Why Invest In Performing Notes?
“I’d rather have a mortgage payment than a rent check any day and not to be concerned about vacancy factors, have the tenants, maintenance, and liability.”
Notes secured by real estate are an excellent investment. Notes produce income from the underlying mortgages and the investor benefits from the “collateral gap” between the amount invested to purchase the note and the value when the note is paid off or refinanced, or if the home is sold. The mortgages are typically purchased from other investors or asset managers.
The face of the note is the value of the note but sometimes when purchased at a discount, there can be a “unrealized appreciation” because note values directly correlate to property values.
Many new note buyers are afraid of foreclosure. With a homeowner, if they miss any payments and there’s equity in the property, you can collect the missed payments, late fees, corporate advances and any attorney fees. By attaching these items onto the loan balance, based on the verbiage of your loan documents, you will recover these fees at some point, as long as there’s enough equity.
Benefits of Buying and Owning Notes
Collateral-With a note and mortgage you have a secured lien. Risk is relatively moderate, especially with equity to protect the mortgage. Notes with a 30% equity cushion are a safe and highly collateralized investment.
Management-Notes tend to be easier to manage than real property. As an investment, they also tend to be more passive. Wells Fargo does not get calls about plumbing leaks. Location doesn’t tend to be as big of a factor when owning the note. It’s easier to own notes in areas that you might not want to buy and hold real estate, especially short term. There’s often less liability and responsibility with owning notes. With notes, you also tend to avoid issues with vacancies and maintenance.
Profitability-Notes and mortgages usually offer comparable returns to “brick and mortar” real estate investing after adding in management and maintenance. There’s a lot less competition when you’re a “lien-lord” versus a landlord because other than large hedge funds there are fewer individuals working today in the note space. You make your money when you buy.
Partial Note Purchases (Partials)
Another opportunity, one that is not well known is either buying or selling a partial note. When an investor purchases all the remaining payments, it is considered a full purchase. When an investor purchases just a portion of the remaining payments, it is considered a partial purchase.
For example, a note has a balance of $100,000 at 10% interest payable in monthly installments of $878 with 360 months (or thirty years) of payments remaining. When the seller sells all 360 remaining payments of $878 to an investor it would be considered a full purchase.
If the investor only sold the first 132 monthly payments of $878 each for $69,900 to a partial investor thus considered a partial sale. Once the partial note buyer received the next 132 months of payments, the note would be reassigned to the investor and the investor would collect the remaining 228 payments (360 total payments less investors partial sale of 132 payments leaves 228 payments remaining to the investor) The entire loan payoff is $97,574. The partial note investor pays $47,291. The balance of $49,283 could be added to the investor’s Roth IRA.
One can maximize the return on investment by accelerating a settlement. It is not uncommon that a note/mortgage may be paid off early either with a refinance or property sale, the notes paper work would reflect the following. Assume an early payoff after 60 months. The UPB is $97,574. It is split between the investor and the partial note buyer investor. The partial investor receives $47,291 and investor receives $49,283.
You can do almost anything with a note that you can do with real property.
- You can “flip” a note (wholesale)
- You can refinance the borrowe
- You can sell the full note or you can recoup your original investment by selling some of note payments (partial).
- A note is an asset; therefore, you can borrow against the note. (Collateral Assignment)
Other Benefits Through Investing With Notes
- Consisting of a single investor or related group of investors or entities contributing a minimum of $250,000.
- Gailthenotegal buys, manages and sells notes exclusively for the Private Fund investors portfolio.
- Secured by recorded property first trust deeds in the investors or investor entities names.
- You can ncrease your IRA or retirement account returns by using these account funds to invest in notes.
- Increase your cash flow from equity in real property.
- You can borrow against the equity in a property and invest in a note to increase your return from that same property.
- Increase your return on investment (ROI) on equity when selling real estate by offering terms. For example: “holding paper”, owner financing”, or carrying a second mortgage often allows the seller to achieve a higher selling price because it makes the property more desirable to a potential buyer.
- Better financing and leverage when you buy real estate through the use of notes and seller financing. You can get a higher return (ROI) on a rental property if the seller assists the buyer with financing.
