The Value of Emotional Equity

When new to the note business, one tries to figure out the way to success and, for the majority, how to incur the least amount of risk in the process. There are three types of notes in this business, which are high equity, partial equity, and no equity notes. New note buyers generally like high equity notes and fail to see the upside potential of no equity notes. Most note buyers think about the gains that are more obvious, and give no consideration to the potential gains from emotional attachment.

Around 2007, people used to buy deals covered in equity so that if the homeowner decided not to pay they would have recourse and be able to foreclose while getting their money back and making a profit. However, with the crash of the housing market where homes lost much of their values, those high equity notes started disappearing. Buying them today would mean paying quite the premium for them. It is because of this that it would be wise to consider the positives to all different types of notes. You see, the difference between buying equity versus no-equity deals is that no equities are cheaper, yet both still have similar upside potential. NNG explains the benefits of emotional equity:

Note Buyers, Homeowners, and Emotional Equity

The two things to consider when buying notes are that homeowners usually don’t have a concept of how much their house is worth and that most homeowners don’t really care because it’s their house and that’s all that matters. Most homeowners do not want to leave their house because they either grew up there, have way too many memories there, or the space is sufficient for the whole family. Some families have many kids and to just uproot their lives and move somewhere else can be difficult for them. As a note buyer these are things to keep in mind, as they are the details that homeowners tend to grasp onto which make keeping their house imperative. There is a great opportunity for note buyers here. If willing to take the risk and work with the homeowner, most of the time they will see that homeowners refuse to leave their homes. And this is when the investors can work out a plan for the homeowners to consider. Both parties can benefit from a no­equity deal in that investors will receive monthly payments and at the same time have much leeway to structure favorable terms for the homeowners.

However, sometimes it isn’t just nostalgia that makes it hard for homeowners to leave but also expenses. Some homeowners can barely keep up with their 2nd mortgages. Renting an apartment for a party of 6 would be even more expensive and inconvenient. Also, if the homeowner has pets, living in an apartment might not be an option. Things such as these are incentives for the homeowner to either find an extra job or seek a higher income somehow in order to retain their house and avoid foreclosure. For these reasons, note buyers should analyze all possibilities. There is no perfect note and sometimes avoiding risks can mean missing a chance to make profits. Think about it! Just how much do you know about note buying and emotional equity?