Mortgage Note FundingIntroduction to Mortgage Note FundingMortgage note funding…these are truly “magical” words. For many persons across the country who, at some point in their life, may be fortunate enough to own real estate, mortgage note funding can be a financial godsend. When these property owners decide to sell their real estate, many times, they use some form of real estate owner financing to do so. The normal purchase of property goes something like this: prospective buyers find the home they want to buy; they apply for a home loan from a bank; the loan is approved; they make an offer to buy; the offer is accepted; then, they proceed with the closing process. Once everything is completed, everyone is satisfied: the sellers are happy because they were able to sell their property and, normally, get most, if not all, the cash they asked for; and the buyers are now the excited owners of their dream property. From this point forward, the buyer will pay the bank a monthly payment to pay off the loan. So, in the end, most homes are bought using money borrowed from banks and other financial institutions. However, as often as the above scenario is played out, and as normal as it may sound, it is not the entire home buying - home selling - home financing story. There is a huge part of the story left untold, and it is this: during an ever-increasing number of home sales, private individuals – not banks or other financial institutions - will actually finance the sale. In these instances, the home buyer will make scheduled payments to this private party instead of to a bank. This is called mortgage note funding or real estate owner financing or owner home financing.
Mortgage Note Funding BackgroundA real estate note, commonly called a mortgage, land contract, or trust deed, is simply a financial note that is secured by a home, vacant land, or other type of real estate property. These notes are very attractive for financial notes buyers and finders for numerous reasons: First, the sheer volume of mortgage notes created on a daily basis is enormous. Conservative estimates places this figure at one in 13 American homes (approximately 8%) is purchased using these seller carry back financing. Second, in most circumstances, real estate notes are relatively secure because real property usually (…but not always, as we have experienced recently) appreciate in value. Additionally, the property is in a “fixed” location, unlike many other types of property (for instance, cars, motor homes, etc) which tend to depreciate and can be easily moved or hidden. Third, buyers want to get the most bang for their buck. This is the main reason many of them choose to work with real estate notes. They know that should a borrower fail to make payments it would be more realistic for them to recuperate their invested funds by foreclosing on a single family home than on, let’s say, farm equipment, cars, motor homes or many other types of property. Fourth, it's also much more difficult for a borrower to hide a house than a tractor or a car. Smart note finders know to look for what buyers want - and real estate notes are often it. Fifth, financing through a seller financed cash flow note is an attractive option for many transactions, particularly real estate. Now a $350 billion industry, peer-to-peer seller financing is a growing global phenomenon.
How Does Owner Financing Work?Mortgage notes or contract for deeds (sometimes known as owner home financing notes) are legally binding documents that offer a mortgage as proof of a debt and describes the terms under which the mortgage note is to be repaid. In essence, a seller financed mortgage cash flow note is nothing more than a privately-held mortgage note. This mortgage is between two private individuals - seller and buyer - rather than a borrower and a traditional lending company. While the majority of real estate transactions involve a loan from a bank, sometimes the seller might offer owner home financing (also known as real estate owner financing) instead of receiving a large lump sum payment as they would in a normal real estate transaction. To put it simply, sellers do not extend mortgage note funding out of the goodness of their hearts. The fact is, using real estate owner financing usually helps the seller close the deal. Many times, home buyers can not qualify for a normal bank loan, due to bank underwriting criteria. Often, this comes about because the buyer’s credit may not be very good, perhaps only “marginal”, or merely “fair”. However, this is not always the situation. Sometimes, banks and other financial institutions deny potential buyers mortgage financing for reasons other than the buyer’s credit rating. This is especially true in the present economy where many banks have instituted artificially constrictive credit requirements. Depending on how motivated the seller is to sell the property, the seller might offer a potential buyer several options. He might offer his home with the specification that “Owner Will Carry”. This means that he could provide the buyer with real estate owner financing by ofering the seller a very low interest rate or contract for “interest only” payments for a fixed period of time, with a balloon payment at the end of that period. The upside to this is that the deal becomes very attractive for the buyer; the lower the interest rate and the longer the repayment terms, the lower the monthly payments. And, of course, the more attractive the deal is, the quicker the property will be sold. When both the buyer and the seller decide to enter into an owner home financing arrangement, they create a real estate note (trust deed). The seller will record the note with the court which indicates that the buyer will make monthly payments to the seller for certain terms and conditions. At this point, the seller of the real estate will start to receive monthly payments from the payor (the buyer).
