the property. It's a payment and any future holder of the note may try to refinance them and if that shows up in the docs, they want the FMV of any trades in the deal.

State usury laws may apply to the APR on payments so your late fee may push you over the limit, check with a local broker familiar with your state laws. Like that originating broker or attorney. 6% is rather odd to me, a flat fee can be seen as an admin fee unrelated to the principal amount and may not apply under usury computations.

Interest on mortgages is paid in arrears not on disbursement as the money has not been used at closing, so paying interest in advance may not be a good idea as it complicates the APR for disclosure by the originator and it could be missed by a buyer or any lender refinancing. Interest is on an accural basis based on a 360 day year.

As to advertising, don't give any numbers or examples as to payments as you may then be required to provide an APR. I didn't use "Easy Terms" I said "Easier Financing Considered" it provide a little more CYA IMO and has the same effect, any time financing appears to be offered they come out of the woodwork.

If you get more realistic on price, you can then push your preceived value making it a better deal with a higher interest rate that a higher price at a lower rate. But make sure you don't sell for more than it will appraise out later on as this could be preditory lending.

Your money partner seems to have means, he may be able to keep the note and simply borrow using it as collateral at his bank.

I'll read more later, good luck and you're in good hands....
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Jeff S.
Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
14y
Like Bill says, first pymt generally due 30 days after closing and includes 1 mo interest.

First pymt can be due anytime you want, just doesn't make sense to have it due at closing.
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Marc Faulkner
Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
14y
Sorry I somehow made the same post here two times folks-It was late-what can I say? Maybe one of the mods will clean this up as I don't know how to:)
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Alfred Bell
OP
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Ok, I just arrived on this thread and I'd like to finish this up. Need to start at the beginning and reread and also catch all the posts I missed earlier. Then will go over my notes and then attack this subject. This has become a lot more confusing than expected, going in a diff direction than expected, etc. But this is all good cuz I'm learning.

I'm not that concerned about the time I've just lost (had more priority business stuff to take care of) nor is my money partner. We'd rather get it right and launch with the best strategy and be successful rather than move fast and make stupid mistakes.

Mike Gulley:
Thanks for your last post. I'll consider everything you stated. Good advice and important points.

Ok. Let me reorient myself and then I'll make a post. Thanks to all for your patience and willingness to help.
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Marc Faulkner
Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
14y
Alfred Bell Well said and a good plan.

It is much better to take your time and do this the right way, than it would be to jump in without knowing what you are doing. I am sorry if it feels like I was pushing you along. I am just anxious to see the end of the story play out:) It is much better that you are under no real pressure. You can take your time and do what feels right based on your research. I am always happy to give me 2 cents and, so are some of the others and, the post has really taken off to be a doozey!!!
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Loc R.
Note Investor · Pasadena, CA · Member since 2009 · 849 posts · 544 votes
14y
Nothing specific here, but I did want to add this perspective:

If you underwrite the loan as if you were going to keep it, then you shouldn't have a hard time selling it. I've been getting notes across my desk that I wouldn't buy for 10 cents on the dollar, simply because I know I would be kissing those 10 cents goodbye.
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Alfred Bell
OP
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Ok, I need to address some issues and points. The first thing that I should do is give you some key details and then fully clarify my goal. This will comprise my first new post.

DETAILS:

1.
We have about 275k into this condo.
2.
There is a glut of inventory in Palm Desert (over 180 condos available). Lots of REOs, short sales and distressed buyers are unloading = valuations are being depressed further.
3.
The most recent BPO I got from a Realtor was 240k to 280k. I believe that our condo is at the top of this range (maybe a bit higher) because of some key features (and most realtors have agreed with this). Realtors know that the very close proximity to El Paseo is a plus point, the full very upscale remodel is a plus point, and the 3rd bedroom/study is a plus point (even if it can't be called a 3rd bedroom because it wasn't permitted and isn't listed in the assessor's profile as a 3 bedroom).

Note: I didn't create the 3rd bedroom. It was done two or three owners ago. All I did was push a wall back to make it bigger and add a closet and run and AC vent into it. I just enhanced what was already there. If an inspector investigated it he would see that it is beyond being up to code and is fine. I would never have the county/city inspect it anyway because I know government bureaucrats and agents can be a headache and someone could easily say "didn't have a permit, don't care how well built it is, tear it down, get a permit and do it over".

