NON-PERFORMING NOTE INVESTING: IS THE RISK WORTH THE REWARD?

Have you been tempted by the high rates of return and potential large profit margins offered by investing in non-performing notes? The abundance of performing notes available along with the potential high yields are often the primary factors which leads many investors to graze in the pasture of non-performing notes. The economy, while getting better, is still trudging along and recent bank regulations require lenders to relieve themselves from certain non-performing assets. The lure? You can get a non-performing note at a deep, deep discount and banks and note-holders are more than happy to dump them and get them off their books.

To many investors this sounds like a beautiful scenario, a plentiful supply of inventory at rock bottom prices. It would be unfair to say that large profits and high yields can’t be made from investing in non-performing notes. However, we have found that when investors begin to dip their toes into the world of non-performing note investing, more often than not, they are met with a far less glamorous reality.

At the end of the day it all comes down to the risk/reward ratio and how much risk you are willing to take on. The majority of investors that we come in contact with are simply not interested using their hard earned capital, often allocated for retirement and generational trust fund purposes, to purchase this level of risk, regardless of the perceived “discount” on the initial purchase price they are receiving. We heard it best from an ex non-performing note investor when he said:

“The eight months that it took to get the note performing, the lost interest earning power of my money during the rehab nightmare, not to mention the energy and worry, cost me much more in the long run compared to the amount of money I thought I was saving buying at a deep discount.”

To read the rest of the article click here

WHY ARE EXPERIENCED INVESTORS BUYING REAL ESTATE MORTGAGE NOTES?

THE TRANSITION FROM CONVENTIONAL INVESTING METHODS TO REAL ESTATE MORTGAGE NOTES.  

Why do we see so many seasoned investors transition to note investing? We have found that towards the end of many real estate investors careers, after they have spent their time, money and energy pursuing the more “conventional” methods of real estate investing (renting properties, wholesaling, and flipping) the natural course of evolution brings them to real estate note investing. We have found this to be true for not only real estate investors but also investors that have been involved with mutual funds, bonds, ETF’s, CD’s and investment vehicles associated with the stock market. Is this coincidence or should we be looking for an explanation to this trend?

To read the rest of the article click here...


HOW CAN I CREATE PASSIVE INCOME WITH REAL ESTATE NOTES?

WHAT IS SELLER FINANCING? 

Before we discuss the process involved in creating a real estate note, it is important to understand the concept of seller financing. Seller financing is when the seller of a property takes the place of a traditional mortgage company or bank and lends money directly to the buyer. The buyer and seller sign a document defining the terms of repayment including the agreed upon interest rate, number of years to repay the loan and the monthly payment.  This document is called a Real Estate Note.  

The Note Factory | Real Estate Mortgage Note Investing

WHAT IS A REAL ESTATE NOTE?

A real estate note is a promissory note, secured by a specified piece of real estate.  It is a written promise to repay a specified sum of money, plus interest at a specified rate, and length of time, to fulfill the promise. The payment streams generated by seller financing a property can be sold, or assigned to other private investors for a profit.


STEP ONE: ACQUISITIONS 

The first step to create a real estate note is to acquire a property below market value.  The basic idea here is to acquire a property below market value in an area where a quality buyer would want to live. We give you our definition of a “quality buyer” and show you how to find them in our course. Click here for a free preview of our course. 

Look for distressed properties that have the potential to be some of the nicest and most desirable homes in the community.  This will ensure a quick sale. 

The Note Factory | Acquiring Property to Create Real Estate Mortgage Note Investments

STEP TWO: RENOVATION

Step two, is to make renovations to the property. The goal of the renovation project is to make the home one of the most desirable properties in neighborhood and deliver a home to the market that stands out as one of the nicest properties on the block. 

We will teach you how to buy homes well below market value so that you have a healthy budget to invest into the home during the renovation process. This will ensure that your home will be easy to sell at market value and you will end up with a highly profitable real estate transaction. Buying a property below market value and renovating it properly, puts you in a great position to create a high yielding real estate note. In the complete version of the course, you will learn the number one mistake new investors make when trying to renovate a home. 