As long as the buyer keeps making payments, there will be no problems; the buyer will have the property he or she wants and the seller will have a nice monthly cash flow coming in. The seller can simply wait 5, 10, 15, 20, or more years in order to get the total amount of money he or she originally wanted for the property.
However, if the buyer does not make payments as agreed, the seller can then foreclose on the property and sell it to receive the money owed - based upon the terms indicated on the real estate note. In short, the buyer can get the property back, sell it, and keep all the payments the buyer previously made.
Again, as long as the payer makes payments every month and the seller can wait that long to receive his or her money, there is no problem. In fact, many sellers think that once they extend mortgage note funding, the only thing they can do is collect monthly payments for years. However, this is not correct. They have options.
Should the seller like his money immediately and not have to wait for years or have to worry that the payer might not be able to make payments; they could sell their note to a note buyer. That way, they do not have to worry about someone not making payments and then have to go through the time and expense of hiring a real estate attorney to pursue foreclose. They could get the money they want and need immediately without having to wait several years. These seller can advertise their "mortgage notes for sale", and sell them that way.
There are various companies that are available to assist note holders sell their real estate notes for a large lump sum payment. (See below for details.)
The Benefits of Owner Home FinancingBecause they do not understand the many benefits of real estate owner financing, many home sellers never consider it as a viable home selling tool.
Additionally, a number of common misconceptions persist about its complexity. The thought by many is that it is much too complicated to be successfully completed by the average property seller. Moreover, they also tend to think that buyers are unwilling to sign a private note.
Once a property seller is properly introduced to and learns owner home financing basics, the advantages become very clear. The upside of offering real estate owner financing, instead lowering the property’s asking price, becomes very evident. In fact, drafting a secured, real estate owner financing note is a very straightforward process. When the mortgage note funding process is boiled down to its most fundamental elements, these are some of its many advantages:
- Offering owner financed homes can bring huge, new attention to listings. Many times, home sellers are “forced” to explore owner home financing as an option. They arrive at this point only after their homes have stayed on the market for endless months at a time. When they offer mortgage note funding, sellers find that the number of potential buyers increase dramatically. By offering this type financing, they, in effect, invite an expanded group of potential buyers, thereby, opening up an entirely new, untapped market.
- The seller can sell at his or her desired price or an even higher price: this point is especially important in a market saturated with homes for sale. - The seller can normally close the deal much quicker than he or she could have had they continued to pursue the normal selling process. - The seller may be able to sell a “non conforming” (i.e., a fixer upper) home which he may not have been able to sell using traditional financing; no lender might have loaned against it. In order for a bank to loan against a home, the property must pass a number of inspections. The banks must do this in order to ensure that the property will remain viable for the term of the loan, normally as long as 30 years, until the loan is repaid. Also, they must ensure that the home is fit for habitation under local and state laws. - The seller may want a monthly income and can receive a monthly payout for as long as he desires, based upon the terms of the contract. Many sellers may have two homes and decide to sell one. And especially, if the seller is retired, he or she may wish to receive some monthly income. Real estate owner financing accomplishes this.
- The typical owner home financing rate of return normally gives the seller a better return than he or she would receive from a money market account or other many other commercially-avaiable financial instruments. The seller can receive any where from 5-12% interest. A money market account will normally pay less than 5%. So, mortgage note funding can potentially bring a far better return. - The seller may be facing capital gains on the sale of the real estate and wishes to defer the financed portion of the sale: owner home financing helps him do this. - On the flip side of the coin, the “credit challenged” buyer may finally be able to afford a home he or she probably could not have using traditional financing. Sometimes, bad things happen to good people. A potential buyer may have had a bankruptcy or some slow pays in his or her credit past. However, since that time, he or she may have eliminated all those credit issues. However, those entries will remain on the credit report for years to come. When applying for a traditional mortgage from a bank or other lending institution, the potential buyer may well be turned down because of these entries. This may not happen with mortgage note funding. - The buyer, on many occasions, can place a smaller amount of money down to acquire the property, in comparison with traditional financing. Normally a bank or a traditional mortgage lender will require a 20% down payment. A seller offering owner financed homes may only require as little as 10% down. The buyer may be better able to afford 10% , as opposed to 20%. On a $200,000 home, that represents a $20,000 diference (10% at $20,000 vice 20% at $40,000) - If a real estate agent is involved in a transaction in which real estate owner financing is used, they get to close another deal and receive their commission, where they might not have, had the property stayed on the market without a sale.
