How to Create and Sell a Note? - Posted by Jimbob

Real Estate Investing
#1

Posted by JohnBoy on October 16, 1998 at 14:49:38:

Couldn’t I create my own note and just have it put into escrow? Then at the time of closing, my note buyer’s funds would pay off all the underlying loans leaving him with a new first mortgage on the property?

What’s the difference whether the owner creates the note or I create the note? Neither note would be effective until the time of closing and all the underlying loans were paid off? I don’t understand the difference here. Could you explain that to me?

Thanks

#2

How to Create and Sell a Note? - Posted by Jimbob

Posted by Jimbob on October 15, 1998 at 11:15:43:

Hello,

I recently bought a fixer house on a 12 month lease/option. My initial intent was to fix up the house and flip it for a profit. Lately I have been thinkinmg it would make a great rental, and I’d like to secure permanent financing for it, but I don’t want to go through traditional lenders because I can’t stand the politics of qualifying and financing. I was wondering if I can create a new 1st mortgage and sell it to a private investor to secure financing that way? Below are the particulars:

Option price: $120,000
Fixup Costs: $15,000
Total: $135,000
Market Value: $180,000
Market Rent for House: $1200

I would like to pay off the option price and recoup my fixup costs. Here is what I was thinking of doing:

Create and Sell New 1st Mortgage $140,000 (78% LTV) @9%

My new payments should about break even with what I can rent the house for. Can I do this and what kinds of pitfalls should I be aware of?

Thanks…

Jimbob

#3

Banks aren’t that bad. - Posted by Ben (IN)

Posted by Ben (IN) on October 20, 1998 at 21:58:15:

JimBob,

Creating a note and selling it works best when:

  1. You are flipping the house and just need to cash out the seller. The new buyers credit and income are used by the note investor to evaluate the note, not yours,

  2. You are buying the property c-h-e-a-p!! When your purchase price is low enough, the 10-20% discount that is hacked off the face of the note just doesn’t matter in your overall profit picture. In this case, its the availability of the funds that are important, not the interest rate.

Creating a note, does sound really great, and it is, but it doesn’t replace getting a loan when you can qualify for one. Especially right now, there are s-o-o many loan programs out there. The B-C lenders are looking for virtually any way possible to get you a loan if you are half-way qualifiable.

Try getting a Mortgage Broker to track something down for you. If you can get some cash out and a reasonable low rate (8-9%) I’d say you are looking good.

Best of luck.

Ben Innes-Ker

#4

Re: How to Create and Sell a Note? - Posted by Bud Branstetter

Posted by Bud Branstetter on October 15, 1998 at 20:00:17:

Jimbob,

Are you telling us that you can make 30-40k on this property if you sell but would rather have no cash and a break even cash flow with a rental?

The 140K mortgage would have to be discounted to yield more than 9% to the institutional buyers. Take away closing costs, appraisals and broker fees if you have to and you may not recoup your all your costs. Talk to a good mortgage broker about low doc loans. It may not be as much hassle but the questions is still why? Would you take a zero coupon bond in trade so that in 2020 you will have 110K?

#5

Re: How to Create and Sell a Note? - Posted by John Behle

Posted by John Behle on October 15, 1998 at 12:26:03:

The first pitfall would be creating the note first and then trying to sell it. It might end up being a note that is not saleable, or would discount heavy.

There are two types of note buyers to possibly help you with this. The national buyers like Metro can do deals like this, but run into the hesitation of the difference between the value and the purchase price. They tend to give the higher prices, but have tighter restrictions.

A local buyer might be a little higher in their yield, but may have access to both institutional and private funds. Look in the paper under the ads or call around to some Realtors or investors that might know some.

Tell the note buyer what you are trying to accomplish and ask how he or his buyers would like the note structured to meet both your needs and his. A “note newbie” that is just starting may be at a loss for this one, so look for someone who has been around awhile and has his own funding if possible. I don’t know where you are located, so if you want to let me know, I may have someone I can recommend.

There are also several websites where you can post a note (list it) and access information on buyers. The biggest is www.notenetwork.com. I’d guess as little as 10% of the buyers out there could help with this, but they are there. Depending on the state, I may be able to help with it or have an experienced broker to recommend.

There are of course other pitfalls, I’ll see if I can fax or email an article I wrote for Realtors on “Seller Financing Do’s and Don’ts”. Might not be until Saturday as I’m leaving for a couple days right now.

#6

Re: How to Create and Sell a Note? - Posted by Greg in texas

Posted by Greg in texas on October 16, 1998 at 13:47:22:

My first comment is, you can’t sell a note you don’t own. I.E. you would not own the note you are tying to sell and create. If you can convince the seller of the home you wish to buy, to owner finance the home for you, then they can sell the note. In order for you to facilite this transaction you have to convince them and explain the discount on the note. If the bottom line on their expected proceeds will allow for the discount, this will and can work. I do this dialy in my business. I would be happy to explore the possibility of this transaction with you. I buy notes with my own money for my own account.

#7

It’s all simultaneous - Posted by John Behle

Posted by John Behle on October 19, 1998 at 02:18:39:

Of course the unsaid assumption was that he would close on the lease option agreement. Yes, he can agree to create a note and table fund it. The cash goes to the seller and he doesn’t have to be involved in the seller financing. It’s a little more out of the ordinary to do it that way, but it works fine.

The note can be created direct to the funding party. It can be structured with a discounted price. Usury would be a potential issue depending on the state with this type of table funding. Not all funding sources or buyers will go with this type of deal and would insist that the original note be made out to the seller, but it does not have to be that way any more than the original note has to be made out to a seller if you are going to Last National Bank for the loan.