Note: There is not and will not be a problem with the HOA regarding this 3rd bedroom. They are very laid back and non-invasive, plus, you own everything inside the walls. They are only concerned with the exterior. You can do almost anything that you want to the interior and they have no say in the matter.
Start painting the exterior with unauthorized colors, planting gardens, putting up fences, changing the window frame colors, etc. and then you'll have a problem.
4.
My money partner is pretty laid back. He's considered holding it as a rental. (I convinced him that that is a bad idea. I don't want him tied to a property that is going down in value (and may continue to go down in value for the next 1-5 years for all I know) and I don't want him to have exposure to liability, and I don't want him to suffer damage from an earthquake (which happen regularly around here), and I don't want him to hassle with the possibility of bad property management or any chance of being bothered by tenants, trash and toilets.
5.
I suggested the idea of carrying the paper as possibly the most workable strategy, and the least exposure to liability and future potential problems, and he is in agreement with doing it.
6.
My money partner is even considering the idea of holding the note for a long time and likes the idea of a 5-9% return on his capital.
7.
My money partner does not want to trade for anything (motorcycles, boats, etc.) just wants to stay with cash.
8.
We think that "owner carry" is the best strategy to get out of this jamb with the least amount of a loss (altho there could be a break even or maybe even a profit if this is done correctly).
9.
The basic strategy is to sell the condo with owner financing and get the best price we can... hold the note for 6 months or so to season it... then put it up for sale -- probably to non-professional buyers so don't have to discount it like we might have to for a professional note investor (eg. a retiree looking for a good return on his cash because treasuries, CDs and money markets aren't working for him any more)... continue to hold the note until we find someone willing to pay an acceptable amount for it... hold it for 6 months, 1 year, 2 years or whatever it takes to sell it off at an acceptable price... meanwhile my money partner is collecting interest which he will be very happy about. His money is working for him again. This is great for him because before this condo investment his money was in treasury bills yielding him .25% per annum or some such.
10.
We figure with the cash from a down payment, plus the interest over a year or two, he has a good chance of not only breaking even in the long run but maybe even making a little profit. He is totally ok with this.
11.
Lastly, we don't intend to do any more remodel/resells. We don't live in a good market area for this and we don't want the liability and hassles. We are going into private lending which I am studying up on now and will do this through a licensed hard money lender to be totally legal. He has other capital and this will enable me to help him make profits that will offset this bad condo investment.

Sorry for being so long winded but we can't converse productively if you don't know the specifics of my situation.

So what is most important to me is laying out a detailed plan of how to sell this condo with owner financing... ensuring that everything is totally legal about it... knowing what the ideal points are that make a note a valuable/desireable asset... and as a result of that having an ideal to negotiate towards when I have a prospective buyer. I know that everything is negotiable regarding how a note is structured (within the existing legal parameters) but having the ideal structure for sale on the secondary market gives me something to work towards when negotiating.

Next thing I want to address is the administrative, legal or background points needed for putting a note together. This post will be coming up shortly.

Thanks for reading this and hanging in there with me.

Alfred

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Marc Faulkner
Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
14y
First talk to the local banks and see what it would take for them to finance the deal. Just get the basics and lets work from there.
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Alfred Bell
OP
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Ok Marc. I'll do this if necessary. Yet... don't we already know that institutional lenders as well a mortgage companies are not lending now and have very strict guidelines. They would rather not lend to a homeowner when they can borrow cheaply and put their money into treasuries/bonds and safely make some money. They want to recapitalize and build up cash and hoard the cash that they have because they know... they are in trouble, their balance sheets are a mess, they are going to get killed by more residential foreclosures, defaulting commercial loans, bad derivative investments and other mal-investments, etc.

Don't we already know that they want 20% down, an 800 FICO, high paying steady employment for at least the last 5 years, super low debt to income ratio, proof of funds that they have their own cash for the DP (can't borrow it), etc. etc. And that if someone could actually qualify for a 30 year fixed it would be @ 3.5-4%.

