As a rehabber, why would I want to do all this? - Posted by HR

Posted by Michael Morrongiello on January 17, 2001 at 19:56:37:

You inquired:
"can I create and sell my own paper on my property, home or investment, or does it have to be brokered? "

You can create your own marketable “paper” by making sure the mortgage is the result of a purchase money transaction. Eg. you have sold a property and financed the buyer. Creating a note on an existing property you own, is akin to a cash our refinancing and generally not as mechantible a note.

Lets explore how we can assist you further, simply contact me.

Warm regards,

Michael Morrongiello
Sunvest Corp.

As a rehabber, why would I want to do all this? - Posted by HR

Posted by HR on January 15, 2001 at 18:12:54:

Hi everyone,

Please let me begin by saying that this post is not mean to be a demeaning challenge to anyone. I truly am asking because I truly can’t see the value in today’s market of all this notemaking activity. Please help me to understand what I am missing. I respect the experience and wisdom of the pros here, and I hope they will help me clarify my misunderstanding.

I renovate property. I don’t see how my creation of owner carry notes is at all profitable. Not compared to the alternatives. What am I missing?

Let’s use an example. I buy a property for 15k, renovate for 10k, and it’ll appraise at 50k. I don’t understand good note structuring yet (so please bare with my ignorance), but it seems to me to have the best shot at making the most money off this situation, I need a good credit buyer (650+) with 10%+ dp, and even then I’m having to carry back a second. Heck, if this buyer is 600+ fico or better, and has at least 3%, why not go FHA and cash out completely? Why even do all this note creation and sales, anyway? By the time I’ve created two notes, discounted and sold the first, and kept the second, I’m going to make little in profit… except for the second. Rehabbing to hold seconds, though, is foolish in my opinion. What am I missing? If creating and selling paper is the goose that lays the golden egg, why aren’t more rehabbers doing it?

Thanks in advance for any response.


Control, Speed , Efficient marketing, etc. (long) - Posted by Michael Morrongiello

Posted by Michael Morrongiello on January 15, 2001 at 21:56:07:

You pose some excellent questions that deserve to be answered. Selling renovated properties quickly for TOP dollar,and getting back to a cash liquid position so that you can take advantage of the next profitable deal is typically a reoccuring theme I hear all the time from investors who buy, fix, and then sell their properties.

Offering to Seller Finance those renovated properties is NOT a panacea or a replacement for other forms of financing. If you can sell one of your properties for TOP retail Dollar, close quickly, not have discount any of the sales price or pick up any of the buyers closing costs, then that is an excellent way to go. However many investors have found that offering to seller finance some or all of their properties provides them with the following distinct advantages:

  1. More efficient marketing:
    When you run an ad that states that you want so much down (typically we require a mininum of 5% cash down, although 10% will do nicely, and so much a month, and that you will finance that buyer with NO traditional bank qualifying, etc. You will generate a TON of activity and interest in that property. Many of the prospective buyers its true will have heavily blemished credit backgrounds, etc. However its a #'s game. Of the 20 phone calls you receive, 3-4 of them will have suitable credit, employment, etc. and wish to go with a seller financed deal simply because it is far easier for them and less intimidating for them than being put under the proverbial “microscope” by their FHA /VA , or more traditional lender.

So by OFFERING to seller finance a property, you are casting a much wider net out into the marketplace that will capture interest from those potential buyers who simply rather go this route as opposed to a more traditonal direction. This tranlates into selling a property FASTER. If you can turn a home in several weeks to 30 days or less, as opposed to several months waiting for a more “qualified” buyer to come along, you are more efficient in your marketing. Perhaps you can turn more properties per year, etc.

  1. Speed to close
    A seller financed deal can be approved, processed, close, and fund in less than 10 days if all the “ducks are put in a row”. This is not always the case but after a deal or two is completed and one understands the process, paperwork, documentation, etc. - closings can take place quickly.

  2. Control
    When you are involved in the sale and financing process, you are much more in CONTROL of the whole process. You can literally meet an interested buyer, and cut your deal on the spot rather then waiting for that buyer to get their approval,etc. - Sub-division builders typically have their own mortgage liasons in house for this very reason, they want to be able to exert greater CONTROL over the financing process.