The Note Factory | Learn to Invest in Real Estate Mortgage Notes

STEP THREE: FIND THE HOME BUYER

Step three is to find the “right” buyer for the home. After renovations and improvements are complete, you want to put the house on the market offering “Owner Financing”.  Owner Financing and Seller Financing are terms that can be used interchangeably.

Because of the huge demand for “seller financed properties” you typically will not have trouble finding someone that wants to purchase your home.  The challenge is to select the right buyer who is willing to make a significant down payment and has the character and income documentation to justify selling them the home.

In the full version of the course we will go into much more detail on “Character Underwriting.” We will teach you how to attract and select the most “qualified” buyers to ensure that your notes get sold for top dollar. 

The Note Factory | Investing in Mortgage Notes

STEP FOUR: SELL OR HOLD THE NOTE

Step four is to sell the real estate note. In the course we will go into much more detail on how to package and sell notes. For now, think of a real estate note as a ticket that gives you the right to collect the monthly payments from the borrower. 

This stream of income can be sold to an investor or you can hold the note yourself and collect the monthly payments.  When you sell the note, legal documents are prepared to transfer the note to the new investor and these documents are recorded.

In the complete module we will teach you where to find qualified note buyers and how to work with banks to hold notes so that you can get 100% of your working capital back in your pocket. 

The Note Factory | Learn How to Invest in Mortgage Notes


WANT TO LEARN MORE ABOUT CREATING YOUR OWN REAL ESTATE NOTES FOR PASSIVE INCOME WITH DOUBLE DIGIT RETURNS? 

CLICK HERE TO REGISTER FOR THE FULL VIDEO COMMENTARY ON HOW TO CREATE YOUR OWN REAL ESTATE NOTES


Mortgage Note Investing vs. Acquiring Rental Properties: A "Great Recipe" vs. A "Good Recipe"

In this issue of the Note Factory News we would like to share an excerpt from our new book "Stop Flipping, Stop Renting, Seller Finance Your Way to Financial Freedom." 

We want to illustrate the value of a “great” recipe compared to a “good” recipe by showing you some compounded returns over time.  Acquiring rental properties has been the investment vehicle of choice for many real estate investors trying to build passive income.  We agree that rentals can be a pretty “good” recipe but definitely not as good as building a portfolio of real estate notes.  Not only are the yields better, but with real estate notes you don’t have to deal with renters, repairs, property taxes, insurance and vacancy rates. 

Most experienced investors that focus on renting properties would consider an 8% net return as very good performance of their portfolio. Our typical real estate notes, sold to our private investors, yields about a 12% net return. If you learn the steps to create your own notes, you could  yield about 16%! These are the same dollars, just a different recipe.

One of the biggest reasons many investors choose to go the rental home route is because they can use leverage by getting a loan from a bank to enhance their returns.  Guess what? You can leverage notes too and we can show you how...

Don't underestimate the power of earning a higher return over time. Take a look at the following numbers to see how earning a higher yield is the difference between an average retirement and an extraordinary one. The following example assumes you are reinvesting your annual return each year.

$100,000 invested at 8% for 30 years grows to:             $1,006,265.69

$100,000 invested at 12% for 30 years grows to:           $2,995,992.95

$100,000 invested at 16% for 30 years grows to:           $8,584,987.69

Which path would you rather take?  The average path of 8% or the extraordinary one at 16%.  The time is going to go by either way. Don't settle for average in anything in you life!

 


ONLINE NOTE FACTORY INVESTMENT STRATEGY COURSE. FREE PREVIEW

WOULD YOU LIKE TO LEARN HOW TO CREATE AND/OR INVEST IN REAL ESTATE NOTES WITH THE NOTE FACTORY?

