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?
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.
Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
14y
Check with a qualified originator in Ca. but, I am not under the understanding that you have to go through full conventional underwriting. You will want to use common sense underwriting. I am not a lawyer in Ca. but, I am not of the understanding that you need to jump through all of these hoops as an individual seller. You are not asking them to underwrite the note, you are asking them to draft the paperwork, close and record the transaction.... Where did you hear that they were going to have to do the underwriting for you?
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
That was my understanding from Bill Gulley.
What originator is going to do this and put his/her name to it without ensuring that the loan is all above board (borrower is qualified, property appraisal, etc.)? Or am I confused and misunderstanding this point?
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Which brings me to another key question...
(I was basically told on this thread that it would be illegal for me to take the steps necessary to see if a buyer/borrower was qualified... ie. "don't have your fingerprints on a Form 1003 and don't discuss terms with the borrower", etc.)
How am I going to be able to get a credit app filled out, do a credit check, determine borrower's FICO, income, debt/income ratio, etc? Can I hire a company to do this for me?
Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
14y
Alfred Bell You are going to have to direct this question to Bill Gulley.
My suggestion would be to have your potential buyers fill out a standard 1003 and have them pull their own credit on the internet right in front of you. You also have them provide you with proof of income and personally verify this. Again, I am not a lawyer and, I would verify this with a qualified real estate attorney in Ca. My understanding is this is not going to be a problem with under 5 properties a year.
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Marc,
I just asked Bill Gulley to respond to this and that should help clarify things.
This is really the only remaining issue that I need to sort out before I can go into action on this. Basically... "Am I going to have to be the one that checks the buyer/borrower's creditworthiness OR can I have some 3rd party do this so it is more legitimate and I'm not violating privacy laws or executing lending actions without a license?"
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
Wow, I wake up and have 4 mentions to work through...LOL
Alfred, a seller who falls under the SAFE Act is not to do any processing or take applications (1003) it's a function of the mortgage originator.
I know it's purely silly for the regs to say a seller is not to discuss note terms, I don't think anyone will be fined or go to jail for saying they'd like 10%. The purpose is to allow the mortgage originator to set terms that are reasonable, consistant and in compliance based on the borrower's qualifications. You'd be passing notes back and forth for weeks if no one communicated, I doubt that was the intent.
You certainly have a right to be informed about your borrower and decide if they meet your qualifications in accepting the deal.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
Sorry I missed that;
There are exceptions to the SAFE Act, it has also been amended and it falls to the states to adopt similar rules. In that kicking the can down the road to the states, if a state fails to adopt rules that are in keeping with the spirit of the SA, then the issue that may arise falls back to HUD and the SA. One property is not an issue for an owner occupied homeowner selling their home, the concerns are with non-owner occupied residential properties securing a note.
I know the Act was amended to allow a variance, I have seen 3 to 5 deals per year allowed for sales from non dealers. I don't know what CA has done. As I mentioned before, it could be that you are not under these restrictions, then again you could be.
I think the easiest way to find out is to call a mortgage originator and simply ask.
Again, while other may not agree with me, if you want a marketable note I would go through a mortgage originator. With the size of this note the cost I'm guessing would be about a half of one point, very little as an insurance policy IMO.
I can see me recieving this note three years from now as a note for sale. If I see that it was not originated in compliance with the laws applicable at the time of its making I'm kicking it back. How do I know that the "lender" only made 3 or 5 loans that year, after seeing it was a non-owner occupied deal, am I to do searches all over the place to see if you made other loans that year? No, I'm not, I'll just send the package back saying not interested.
No one has been there yet since these requirements are new, but I can see this being a compliance issue years ahead.
To avoid that issue, use a mortgage originator.
Now, as to underwriting of seller financed notes. There are requirements, such as limitations on balloons, but it really is common sence as Marc mentioned. I don't think that the three day mortgage originator course that was required is going to get into many concepts of underwriting and an originator is not really an underwriter, so I imagine what it's about is the simplistic issues of debt ratios, down payments, credit issues that may restrict the borrower from qualifying later on to meet the obligation and having time to fix credit issues, perhaps they will require counseling with a non-profit. I seriously doubt the borrower is held to secondary market standards in every issue but rather a look at how much they miss conventional financing.
In my opinion, there will be few originators who will be that great at underwriting a seller financed deal with a borrower who fails to qualify for conventional financing because seller financing is not so much about what things are like today on a 1003, but what things can be like 5 years out. Most originators have been trained to meet today's requirements and they usually don't need to consider future issues. I could be wrong, maybe that three day course addresses this matter, but it's difficult to grasp and I doubt it does. Government usually takes the path of least resistance, so they will probably use parameters to be met.