  3. Flexibility
    Can your mortgage lender accept a “deffered down payment” paid over time, or perhaps finance a buyer who can only afford 10% interest the 1st year, and then 11% the 2nd year, etc.? Seller financing is not “off the rack” financing, but more like a “custom tailored” suit if need be. Also, I see little reason to “quibble” or dicker over the sales price when you are offering financing. Often I see sellers reduce or be willing to negotiate their sales price lower when they are dealing with a qualified buyer who can purchas any # of properties and knows it.

There are a few more reasons that I have recently outlined in a free report entitled “Why Use Seller Financing?”, simply send me a request and I am more than happy to send you out a copy.

To your success,

Michael Morrongiello

Don’t Take A Knife To A Gun Fight! - Posted by David Butler

Posted by David Butler on January 15, 2001 at 21:48:03:

Hello HR,

Excellent question. Bears repeating… excellent question! Unfortunately, it would take the better part
of two short courses to answer that question adequately.

But here is some food for thought:

Whether is involves owner financing, owner financing combined with a simultaneous close, or one of several hundred financing techniques or their deriviatives, there are several important things to remember:

  1. There are often three parties to financing - the owner, the buyer, and about 85% of the time, the lender (or alternatively, a note buyer). Each of these parties has interests which can conflict with the others’ concept of “the ideal situation”. The objective is to resolve this conflict by using a financing technique which gets the deal done and most closely meets everyone’s objectives. As you can imagine, it is unlikely a deal will close otherwise :wink:

  2. The solution to a real estate financing problem depends on knowing whether a particular financing technique CAN provide an answer;

  3. You will not be able to arrive at that answer without a clear understanding of the goals of the parties - there are generally 10 goals that can be met through financing, and at least one of those goals must be met for ANY financing technique to have any real benefit for ALL of the parties to the transaction;

  4. There will frequently be different points of view by the buyer and the seller in their interpretation of these goals. Often, the results of the financing technique used, and form it follows, will affect these two parties differently.

Now, forgetting for a moment that real estate financing tends to run in hand with the historical six (6) year “easy-money”/“tight money” credit cycles, and that this last “easy money” cycle (which is finally starting to run out of steam) saw lenders practically ladling out money to any living, breathing life form - in general, I have to say that in all honesty, a person definitely should look for available loan programs in the first instance.

The longer you are in the game, you will run into more than your share of how, why, and when it does make sense to follow the owner financing route. Under a complete analysis, you would see HOW you structure the deal will make a great deal of difference with regard to the feasibility of a note deal.

Given the length of my reply, I will leave to others to jump in with examples… perhaps we’ll have the good fortune of hearing from Steve Cook, CREO’s “Blue Vase” winner from two years ago, who started with nothing but his wits, and has built a highly successful business out of doing just what you are talking about here - creating a lot of paper, and selling it in the process!

But, I hope my thoughts help for starters!

David P. Butler

lol. Good points by both of you. BUT - Posted by HR

Posted by HR on January 16, 2001 at 13:15:00:

Misters Butler & Morrongiello,

I appreciate your answer and the time it took to post it; thank you.

I believe that there is a place for paper; I’m just struggling to find it. I also agree: cash cycles, and different sellers can command different approaches to financing.

I just have a suspicion that paper is more difficult to pull off than meets the eye. Can we use my example and tear it apart for learning sake?

I buy a place for 15k. Put 10k in. It will appaise solid at 50k. No question: when I advertise that puppy as owner finance, I’m going to have to hire a secretary just to handle all the calls.

I’m my limited experience, though, that’s one of the first problems. Handling the calls takes me out of the 20% of my work that generates 80% of my profit. Most of these caller will have bad credit. Some will be decent enought to get financed one way or another.

I tried referring these calls to a mortgage broker, and I found she did a bad job with follow up. Never found me anyone that could buy the house either. I tried having a realtor do the follow-up; he coulden’t handle all the work either. In the meantime, I had the property properly listed in the MLS and it sold fast, without having to carry paper. I did take a few months, though, and I did have to sweat out some moments. No question.

So, back to my example. In the best case scenario: note properly structured, buyer with good fico score, good dp, what would my numbers be? Real world. Let’s say 600 fico, 5k cash to put down. What’s my best case scenario.