 

GET YOUR FREE ACCESS TO PREVIEW THE COURSE HERE:

www.thenotefactory.com/free-module-preview

 

WHEN YOU PURCHASE THE COMPLETE VERSION OF MODULE ONE, YOU WILL BECOME A MEMBER OF THE NOTE FACTORY ACADEMY AND HAVE ACCESS TO EXCLUSIVE ONLINE VIDEO LESSONS AND COURSE MATERIALS.

ACCESS TO OVER TWO HOURS OF INTERACTIVE ONLINE VIDEO LESSONS

+

90 PAGE COLOR MODULE BROCHURE

+

FREE INVESTMENT CONSULTATION WITH THE PRINCIPALS OF THE NOTE FACTORY TO DISCUSS HOW TO BUILD YOUR NOTE PORTFOLIO

COMPUTER COURSE AND BOOKLET.jpg

 

IN MODULE ONE, YOU WILL LEARN...

 

HOW REAL ESTATE NOTES CAN BE YOUR TICKET TO MONTHLY PASSIVE INCOME.

WHY SELLER FINANCING HAS BEEN A SUPERIOR INVESTING MODEL COMPARED TO OTHER MORE CONVENTIONAL METHODS OF REAL ESTATE INVESTING IN OUR EXPERIENCE.

HOW TO USE THE POWER OF AN AMORTIZATION SCHEDULE IN YOUR NOTE INVESTMENTS

HOW TO USE REAL ESTATE NOTES TO BUILD PASSIVE INCOME FOR RETIREMENT. 

HOW TO MAKE THE KEY CALCULATIONS THAT YOU NEED WHEN INVESTING IN AND CREATING PROFITABLE REAL ESTATE NOTES

THE LEGAL DOCUMENTATION YOU NEED IN ORDER TO COMPLETE YOUR TRANSACTIONS 

AND MUCH MORE....

CLICK HERE TO LEARN MORE ABOUT WHAT YOU WILL LEARN IN THE COMPLETE MODULE ONE 

 

WHETHER YOU ARE EARLY IN YOUR DEVELOPMENT OF CREATING STREAMS OF PASSIVE INCOME, OR YOU ARE A SEASONED INVESTOR LOOKING FOR A SUPPLEMENT TO YOUR PORTFOLIO, THIS MODULE WILL TEACH YOU A SYSTEM THAT CAN PRODUCE STREAMS OF MASSIVE PASSIVE INCOME YIELDING DOUBLE DIGIT RETURNS ON YOUR MONEY

THROUGHOUT THE MODULE, THE PRINCIPALS OF THE NOTE FACTORY INTERJECT WITH PERSONAL VIDEO INSTRUCTION EXPLAINING THE KEY TOPICS COVERED IN THE LESSONS.


“After taking Module One, I saw the power of note investing the with The Note Factory. I would highly recommend any investor serious about taking control of their portfolio to educate themselves on this amazing passive income vehicle.”

-Note Factory Investor


We look forward to seeing you in Module One...


Please provide feedback on the lesson by using the button in the upper right corner of the course screen. Also feel free to share the link below with you friends and colleagues so they can gain access to the free material as well. 

www.thenotefactory.com/the-note-factory-news/015/5/30/a-good-recipe-vs-a-great-recipe



THE EGGERSS REPORT FEATURING THE NOTE FACTORY: WHY SHOULD YOU INVEST IN REAL ESTATE NOTES WITH THE NOTE FACTORY?

The Eggerss Report features The Note Factory

The Note Factory was recently featured on The Eggerss Report with Karl Eggerss. Karl Eggerss is the principal and CEO of Eggerss Capital Management. On the show, Karl discusses with Mike Arch, principal of The Note Factorythe potential for real estate notes to become a valuable addition to your investment portfolio. Karl is a widely known financial analyst and adviser. He has been featured many popular financial and investment broadcasts including Fox Business and CNBC

Click below to listen to the show and learn how notes created by The Note Factory can become a substantial component of your investment portfolio. 

CLICK PLAY TO HEAR THE REPORT

 

 

 

Sneak Peak Book Excerpt: Why Seller Financing?