Again, the only way to know is to ask a mortgage originator in your area, I'm sure they will tell you what the borrower needs to look like so you can move on your plan.
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Ok, Bill thanks.
One final clarification... exactly what is meant by mortgage originator? Is this just any lender for residential property? Some small local mortgage company? A hard money lender?
I want to make sure I understand who/what I'm looking for to talk to and how and where I'm gonna find someone who will be able to help me with this.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
A mortgage originator is one who takes an application and performs processing functions and a mortgage broker will be an originator. They are usually employees. You should probably look for a mortgage brokerage office, in fact I'm thinking that a smaller brokerage might be better as they may not be under some corporate influence that might restrict them form these activities, so a good small broker who can do it and might be willing to do it. I know in some areas it is hard to find a broker to do this.......
So, an attorney may also originate a mortgage (but won't have a clue probably) but they can if they will and they may use their bar/license number. At least they were an exception under the SAFE Act, so check in CA.
Otherwise you may need to enlist one within the state....good luck.
Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
14y
Alfred Bell I said to sit down with your potential borrower and, have them run their own credit report right in front of you. Have them do it-not you and, there won't be any issues in this regard. Also-my understanding is that you can do 5 deals a year before the SAFE Act becomes an issue. There is nothing wrong with you keeping the credit report, your borrowers pulled on themselves, in your file.
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Marc:
No problem with that, and I understand. I could have them sign a doc that authorizes me to have and keep their credit report in my loan file. I could have them go online and order and pay for a credit report and FICO and then submit it to me.
But before going that route I want to finalize this major uncertainty of me doing this versus an originator handling the loan cycle.
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
I know that I will most likely wind up having to negotiate this point, and I know that each prospective buyer/borrower will have different circumstances and capabilities, but, in general... 9% seems to be such a HIGH percentage rate (especially now with rates at 3.5%)... should I really try for a 9% interest rate?
(Maybe 9% isn't really so outrageous since, amortized for 30 years, 200k @ 9% = $1,609.25 and 200k @ 7.5% = $1,398.43. Which is only $200 more per month or $2,400 more per year.)
Also, in relation to the above question... would it be best to avoid announcing percentage numbers for DP and interest, and just negotiate with the prospect using the money numbers, such as... "we'd like a $50,000 down payment and we'd like a monthly payment of around $1,600"?
Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
14y
Alfred, yes the lender's title policy would convey in any sale of the loan.
The whole rate question is a function of what you and the borrower can agree to. Interest paid by the borrower is return for the investor. Investors like higher returns opposed to lower returns. You are not forcing anyone to take your loan, if they don't like the interest rate they can see another lender. Interest and down payments have affinity to risk. Risky loans usually have higher interest rates. Don't be so emotional on behalf of the borrower and be a bit more concerned about the investor.
Just to be clear with negotiating loan terms and "announcing" loan terms. Do not market your loan in your listings or signs or online posts, etc. There is regulation around that and it will be easier to avoid it and just saying "owner financing available/considered" or something to the same.
How you present your desired loan terms in conversation really just depends on you. Certainly some sentences are a little softer than others. At the end of the day, the terms you want are the terms you want, sort of is what it is. Whether you say 20% or $50k is really over analyzing it a bit if they both are the same thing.
Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
14y
Dion DePaoli has some good points here as to the conversation you would have with your potential buyers.
As for the title policy, it can transfer to a new note holder, with an update. It takes less time and money to do the update from where you left off. It is also nice to have in your deal file and note package.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
Way up there noticed a discussion about credit reports. The borrower does not receive a mortgage credit report which is updated and shows all current liabilities, job history and addresses. If I were looking at a seller financed note at 200,000+ that's what I'd want to see or run.
If a borrower requests a credit report they will receive basically an in-file report that is not updated or brought current but shows what the agency has at that time, there are three agencies to tap into.
There is a concept in loan processing of direct verification where the lender obtains verifications and credit reports as well as supporting documentation directly from the source, not from a borrower. There have been many cases where a borrower and broker being in cahoots doctoring documents. This can happen when the borrower has access to the verification process. As a lender, you obtain authorizations and then verify yourself directly with that source of information.
You don't hand an employment verification to a borrower and ask him to take it to his boss, fill it out and return it. You have them sign it and mail it directly to his boss.
You'll also find that a borrower or individual makes a request for a credit report it is sold and provided on the condition it is for the customer's inquiry and is not used in any manner for the extension of credit.
In the state of CA, they could say you can do 50 loans a year, totally irrelevant unless you can devise some way of proving that was the 1st or 49th loan you did! If you can figure out how to do that your method will be worth some money.