The Problems With Owner Home FinancingThough the process can be very simple, there can be some disadvantages. The more attractive the deal is for the buyer, the more the seller who offers real estate owner financing may be placed at a financial disadvantage: - The seller does not receive one large single payment at the time of the sale. He will only receive a down payment, which could be smaller than the one they would have received as the result of a traditional sale. Moreover, if a real estate agent is involved in the selling process, most of down payment will probably go towards paying the real estate agent's fee. This leaves the seller with virtually no upfront money. Many times, he or she must wait until the first monthly installment to receive any money. - Besides the smaller down payment, the seller will only receive relatively small monthly payments. Many home sellers may be interested in buying another property or making some other investment. However, these small monthly payments will not be enough to do this. - The buyer may default on the payments. Should this occur, the seller would be forced to initiate expensive foreclosure procedures.
- Sellers will have the bulk of his or her funds tied up in the property for years, while the buyer pays on a monthly basis.
Selling Your Real Estate Owner Financing NoteThough some note holders prefer the structure of receiving monthly payments, most others, however, desire a large lump sum of cash. Most sellers offering mortgage note funding do so because they need to sell their property very quickly and traditional selling methods do not afford them the opportunity to do so. Many hope that they will gain enough money from the transaction to make other investments. So, once they sell their property and create a note, many think that is the end of the process. However, that is far from the complete story.
Most private mortgage note holders do not know there are investors, both institutional and private, who purchase these owner home financing notes and contracts-for-deed. The amount these investors will pay for these financial instruments is determined by the merits of each individual mortgage note or deed.
A note’s merit is determined by a number of factors to include (but not limited to): the note’s seasoning (how long the buyer has been paying on the note without problems); the note’s equity (how much of the note has been paid off – the greater the equity, the better); location and condition of the property; the length of the note’s term (number of months); the buyer’s creditworthiness; the note’s interest rate; whether the note has a balloon payment or not; etc.
There are several benefits for a note holder to to offer his mortgage notes for sale: - It provides immediate cash for the seller to make other investments, pay off bills, purchase other properties, start a business, take a vacation, pay medical bills, pay for college tuition, provide money for children/grandchildren, donate to charity, etc.
- The seller no longer has to collect payments on the note. Many sellers who provide real estate owner financing use mortgage service companies to “service” their notes. These companies collect the monthly payments from the home buyer, take their servicing fee, and remit the remainder to the note holder. Based upon the note and the servicing agreement, servicing the note could cost the note holder up to $100 per month. If the note holder did not receive the amount of money he or she wanted in the first place, paying a mortgage service company up to $100 per month is just another nagging expense. Selling the note will end this monthly payment.
- The seller no longer runs the risk of non-payment. This is perhaps a note holder’s worst nightmare: a buyer who defaults on payments. Many sellers of owner financed homes do not want this constant pressure. They constantly monitor the buyer’s financial status for signs of adverse changes, such as slow pays, huge medical bills, job loss, etc. This represents stress for the seller who has provided owner home financing. Selling the note will end this.
The first point a mortgage note seller must understand is the time value of money. This means that no investor will pay the seller the face amount of the note, then wait years to recoup their investment. This occurs because money is worth more today than it will be years from now. So, investors will “discount” or decrease the amount of money they will pay for the note to compensate for having to wait years to get their money back. Remember: everything…and we mean EVERYTHING…depends upon the note’s fundamentals. These factors are the only considerations important to note buyers. So, if you have mortgage notes for sale, count on receiving only 50 to 80% of the note’s present value. Again, the amount of the quote will depend upon the note’s fundamentals.
The note selling transaction is a relatively simple process that can be rather quickly done. If the note seller has questions about how to sell a mortgage note, he or she can contact a company which buys notes and get answers to questions (for such a company, see below). In fact, the process is so simple, most legitimate notes buying companies have web sites where a seller can input his or her note information. Within 24-48 hours, the company will contact the note seller with a free, no obligation note quote (i.e., how much money it will pay for the note). So, if you have mortgage notes for sale, take the plunge. It will be alright.
Do You Have A Mortgage Note For Sale?If you have a real estate owner financing note for sale, then get a free, no obligation quote. Click the link below and you will be taken to a site on which you can enter a few pieces of data about your note and get a on the sale of your future business note payments. Click Here To Get a FREE, No Obligation Mortgage Note Funding Appraisal and Quote
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