Most people know the above so Mr. Condo Buyer knows that he is going to pay a premium for a loan from me if he wants to avoid having to qualify with a bank (and knows that he probably wouldn't qualify anyway). And he'll go along with my administrative requirements to get the loan (Form 1003, credit check, etc.). He'll pay 5-6% figuring that he has anywhere from 1-3 years to refinance into a lower interest rate when he feels he'd be able to qualify.

I don't have a problem with seeing what a bank would want to finance a 200k+ loan on a condo, but please explain a bit further as to why I should do so?

(Also, I've never done this so I don't know whether a lender would give me this info and how hard or easy it would be to get it. Maybe it will just take some phone calls to some loan officers at Wells Fargo, B/A, and some local Palm Desert banks.)
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Alfred Bell
OP
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
If you don't mind, first I would like to outline the administrative or preparatory requirements regarding doing an owner financing sale (NOT the structuring of the note itself). What is mandatory? What is unnecessary? What would enhance the value of the note? I'd like to clarify these past points first. There was debate and disagreement on some of these points earlier. I want to ensure that nothing exists that would make me decide that doing an owner financing action is NOT the right way to go. Can we clarify these points below?

1.
Is it most optimal/vital that the loan be originated by a licensed loan broker? If so, why?
2.
It would not be smart for me to hammer out an agreement with the condo buyer and then create the promissory note myself and execute the loan through escrow (basically the same question as #1)? If so, why?
3.
Is it a must that the potential condo buyer fill out a Form 1003?
4.
Is it most optimal/vital that the note is administered by a loan servicer? If so, why?
5.
I understand that this is negotiable but is it normal or reasonable to have the condo buyer pay the setup fee and monthly servicing for a loan servicer?
6.
Should impound accounts be set up for property tax and insurance or just a requirement that documentation is submitted regularly by the condo buyer to ensure these are being paid?
7.
Definitely want this done through escrow—as escrow instructions, certified copy of HUD 1, proof of down payment, a credit app, credit reports, notarized note and trust deed, etc. etc. will supply me with a nice package to show to a future note buyer to validate the authenticity of the original transaction and note. Correct?
8.
Is it really necessary to have an appraisal in this transaction? Won't Mr. Condo Buyer's agent run comps and tell him whether it is a FMV price or not? (I figure that anyone who buys this condo is going to lose equity over the next 2-3 years. I agree with Shiller that—based on the economy, demographics, the foreclosure inventory currently existing, and the 3-5M more foreclosures coming— we are not at the bottom and prices can go down another 10-20%. We just don't know if it will happen slowly over the next 2-5 years or in rapid drops. As the note holder why would I be responsible if Mr. Condo Buyer goes underwater on his loan? Would he really have any grounds for seeking recourse?). Maybe it would be smart to create a disclosure or a clause in the note that states that Mr. Condo Buyer understands that residential home prices may move downwards and will not hold the condo seller liable or responsible for this? Could I really be hit for "predatory lending"?
9.
It seems obvious that Mr. Condo Buyer will have some impairment or barrier to getting bank financing which should be to both our advantages. Like you said... a BK, a divorce, a foreclosure that hasn't been wiped off his credit report yet, etc. BUT he would have to have strong fundamentals such as the cash to make a substantial DP; a very high paying secure job, a successful business that he owns and runs, assets and/or passive income from assets, savings or nest egg in a brokerage acct, a 401k, etc. which actually would make him low risk because he truly shows the means for being able to service his mortgage debt. Correct?
10.
I'm justified in wanting a higher interest rate as this person would still be considered a risk by an institutional lender. Correct?
11.
I think per Calif law a mortgage loan must be 5 years or longer and 10% is the maximum interest rate per usury guidelines. I'll find out for sure but I'm pretty certain this is correct. So the shortest term I can give is 5 years with a balloon, and that is a good term and Mr. Condo Buyer will understand that it can't be any shorter due to the law.

Again, I appreciate your time and input in assisting me with this. It is not as easy as I thought it would be!!

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Marc Faulkner
Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
14y
I am asking because I honestly do not know what a conventional lender would take into consideration right now, in order to make a loan on your unit in your area. I am asking because as a buyer of your note, I would want to know exactly what it would take for someone to qualify for a conventional loan on this unit.

