TriMark Capital Funding, Inc.

Owner Financing Real Estate Notes

Everyone knows the real estate market has been on a wild roller coaster ride since the latter half of 2007. Not to be the doom-and-gloomer of the crowd, but the bad news is that it’s not over yet; in fact, it’s not even close to being over yet.

The core problem is the resetting of interest rates on tens of millions of adjustable rate cash-out mortgages, home equity loans and home equity lines of credit. According to Fannie Mae and Freddie Mac, there is one REALLY BIG wave of resets left (the “last hurrah” before banks stopped writing them), and we won’t see the last of those resets until the 1st and 2nd quarter of 2010. Foreclosure is about a 6-month process in most states, so it’s a safe bet  that the last big batch of “toxic” mortgages will be hitting the market right around the end of 2010 and the beginning of 2011.

After that, we estimate a period of about 6 to 9 months for the market to stabilize while investors and bargain-hunters buy up the last of the outstanding foreclosures and REO’s. Only after that happens will real estate values slowly begin to solidify and then start to creep north as the excess inventory of homes starts drying up.

When are banks and mortgage companies going to relax their lending requirements and actually start writing mortgage loans again? Well, that’s anyone’s guess but if history is any indicator, that probably won’t happen for a very long time.

So what does all that mean? Simple: Don’t look for property values to stop falling or the real estate market to begin improving until at least mid-2012.

And that estimate is only good IF the White House can actually deliver on its campaign promises of millions of new jobs, dramatically reduced unemployment, no more recession and a growing, recovering economy. Needless to say, those are some mighty big “IF’s”.

But I Need to Sell My House NOW

In the late 80′s and early 90′s when interest rates were out of control, millions of people turned to owner financing to buy and sell their homes. And if the last year is any indicator, it’s happening all over again now. Homeowners needing to sell their homes or other property are opting to carry a note for buyers who are unable to get approved for a bank mortgage (which nowadays seems to be just about everyone). Once the transaction is completed, they can sell the entire note, or just a portion of the future payments, to a mortgage note buyer like TCF in exchange for a large lump sum of cash now. It’s a creative solution to a very widespread challenge.

One of the biggest problems TCF is seeing with seller financed real estate notes that are being created these days is, to put it bluntly, an overall lack of financial intelligence when it comes to creating the note. Many sellers are desperate to sell and as a result, they cut corners, try to save a few bucks by not using an attorney or title company and they just throw together a deal with the first person willing to buy the property. The trouble is, if it’s not done intelligently, it often renders the note unsellable or worse – uncollectible.

If you are considering carrying back a seller financed mortgage in order to sell your property, these general guidelines will help you avoid that situation and create a note that will be sellable, profitable and require the least amount of discount when you sell it:

• Understand LTV (Loan-to-Value %) and then Avoid High LTV – Anything higher than 80% LTV and you’re approaching the danger zone. We calculate LTV by using the most recent selling price of the property, then order an appraisal to verify the value has not dropped below what is owed on the note. Once a borrower realizes they owe significantly more on a property than the property could be sold for, there is a high probability that buyer will feel he was overcharged and simply walk away or allow the mortgage to default. Because of the ongoing problem with declining property values nationwide, LTV is one of the most important considerations in creating the note and ensuring it’s future saleability.
• A Good Down Payment Is CRITICAL – Cash is king; always has been, always will be. High LTV can be partly or totally overcome by requiring a large cash down payment from the buyer – 10% to 15% minimum – more if possible, thus making sure the buyer has substantial “skin in the game”, so to speak. The larger the financial commitment that the buyer makes to the property, the less likely they are to allow it to be lost in a foreclosure, regardless of declining property values. If you choose, you can further reduce LTV by carrying back a 2nd mortgage for up to an additional 20%, although you would probably not be able to sell the 2nd to a note buyer.
• Buyer Credit Is CRITICAL – Know who you’re financing. Not verifying buyer credit is the single most common and most costly mistake we see. It is also the single biggest reason that a note becomes unsellable. Fortunately however, it is also the single easiest to avoid problem PRIOR to the sale, so there’s no excuse for skipping it. We hear dozens of excuses like “I didn’t care about credit because he gave me such a large down payment”, or “I’ve known him for years”, or “He seemed to be such a nice person”, or “I was just in a hurry to sell”. Understand this: Banks WILL NOT make a loan to people with bad credit in this market, at any price, so you shouldn’t either if you ever intend to sell the note. Always insist on receiving a current tri-merged credit report for the buyer and spouse and then review it carefully so you have a good understanding of their historic tendency to pay bills on time. FICO mid-score should be at least 650 or higher. Anything below about 625 in this market will be difficult or impossible to sell and will, at a minimum, require a much, much larger discount.
• Interest Rate Is IMPORTANT – Rate reflects risk – remember that. Banks are in the business of taking calculated risks when they loan money and the interest rate they charge a borrower is a direct reflection of that risk. You should NEVER charge current bank rates or less because your risk is far greater than a bank’s risk. You should insist on at least 1 to 2% more than market rates; more if the buyer has credit below 700. We currently recommend a minimum of 9.5% to offset the risks of seller financing in this market and absorb the bulk of the discount when you sell your note. Lower interest rates will require a larger discount to make the note attractive to investors and that translates into significantly less money in your pocket.
• Financing Term Is VERY Important – Have an exit strategy – always. The average American homeowner changes homes every 4 to 5  years, so the notion of carrying a 30 year note is ill-advised and expensive for the lender (you) because the borrower won’t go to note maturity and a 30 year note requires a much greater discount than a 5 year note, especially at lower interest rates. We currently recommend interest-only with a 5 year balloon. This will provide sufficient time for the buyer to improve their credit if necessary and should be sufficient to weather the current mortgage crisis and put them in position to successfully refinance out of the loan if they keep the house longer than 5 years. Most importantly it gives you a solid, definite plan to get you out of the lender’s chair within 5 years.
• Pay Attention To Underlying Obligations – If you have an underlying mortgage that you intend to continue making payments on (a wraparound mortgage or all-inclusive wrap), be sure that the underlying balance is less than 75% of the current value (selling price) of the property or the note may be difficult or impossible to sell. This can be mitigated by getting more cash down payment from the buyer and doing a principle reduction on the underlying mortgage. Also remember to check for a Due on Sale clause in the underlying mortgage.

The bottom line is that the seller-financed mortgage industry is booming and represents an excellent alternative to conventional bank financing, especially when bank financing is not available. and if you follow these common sense guidelines, it can be safe and lucrative as well.

For more information about selling your real estate note or mortgage note or to get a free, no-obligation quote click here: Sell Mortgage Note.

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