The economies of the U.S. and other developed countries continue to stumble, the stock market is trending downward and threatening to completely tank, and most literate citizens are slowly waking up to the fact that the governments that created this mess are only making it worse. The banks, seeing all of this happen and having sizeable problems of their own, withdraw from lending to anyone except the most stellar (credit-wise) companies and individuals.
Real estate investors can be at the extremes of either wanting to buy now at rock bottom prices or selling all of their properties on the chance of conditions getting worse, and everything in between. My phone has been ringing more frequently lately with questions from investors about whether they should sell properties using owner financing (because buyers cannot get a bank loan) and how they do that.
Below, I cover some of the most common questions, and how both I and other note buyers are likely to answer them. These answers are based on assessments of risk and apply if you might want to later sell the real estate note.
Top Questions and Answers About Real Estate Notes
On what type of property can I create a mortgage note?
A note can be created for any property type – or just about anything else, for that matter. If you want to later sell the note, then be aware that notes on single-family houses and some commercial property types are most marketable. Vacant land, especially without utilities, is considered highly risky, so you should expect to get much less money for this type of note.
What is the minimum payer credit for you to buy a note?
Some investors require minimum FICO scores of 620 or 640, while others like us have no minimum. However, poor payer credit means a riskier note and thus a bigger discount to the note seller.
Can I sell the note simultaneously with selling the property?
For almost all investors, the answer is no. Part of the reasoning is that we like to see at least 1-3 months of payment history, but another big reason is that we don’t want to be classified as lenders, where additional licensing is required.
What about interest-only notes?
These are fine, but you need to have a plan in case the payer cannot make the balloon payment. You’ll want the balloon to be at least three years out.
Are investors able to buy notes on flipped properties?
Not right away. If you owned the property for less than a year before selling it, then most investors will require a minimum of either six or twelve months of pay history with the new buyer.
What about 2nd liens?
Most note buyers won’t touch any junior liens. The only exception would be if there is such a large amount of equity in the property that the investor would be well protected in case of default.
If a corporation or LLC is buying the property, should I get a personal guarantee?
If possible, yes. Having that personal guarantee lowers the chance of a default and will get you a better price if you later sell the note.
We’ll go over other types of questions and answers in next week’s blog. As a general rule when setting up a note, put yourself in the shoes of a mortgage note buyer and ask yourself “Would I want to own a note with these characteristics?”
Until next week …
REAL ESTATE HIGHLIGHTS FROM THE WEEK
* The Federal Reserve estimates that at the end of June, Americans held $6.2 trillion in equity in their homes, down from $13.2 trillion in 2005. One of every three homes is mortgage free.
* Foreclosure starts rose 20% in August from the prior month to the highest level of the year. Foreclosures are delinquent an average of 611 days. Foreclosure starts were down 12% from a year earlier (10/4/11 Housing Wire)
* The U.S. home ownership rate in 2010 fell to the lowest level in 70 years, dropping to 65.1%, down from 66.2% in 2000. (10/6/11 Housing Wire)