I would not waste your time calling BoA and Wells. I would call the smaller local banks and lenders that are hungry for business. There are a bunch of them right here on BP. I would be honest with them and tell them you are selling your condo. Give them the details of the unit and, ask them what the minimum criteria is for someone to qualify for a loan is on this unit.

Are there HOA fees due monthly or yearly? If so - I am sure they are going to look at this when they consider the debt to income. I suspect that it is actually harder to qualify for your condo than it is for a stick built home in the same price range, in your area. I am not an expert on condo loans at the moment. I do know that when you own a condo you own a unit, you do not own the dirt and you have to play by the rules of an association.

Notebuyers, in the performing note arena, generally look for two things:

A) Security
B) Return

Security = Credit and Equity when it comes to buying performing notes.

Return = The remaining number of payments left and, what I can buy them for. What is in the deal for a potential investor assuming they collect the remaining payments per the note? What is in it for them assuming the borrower fails to pay?

As an investor-I would like to be safe and come out ahead either way. If my plan does not work out and this borrower fails to make the payments-what can I turn around and sell the unit for CASH-in 30 days, IF I had to? What could I sell the note for in the REAL secondary mortgage market for? I can assure you this-the market of institutional note buyers, that even consider notes secured by a condo right now, is less than what I can count on one hand.

I understand that you are going to look for note buyer that will be happy with a lower return and less due diligence than what an institution would require. I am asking you what it would take (from a local lender that you trust) to get a REAL loan on your unit for, because I am trying to HELP you. I want to be able to look at this from a lenders and buyer/borrowers perspective.

I have been in the note business since 99 and have never bought a condo note in that time, but I have handled millions of dollars in notes, including chattel notes, which is essentially how I am looking at a note secured by a condo. The borrower owns a unit - not actual real estate. They are subject to the rules and fees of an association they do not control. Can I have a dog? Can I paint my steps green? All of this is a barrier to entry as some of your potential buyers will not be able to deal with the rules. Some of them may not be able to afford the place, if you look at it from a lenders Debt to Income requirements.

Any REAL lender, broker, MLO, that would not be happy to sit down with you and discuss the programs, and minimum requirements with you would be a complete A#ole in my book. Most of them should be hungry for any business they can get their hands on right now. IF they don't have that attitude- I hope they will be back delivering pizza's next week:)-

Don't expect the CLERKS at BoA or Wells to be of any help. Talk to the small local lenders and see what they can really put together. I am asking because I want to help you get this sold in an open forum so that a bunch of readers can learn from a REAL life experience. I am not asking for my health or some other motive. You already said you are looking for a private investor that is happy w/well whatever you said.....

I personally would not touch a note secured by a condo (or anything else for that matter) unless I knew I was going to WIN-EVEN if all else failed.

I feel like I am a more motivated Helper, than you are a seller right now. The more you wait-the more you are going to have to soak it to your buyer for in order just to break even on this deal. I have to assume you did not get into this situation to break even. I will be happy to help-IF you will do the research I asked you to do.

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Alfred Bell
OP
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Marc:
Thanks for the full explanation. Improves my understanding. I also have a better understanding of why you are doing this (in part, to give everyone in the forum a real life experience to learn from... I think that is cool... and smart). As I wrote earlier, I'm willing to do the research. I'll get it done. (If I have a clear understanding and a clear purpose, I do the required work.)

I'm also glad that I wrote these posts today because I feel that you have a fuller grasp of my situation now, due to the details and opinions I've given, and your advice and instructions will really parallel the reality here.

Is it possible, you could give me questions to ask these lenders? Could we collaborate and write up the scenario to give them and the questions? I'll submit my version to you as my next post.

I'm way up in the mountains and it takes an hour for me to get to Palm Desert. It winds up being a 3-4 hour trip total when I go there for most purposes. Bit of a hassle because I assist my wife with her new business on a daily basis and she has a lot going on and just pulled in a huge client.

My plan is to get on the internet and locate all the local small banks in the area and call their loan officers and give them the scenario and ask the key questions. Ok if I do it that way?

Been busy and at it since 7am this morning. This will be my last post for the day. Need a walk and wind down before bed.