Michael, I agree that I can potentially control this better, get more buyers, offer more, etc. but I still suspect I will net FAR less selling with paper than selling outright. I’m also not honeslty convinced it will be easier to control. I’ve heard some less than favorable stories about folks waiting on table funded deals, terms changed at the last minute, etc. And from a stranger in cyber land, to boot. Heck, if I have to deal with those mortgage headaches (which are common), I’d rather battle with a local broker who I can talk to and hound face to face.

I’m open to being wrong. First one to show me differently gets a lot of paper! lol. Let’s run the numbers on this example. What does the structure of the paper have to be? How would all the numbers fall out?

Thanks in advance.


My 2 cents… - Posted by Rick Roberts - KC

Posted by Rick Roberts - KC on January 16, 2001 at 19:40:39:


You raise good questions.

I have been in real estate since 1978, and have seen most aspects of it. I suggest to you that real estate decisions–like other decisions in life–are relative to other available options that will allow you to meet your desired goal(s). While certainly not the preferred way to go in all cases, you may find owner financing to be an excellent way to go in certain situations. Well over one-half of our volume last calander year were rehabbers, and most of those folks chose owner financing for one of the 4 reasons that Mike and David highlighted (most popular reason by far = speed at which the deal can close).

Regarding the “best case” for the scenario you presented, here are my thoughts.

$50,000 = sales price
$40,000 = First Note (12.5%, 30/30)
$ 7,500 = Second Note
$ 2,500 = Down Payment (more if you can get it)

$37,600 = (from sale of note @.94 buy rate)

  • 2,500 = (DP)
    $40,100 = (gross cash at closing)
  • 7,500 = (second)
    = 47,600 = (total gross proceeds)

In closing, I encourage you to add owner financing to your arsenal–you may suprise yourself and use it more than you think!


Re: lol. Good points by both of you. BUT - Posted by David Butler

Posted by David Butler on January 16, 2001 at 19:09:58:

Hello HR,

You are certainly welcome, but you still are missing the point just a bit. I am glad Mike stepped in to follow up with my original post, and he made good points as well… but as we both intimated, OWNER FINANCING is not a panacea. I have often quizzed people right here on these boards as to why they are coming up with some complicated deal just to work owner financing into the mix.

And looking at your reply here, it seems as though you anwsered a great deal of your own basic question. In the scenarios you are describing here, why would you offer owner financing, even if you could get par pricing for the paper? Seems like a waste of time, in light of the circumstances you describe. Buy the homes, rehab the homes, sell the homes… buyers are lined up with all the financing they need, you are getting your price, that price is in the market range for your properties - what else is there!!!

Seller financing is just one more tool in the bag - and no need to use it if something else works better for your principals… so long as the deal goes to bed! (Same thing with 1031 exchanges, lease-options, etc). And of course, it is much better than trying to force private financing, where none is necessary. In all honesty, the circumstances dictate the deal.

If you are selling those properties under the conditions you describe, it means that there is sufficient funding available in the institutional lending pipelines, and plenty of qualified buyers to go around (who also have no special needs or circumstances they need to address)… in which case, who cares, right?!?

But… is this truly the case? Are you truly getting qualified buyers calling on all of your listings? Are all of your listings being sold within the listing period? Is the average selling time of your listings commensurate with the market average throughout and is it an acceptable market time (i.e. less than six months?). Are your properties selling within the average sales price/listed price ratio for your market?

If you can answer “NO!” to any of these questions, the probability is very, very high that you have some real opportunity there to boost your closings through the understanding and use of alternative financing techniques.

A second part of that equation - table-funded deals (aka simultaneous closings) are but one form of using paper, and utilizing seller carryback financing. They are a specialized niche, with some mechanics, and higher risk factors… IN MOST CASES (a proven risk factor after the bloodbath the major funders have taken in this area over the past 18 months).

The primary attraction with this ONE particular paper technique, is to bring cash to a deal where cash is the determining factor… and, in most cases, where cash is difficult to come by, or creates a particular situation that does not satisfy a buyer’s objectives for one reason or another. (But again, if you have buyers lined up… who needs this guy, right? Let him offer his paper deal to somebody else.)

And the possible situations can offer a multitude of variations. One of the problems with these boards is that people want to find a “one-size fits all” answers, and in both real estate and finance, it’s not pure cookie-cutter. I have written an awful lot of conventional, government, and subprime loans over the past 23 years… and with the exception of the the “streamline” refinance programs, I rarely had a deal where we didn’t have to do some kind of tap-dancing to get things closed up.