- Private held notes used for “rehab loans” are usually more affordable than a hard money lender because of the interest rate and fees these lenders charge.
Seller Financing-It’s Making A Comeback
If you have flexibility on the financing terms when you sell a property, you can literally double the amount of potential buyers and increase the demand for your property. If the property is not in the best of condition or is not unique in some way, your property may sit on the market and become stale. You are competing with all of the other houses for sale and you may need to spend thousands of dollars to compete with the current inventory. The buyer’s lender may require additional repairs and improvements before approving the buyer’s mortgage. You can avoid most of these fixup problems with seller carryback financing.
Over the last few years, with low interest rates, the concept of seller financing has been put aside. The truth is seller financing has been around for years and, in some areas of the country, seller financing has remained a very popular financing strategy for selling real estate. Rural properties and mobile homes have always been a challenge to finance using institutional financing. In this current economy, more people will once again turn to seller carryback financing to get more transactions closed. Business owners are more familiar with the concept of carrying paper simply because it is difficult to obtain financing for the purchase of businesses. The underwriting is much more stringent and quite different from residential sales.
Note holders have the option to sell their note, or part of their note payments, when they would rather have cash at closing.
Seller Financing can be quick and inexpensive to implement regardless of market conditions. Oftentimes, a seller can receive market value or more than market value for their property.
Seller financing makes closing a transaction all the more simple. It is common for these types of transactions to close in 7-14 days. When a seller offers owner financing and gets lots of offers, they can close up to 4 times faster than when conventional financing is used. The seller can then decide if they want to keep the note as a cash flow investment or sell it for instant cash.
Call today to discover the best strategies for creating seller carryback mortgages to receive top dollar if you choose to hold it for cash flow or sell it to receive cash!
Benefits of Seller Financing
- Defer capital gains
- Maximize the sales price by offering terms to make it easy for a buyer to purchase the property
- Receive a cash flow and allow your equity to continue working for you
- Get a good cash down payment and payments in the future
- Collect monthly income for years
- Your note is secured by a property you know and understand
- Oftentimes you will receive more cash each month than you could receive in rent
- Stop having to deal with tenants or maintain the property
- Stop paying property taxes and insurance
- If buyer stops paying, you have received payments up to then and you get the property back
- If you need money for whatever reason, you can sell all or part of the note for cash
SUPERCHARGE YOUR IRA WITH NOTES!
LEVERAGED GROWTH. PROTECTION AGAINST INFLATION AND MARKET VOLATILITY
Up and down stock market, measly savings returns, where do you put your IRA funds to get a great rate of return without the downside risks? Notes secured by real property may be your answer.
We’ve worked with many major self-directed IRA trust companies to help our investors unlock the potential of notes for their IRA accounts and we can help you too.
Contact us to find out more info on how you can use your IRA funds to invest in notes.
Questions on Selling Mortgage Notes
Why Would I Sell My Mortgage Note?
What Can I Do to Make My Note Worth More?
Here are straight forward answers to the most common questions on selling mortgage notes. We also invite you to visit our learning center filled with helpful articles and tips for creating and selling trust deeds, land contracts, and mortgage notes.
Why Owner Financing?
Circumstances change and many sellers would prefer cash today rather than small payments that trickle in each month. Here are just a few reasons people have sold their note payments for cash:
- Investment Opportunity
- Expensive Medical Care
- College Tuition
- Unexpected Financial Changes
- Peace of Mind – no more worrying if the buyer is going to make late payments or having to foreclose
- Accounting headaches, IRS regulations, paperwork hassles and the list goes on…
What is a note appraisal?
online form or by calling us at (321) 417-1142. We also request copies of the documents relating to your transaction:
- Note and Mortgage (Deed of Trust or Contract)
- Closing statement
- Buyer information
- Pay history and current balance
- Previous title insurance policy
- Current hazard insurance policy
The purchase price is paid in guaranteed funds (cashier’s check or wire transfer) upon receipt of the final transfer package and original documents.
We pride ourselves on:
- Quick closings
- Excellent customer service
- Competitive quotes
- Providing customized options
- Strong financial backing
- Flexibility on all note purchases
- Confidentiality with all transactions
- Credibility in the industry
Contact us if we can assist you!