Thanks. Talk tomorrow.

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Marc Faulkner
Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
14y
Originally posted by Alfred Bell:
ANSWERS IN CAPS-ENJOY! THIS IS ONLY MY OPINION. I AM NOT AN ATTORNEY NOR AM I QUALIFIED TO GIVE LEGAL OR ACCOUNTING ADVICE ACCORDING TO THE POWERS THAT BE......
1. Is it most optimal/vital that the loan be originated by a licensed loan broker? If so, why?

NO-YOU ARE SELLING ONE PROPERTY-YOU ARE NOT IN THE BUSINESS OF DOING THIS......... TRY TO FIND A LOCAL TITLE COMPANY THAT CAN CREATE COMPLIANT DOCS AND DO A CLOSING.

2. It would not be smart for me to hammer out an agreement with the condo buyer and then create the promissory note myself and execute the loan through escrow (basically the same question as #1)? If so, why?

AHEM-NO IT WOULD NOT BE SMART BECAUSE YOU ARE NOT QUALIFIED TO TO DO THIS.......

3. Is it a must that the potential condo buyer fill out a Form 1003?

NOPE:)- BUT THE NOTE BUYER WOULD LIKE TO SEE SOME KIND OF APPLICATION AND AUTHORIZATION TO PULL CREDIT THE IS LEGAL IN YOUR STATE......

4. Is it most optimal/vital that the note is administered by a loan servicer? If so, why?

YEP- LENDERS DO NOT HAVE THE BEST REPUTATION FOR AVOIDING FRAUD. AS AN ASTUTE INVESTOR-I WOULD RATHER TAKE A THIRD PARTIES WORD AS VERIFICATION THAT THE NOTE IS BEING PAID AS AGREED, THAN THE SELLER/LENDERS. YES THIS INCLUDES YOU.

5. I understand that this is negotiable but is it normal or reasonable to have the condo buyer pay the setup fee and monthly servicing for a loan servicer?

SURE... OR IT CAN COME OUT OF THE DOWN PAYMENT IF IT HAS TO. YOU WILL NEVER SELL THE UNIT IF THIS BECOMES AN ISSUE THAT YOU CAN'T JUST SAY, "HEY I UNDERSTAND FOLKS-THERE ARE A LOT OF OPTIONS OUT THERE RIGHT NOW-FORECLOSURE IS AT AN ALL TIME HIGH-WHAT PART OF THIS DEAL DOES NOT WORK FOR YOU? IS IT THE RATE? THE DOWN PAYMENT? THE MONTHLY PAYMENT? THE TERM? THE PROPERTY? ME? WHY ARE YOU EVEN HERE MR. POTENTIAL CONDO BUYER?

[b]NOW-FIND THE PAIN-SOLVE THE PROBLEM OR SIT ON THIS CONDO THAT YOU OWE TO MUCH ON FOREVER......

6. Should impound accounts be set up for property tax and insurance or just a requirement that documentation is submitted regularly by the condo buyer to ensure these are being paid?

YES AND THE SERVICING CO HANDLES THIS!!! IT ALSO NEEDS TO BE A REQUIREMENT THAT THE NOTE HOLDER IS THE LOSS PAYEE AND ADDITIONAL INSURE ON THE HOME OWNERS INSURANCE POLICY.

7. Definitely want this done through escrow—as escrow instructions, certified copy of HUD 1, proof of down payment, a credit app, credit reports, notarized note and trust deed, etc. etc. will supply me with a nice package to show to a future note buyer to validate the authenticity of the original transaction and note. Correct?

YES-DUH-SILLY! TALK TO YOUR LOCAL TITLE COMPANIES AS STATES BEFORE...........

8. Is it really necessary to have an appraisal in this transaction? Won't Mr. Condo Buyer's agent run comps and tell him whether it is a FMV price or not? (I figure that anyone who buys this condo is going to lose equity over the next 2-3 years. I agree with Shiller that—based on the economy, demographics, the foreclosure inventory currently existing, and the 3-5M more foreclosures coming— we are not at the bottom and prices can go down another 10-20%. We just don't know if it will happen slowly over the next 2-5 years or in rapid drops. As the note holder why would I be responsible if Mr. Condo Buyer goes underwater on his loan? Would he really have any grounds for seeking recourse?). Maybe it would be smart to create a disclosure or a clause in the note that states that Mr. Condo Buyer understands that residential home prices may move downwards and will not hold the condo seller liable or responsible for this? Could I really be hit for "predatory lending"?