Frankly, I might have a different attitude toward the DIY stuff if it were a 50K note, but it is not, your money guy could have near a quarter of a million dollars in this note and there is just no excuse not to have it professionally done, this is just not a DIY deal IMO. You can go on in this thread for another hundred posts and you'll not get close to the issues that could arise.I've not heard anything yet about what a mortgage broker in your area has suggested.
And, I'm not getting involved in giving specific underwriting or loan origination advice on this particular note nor should anyone else be doing so unless they hold a license to do in the state the note is to be originated in/of the secured property. When this DIY deal blows up I don't want to get any registered mail over it. We can talk in generalities but not specifics when you find a buyer.....
Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
14y
I agree with Bill here and have suggested that you talk to a licensed professional in your area as well. You should talk to more than one. I think you owe it to all of us, yourself, your money partner and potential buyers to do the right thing here. Call some professionals in your area.
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Dion:
Thanks for the input.
Good to know that lender's policy will transfer to next note buyer. (I'll ensure that I go over this with escrow to ensure getting the correct type of policy and that it will convey.)
I am definitely concerned about my investor. I'm doing everything that I can to ensure this works out and he gets all of his capital back (and a profit if he is willing to hold the note for a longer period of time). Luckily for me he is easy going and not upset about this strategy to sell for a lower/marketable price and carry paper for a few years in order to recoup his losses. I want to get him the best interest rate that I can but there has to be a balance between his needs and the buyer's needs. (I talked with a local broker today and she told me that she is having some of her listing clients carry paper too in order to facilitate a sale. I told her I was thinking about asking for 20% down and 9% for 8 year term, amortized at 30 years and she said that it sounded good except that the 9% might be too high. She said hard money lenders are doing 8% locally. So... I'm gonna verify this by calling HMLs in the area. This data will then help me to get the highest interest rate feasible yet stay within the market.)
I won't market my loan through public media. That is private between me and the condo buyer.
I think I'll go with Marc's advice on the language. I believe it will be better to say... " would like 50k down, the payments would be approximately $1,400 per month, which is about what these units are renting for" and then go over the details with him as we move forward... as opposed to "want 20% down and 9% interest". This is not a problem I can handle this, altho using the best language will make things go smoother.
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Bill Gulley:
Thanks for your input and concern on this point.
This point is the thorn in my shoe. I've started to research this now so as to find out if and how this can work. The question is... Will I be able to find a licensed loan originator to do this for me? If not, it will have to be a DIY job. If I can find someone who will do it, I will need to find out exactly how this will work. What doesn't make sense to me about this is that the licensed originator's requirements could be exactly what a bank's requirements would be so how could I advertise or tell a prospective buyer that I'm offering "owner financing, no bank qualifying" when in fact it will wind up being the same thing?! This has been my confusion all along. But I will sort it out soon enough and know whether I'm going LMO or DIY.
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Marc: Yes, of course I will check with professionals on this. No way I would go forward without having this last aspect fully understood. I should have a good grip on it within a day or two and then be ready to go into action. Finally. Thanks everyone for your input thus far.
Alfred
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
Yes, we all would like to know who the closing compnay is that will do seller financed notes. Remember, I also said an attorney is exempted from the SAFE Act, so an attorney at the closing company can solve this as to compliance with those applicable laws.
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Spoke with a local small lender in Palm Desert and he said he couldn't/wouldn't originate the loan and that I'd have to search for some small lender who might be willing to do it but it doesn't seem too realistic.
Also, just spoke with a hard money lender here in Palm Desert (Pacific Mortgage Exchange). They told me that they could not originate a loan unless they were a principle in the loan transaction.
I was also told that here in California technically what I want to do is not considered a loan... it is a "seller carry back", not a loan. This is done through escrow and as long as there is a valid and properly done promissory note, trust deed and lender's title insurance policy, that there would be no problem selling the note at a later date.
I'm waiting to hear back from another HML in order to get his feedback on this subject. I'm searching for other small lenders to call for feedback as well to get to the bottom of this.
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Just spoke with a HML and note investor who has been in the business for 30 years. He agrees that this could all be done through escrow with no problem YET he confirms the advice that Bill, Marc and Dion have suggested... I must "CYA", must practice "be safe than sorry" and get this originated by a licensed individual. California's translation of the SAFE Act, or other legislation that the banking lobby manages to get passed in this area, could change the dynamics some years down the road and have a negative effect on my "escrow originated note". I need a person with a NMLO license (National Mortgage Lender Originator). He is going to try and hook me up with one and it should only cost a few hundred bucks. At least I have a better idea of what I'm looking for now.
As an aside, he told me that the powerful banking lobby got the SAFE Act put through with hardly anyone even reading it. They will continue to work on passing laws of this nature because they want to stop all private lending so as to control it all.