By the way… although it is not written in firm policy, in my experience with government and conventional programs, it is almost impossible to push through a loan with less than a 620 credit score. And I have had many occasions where we have had to run folks with even 680 and 700 scores, through subprime programs due to nonconforming elements related either to the property, or the borrower’s employment histories, credit irregularities, or insufficient down payments.

Indeed, as I have discussed at some length in our FREE report, THE COMPLETE GUIDE TO UNDERSTANDING CREDIT RATINGS AND CREDIT REPORTS, at: - This website is for sale! - notenetwork Resources and Information.
we discuss to some degree the fact that in mortgage lending, the underwriting process is not score-driven, so much as it is “profile” driven. It is worth noting here too, that a 600 credit score is not considered “good” by most standards (although admittedly, we like to see that in a subprime application).

Some good ground in this area offers direct pointed discussion with regard to your last few paragraphs here, and can be found right down below at:

More food for thought… we’ll see what else comes here in a bit

let me chime in… - Posted by Michael Morrongiello

Posted by Michael Morrongiello on January 16, 2001 at 22:02:57:

Rick has done a good job of conceptually illustrating what might be accomplised if you are willing to carry a 15% smaller 2nd lien along with an 80% LTV ($40,000.00) 1st lien. The 1st lien then gets sold off for CASH. This is a good way to go with lesser credit invididuals. Not much to add here…

However, Just like other types of mortgage lending with stronger credit buyers who have stronger credit scores (around 650 or greater FICO’s, etc.), you can take back a more agressive loan like an 85%LTV ($42,500.00) - 90%LTV ($45,000.00) 1st lien that can be sold off to generate a CASH funding in the low to mid 90’s of the note’s principal balance. This then eliminates the need to carry a 2nd lien or at the very least makes the 2nd lien much smaller to carry.

If the credit is weaker, then carrying both a 1st lien at a lower exposure or (LTV) loan to value level along with a smaller 2nd lien is a fall back option.

Remember with an owner financed transaction, there is typically NO application fee, NO points, No lender junk fees like a Document prep fee, underwriting fee, warehouse fee, etc., there is also no PMI expense, or prepaid requirements for any tax and insurance escrow impound account. In short the actual down payment funds that a prospective buyer has go towards their DOWN PAYMENT and not partially to cover a lot of extraneous expenses.

Of course there is a discount in selling the note to realize its cash value today, however when you factor in ALL of those other costs, and then your longer anticipated holding time for a property BEFORE you can sell it and close, the benefits of owner financing must be considered.

Over the years, I have purchased and sold 100’s of homes in mutliple states and have used owner financing extensively to sell my properties. My position is the EXACT opposite of yours. Given the chance to have one of my potential buyers have to obtain their own loan and go through that application process, and uncertainty, of sweating out their approval and the closing, OR agreeing to “pre-underwrite” the deal myself by offering owner financing to the buyer, knowing that I can covert that “paper” into cash anyway, I’d choose the latter, time in and time out.

I much rather make a “quick nickel than a slow dime” anytime.

To your success,
Michael Morrongiello

Excellent! - Posted by HR

Posted by HR on January 16, 2001 at 22:26:35:

To all of you who have responded, I appreciate the information. This is very helpful for me in understanding how I can make paper work for me. No question: there is a place for paper, maybe even in a good market. Ok, I’m convinced.

I must confess, though: I still believe (and again, maybe I’m wrong) that getting into paper to find existing notes is an incredibly hard row to hoe. Maybe one can market enough to make a few dollars at this, but, it would seem to me, that creating paper, if one can, is far more profitable than finding it and brokering it.

Now how do I learn more? I have John Behle’s tapes on paper, improving paper, etc. and while I think John is a genius, following all the tapes to learn how to use paper as a rehabber has not been high on my list. Any stuff out there teaching rehabbers to “do” paper? Also, can I create and sell my own paper on my property, home or investment, or does it have to be brokered? How can I cut out the middle man (more expense, more profit loss)?

I’m all ears about how to learn more and “do” a transaction. I’ve got a rehab finishing in the next two weeks that might work. How do I learn more?

Thanks again for the patient and intelligent responses.