IF MR CONDO BUYER HAS AN AGENT-MR CONDO BUYER IS NOT YOUR CONDO BUYER!!!!!!! GO FIND ANOTHER BUYER......

9. It seems obvious that Mr. Condo Buyer will have some impairment or barrier to getting bank financing which should be to both our advantages. Like you said... a BK, a divorce, a foreclosure that hasn't been wiped off his credit report yet, etc. BUT he would have to have strong fundamentals such as the cash to make a substantial DP; a very high paying secure job, a successful business that he owns and runs, assets and/or passive income from assets, savings or nest egg in a brokerage acct, a 401k, etc. which actually would make him low risk because he truly shows the means for being able to service his mortgage debt. Correct?

YEP-THINK OUTSIDE THE BOX UNLIKE THE BANKS!!!!!!! BECOME A PROBLEM SOLVER AND DEAL MAKER VS WELL...... I WILL JUST KEEP MY MOUTH SHUT HERE.

10. I'm justified in wanting a higher interest rate as this person would still be considered a risk by an institutional lender. Correct?

YEP-LINE THEM UP AS EXPLAINED AND THEY WILL NOT CARE WHAT THE RATE TERM OR EVEN THE PRICE IS! THEY WILL SAY " IF I WAS TO MAKE MY PAYMENTS-WHAT WOULD THEY BE?"

11. I think per Calif law a mortgage loan must be 5 years or longer and 10% is the maximum interest rate per usury guidelines. I'll find out for sure but I'm pretty certain this is correct. So the shortest term I can give is 5 years with a balloon, and that is a good term and Mr. Condo Buyer will understand that it can't be any shorter due to the law.

MR CONDO BUYER SHOULD NOT GIVE A HOOT AS LONG AS HE CAN GET INTO THE CONDO HE WANTS AND DOES NOT HAVE TO GO TO A BANK FOR MONEY!!!!

NOW BE GENTLE AND FOLLOW THE LAW. DO NOT TAKE ADVANTAGE OF MR CONDO BUYER JUST BECAUSE YOU CAN. I SURE HOPE MR CONDO BUYER IS MORE MOTIVATED TO BUY THIS THAN YOU AND YOUR INVESTOR ARE TO SELL- LMAO!!! YOU ARE OFFERING THE AMERICAN DREAM OF HOME OWNERSHIP-YOUR BUYERS SHOULD ONLY CARE ABOUT HOW MUCH THE DOWN PAYMENT AND THE MONTHLY PAYMENTS ARE.

a. FIND A BUYER W/CASH OR THE ABILITY TO GET A LOAN-FEEL FREE TO NEGOTIATE WITH THESE FOLKS ON THE PRICE.

1. FIND A BUYER WITH A FAIR DOWN PAYMENT

2. KEEP THE TERM AS SHORT AS POSSIBLE-NO BALLOONS. THIS IS THE REAL DEAL REGARDLESS OF WHAT ANYONE HERE OR ANYWHERE ELSE TELLS YA. YOU WANT THE NOTE TO BE FULLY AMORTIZED.

MR CONDO BUYER WILL ONLY CARE ABOUT THE LAW WHEN HE F'S YOU OVER AND DOES NOT KEEP TO THE COVENANTS OF THE AGREEMENT HE SIGNED. HE WILL NOT CARE ABOUT THIS AS HE IS SIGNING ON THE DOTTED LINE!

Again, I appreciate your time and input in assisting me with this. It is not as easy as I thought it would be!!

I AM GLAD SOMEONE DOES AND-SURE IT IS-LIFE IS WHAT YA MAKE IT. MAKE IT GOOD!!!

0 Reply
Marc Faulkner
Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
14y
My personal mortgage is as thick as The Bible. I am guilty of not reading either one (my mortgage or the good book) from cover to cover, at this stage of my life. Nor do I fully comprehend the covenants contained therein-I hate to admit.

My mortgage has been sold like 4 times. Why hasn't my lender ever offered me a discount?

HUMMMM........
0 Reply
Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
Alfred, I have a question for you. As a note buyer, how do I know that your note was lawfully originated and underwritten in complaince with the SAFE Act and Calif. law?

How are you going to prove to me that the note is valid, just because it's being paid does not mean it always will be. If there is a default and the borrower gets an attorney (and guess what, anyone buying a 275K condo is not so stupid not to seek legal advice, this is not some 60K bungalow) so how are you going to show you met the requirements?

The exemption of doing less than 5 deals a year may apply to you, can you prove that you qualify? Won't know until a year has gone by! As a note buyer, how do I know you didn't make 6 other loans? I'm not going to search title records all over the country to see if you made any other loans! The law doesn't say the first 5 are freebies, if you make more than 5 all of the notes need to be originated by a mortgage originator.

This can go on for another hundred pages and you still won't be qualified to write notes or do underwriting, sorry.

Now, if the note has the seal of a licensened mortgage originator in the state where the note was originated with his/her licensen number on it, I know the note was done in complaince with the law! I don't have to worry about anyone crying foul about any preditory seller/lender and making me prove anything about the origination.

Your original question was about marketability of the note, having it properly originated will enhance the value greatly.

You already have a huge problem with the collateral for this proposed note.....a condo! Don't add to the complexity of your deal trying to take care of the financing yourself.

The very best way to protect your money partner is to have this professionally accomplished. Find a mortgage originator!

Your finger prints should not be on a 1003, in fact you aren't even to discuss note terms with a buyer! Now, in reality, you will but your discussion should end by saying you'll need to see Joe the mortgage originator and he can tell you what the final terms will have to be.

All you need to do is tell Joe what rate is acceptable and when you want all your money, that's it! Let Joe inderwrite it and inform you and your money partner of the risks and particulars of what would be acceptable.

I think your time would be better spent finding a buyer instead of trying to learn about mortgage originations.

Good luck!
0 Reply
Alfred Bell
OP
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Bill Gulley:

Thanks for the input.

Hmmm... ok, you may have very valid points here. I wouldn't know. This needs to be sorted out. I'm pretty much at a standstill until it is.

What do you say to this Marc?

It seems to me that lots of owner carries are done "informally" here in Calif. I think the owner/buyer work out the terms and then either the owner or escrow officer or an attorney must create the promissory note.

I don't want to violate state or fed laws and I want my note to be as valid and marketable as possible. Need to get the facts on this matter.

As an aside... are there any California experienced/professional note investors out there? And any California mortgage originators?

I MUST find out how to proceed CORRECTLY with this. Maybe I need to talk to a licensed professional mortgage broker here in Calif or maybe a real estate attorney?

(I'm about to review and respond to Marc's May 17, 9:43 post with any questions or needed clarifications. I need to keep moving forward.)

0 Reply
Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
I'm not blowing smoke Alfred, you might visit my profile and/or read many of the posts on BP about notes. Yes, you need an MO in Cali, there might be an attorney willing to do it, but they really aren'y finance types, but then here, an attorney is qualified to do anything, I think they can do brain surgery if they want to. Yes, I'm sure notes such as seconds are taken back by sellers, they may not have the intent to sell the note either. Just because one guy jumps off the bridge doesn't mean we all should....

Set up your "team" a MO, an attorney, title plant and closing agent and make friends with Realtors and then find note brokers and individuals that can buy the note if that is your choice. Good luck!
0 Reply
Marc Faulkner
Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
14y
Bill Gulley Are there really SAFE Act compliance issues for one guy, seller financing one property in CA? I personally don't think that the SAFE Act is an issue here but, I do appreciate your insight on this and, know you know what you are talking about.
0 Reply
Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
Marc Faulkner, From what I recall, as I'm not looking it up again, but there are exemptions for owner occupied sellers and the number seems to vary by state but doing less than 5 was another issue, that is if you are not in the business of selling residential properties with seller financing. There is no distinction between one person or one corporation with 500 employees, the law defines them all as person.

The exemption too really seems to address owner occupants excluding them from having to be licensened as a mortgage originator, not so much as to the right to originate a loan on their own. IMO, a note secured by residential property can not be preditory regardless of who does the origination. The law also addresses sellers from discussing financing terms, taking applications for any such loan, or processing it as forbidden waters.

In this case it appears we have a partnership, Alfred and his money partner, not clear about the name on title, but it's my understanding neither lives in the unit making it a non-owner occupied residential property, clearly falling under the Act, IMO since I'm not an attorney.

Next, are they "in the business" of selling properties and providing financing? Well, they are not related family members that I know of, they have a business name or partnership agreement? I don''t know but they are acting as if they are in business for a profit based on what has been said in this thread.....

Is a business allowed to do 5 without a MO, doesn't seem so to me. Seems there has been an exception to mobile home dealers

The status will depend on Calif. laws relating to the SAFE Act and the newly CFPB as being formed too. I have no idea what Calif. requires, but I do know Calif is a more liberal state, it sure isn't Missouri where findings usually fall toward the corporate world, they are more people consumer oriented, so I'd say, just guessing, this looks like a business deal, but not a commercial loan.

The issue pointed out above is not off base, how does any note buyer know the note was not made under illegal circumstances if a mortgage originator was not involved?

I think this issue will become more obvious as notes are sold especially to instutional investors as they will be doing more complaince issues than individual buyers, IMO. The only way to know if a note was legally made is much clearer if it was done by a MO.

I still get involved with notes and I won't touch one that is not originated as I'm sure not going to take a note holder's word for it that it originated in complaince with state laws. The note could be worthless!

I know too that a seller financed note over 200K is not a little deal, and the borrower won't think so either. I would assume the borrower has enough horsepower to get an attorney if things go south, so you're looking at a more sophisticated buyer than someone buying that small bungalow for 60K.

Alfred already has a stike against him with the collateral being a condo, I'd make sure the rest of the deal is as squeaky clean as I could make it if there is any intent at all to sell it.
0 Reply
Alfred Bell
OP
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Got pulled off onto something else (wife's business). Here is a response that I got from my escrow officer friend who owns and runs her own business.

MY QUESTION:
I thought that I could just find a buyer for my condo... work out the terms of the owner carry... draw up a promissory note myself... do the transaction through escrow (documenting the sale as best as possible)... season the note... and then sell the note. But I've been told that my note has to be originated and underwritten in compliance with the SAFE Act and California law and that this should be done by a licensed mortgage originator if I want the note to be valid and marketable so that I can later sell it to a note buyer/investor. Is this the case?

HER ANSWER:
Um….not sure what he means by the SAFE Act. There are many new laws (that may sunset soon) with respect to loans if the borrower is in default.

We prepare the purchase money trust deeds and note on title company forms, which are in compliance with California law. I also use the long form of the trust deed so that the terms are listed out. Plus you will have title insurance.
In my 35+ years I am not aware of any of our owner carry loans be in valid….
Hope this helps…
0 Reply
Bill Gulley
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
LOL, goggle.....SAFE Act, mortgage originator

Title people have been using blank notes for as land has been conveyed I guess, they can and do, but really shouldn't, especially those that don't keep up....no offense meant to your friend or anyone.

The SAFE Act is a federal law adminstered under HUD and they have allowed each state to adopt their own version and if not "approved" they will be following the federal statutes.

It's pretty long and it will look like it won't apply, but it does to investors and it's about two thirds or three forths the way through.....seller financing.

You have some homework Alfred......good luck
0 Reply
Alfred Bell
OP
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
I don't know about this. Getting all hung up on sigificances here. Shouldn't be so time consuming and complicated. Trying to find a Calif professional I can talk to and sort this out so I can get into motion.

My first response is that this is not that complicated. Firstly, Bill Gulley, you are in Missouri which is probably a mortgage rather than a trust deed state. Calif is a TD state and is very liberal (I'll have to find out if they've drafted there own Safe Act or follow the Fed's).

People do this all the time out here. If you got a prom note and a TD properly written and recorded you are good to go. I don't think the state is running after people for predatory lending. Probably the only thing that you have to really worry about is usury laws. This is just my gut feeling. Somehow I'll figure out how to clarify this stuff so I can safely and confidently move forward.
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