In this month's Note Factory News, we would like to share a "sneak peak" from our new book on seller financing. This book is filled with valuable information for both the passive "hands off" investor and the "do it yourself" investor interested in creating his/her own notes. For the "hands off" passive investor, it will provide you with a "nuts and bolts" view of how your investment is working and give you a better understanding of exactly how your returns are being generated. For the "do it yourself investor" it will provide you with the framework you need to begin creating your own notes. 

The following excerpt focuses on the reasons why one should consider to begin creating and/or investing in real estate notes. If you would like to pre-order a copy of the book, please email Mitchell@thenotefactory.com. Subject line "Book Pre-Order." We hope you enjoy.

Why Seller Financing? 

1. Owners VS. Renters: We met a wealthy man recently who asked what we did for a living. We explained that we are in the business of creating and selling real estate notes for ourselves and private investors. During the conversation he told us about a friend that had accumulated over 150 rental homes during a 10 year period and ended up having to file bankruptcy! What started out to be a plan to build wealth turned into a financial nightmare!

We can’t tell you how many people that we have come across in the past 10 years that wanted to invest in real estate and chose the rental home route. Almost all of the people we have talked to say something like this “I used to have rental properties but I never really made any money and just could not stand the headaches of tenants any longer, so I sold my homes”. Even people that had property management companies often say the same thing. Just because there is a property manager, does not mean you don’t have to write checks for air conditioners, new roofs and new stoves because the last one got stolen by the previous tenant. We managed our own portfolio of rentals for several years and it went about as perfect as we could have hoped for. When it was all said and done, we did get some appreciation on our properties and the tenants did help us pay our mortgages BUT…. the routine maintenance and the vacancies between tenants ate up most of the profit. Rarely do we meet anyone who talks about how much money they are making on their rental properties, especially when they have a mortgage on the home.

When you owner finance a property, the home owner fixes their own toilet, air conditioner etc. Also, assuming the home owner keeps paying, the vacancy issue goes away. On a typical rental property, most people collect a deposit in the amount of ONE additional monthly payment. BIG DEAL! Most “deposits” are not enough for the tenant to care about when financial trouble comes their way. Let’s say we have a house that would rent for $1000 per month. On a typical rental, most people would collect a $1000 or even a $2000 deposit. On the same property, if you were to owner finance it you would collect about $10,000 from the buyer in the form of a down payment. A buyer that has “skin in the game”, is much less likely to flake out when things get a little tough. Most people will beg, borrow or steal the money to keep a roof over their head if they have $10,000 in the game. $10,000 has seemed to be the magic number to avoid most payment problems on homes valued under $100,000. If you can’t get a solid $10,000 down payment, we would not recommend offering owner financing terms to a buyer.

1. Amortization schedule: Our friend Joe stopped by our office one day and asked if we would review his paperwork from a house he had financed about 10 years ago. We looked over the file and saw that he paid $65,000 for the house and paid $5,000 down. Joe financed $60,000 over 30 years and the interest rate was 10.9%. Joe wanted to know how much he still owed. He had guessed about $35,000 to $40,000 because he had been paying on the house for about 10 years. When we worked up an amortization schedule for him, we said “Joe, you still owe a little over $55,000”. Joe said “that can’t be right! I have been paying on this house for 10 years”! We double checked the numbers and verified that they were correct. Joe paid 10 years of payments at $566.86 per month for a total of $68,023.20. He only paid $4,717.22 in principle in 10 years and he still owed $55,282.78. Read this paragraph again and again. He made payments for 10 years and on average paid less than $500.00 PER YEAR towards principle. That is the beauty of the amortization schedule. When you offer owner financing, YOU get to collect all of that interest. In the above scenario, you would have collected $63,305.98 in interest during the first ten years of the loan and still be owed $55,282.78 on an original loan of $60,000. Are you starting to see the unlimited potential of the owner financing business model?

2. Appreciation and Principal pay down: Like a fine wine, as time goes by, a steady paying note gets better with age. Notes that have been performing for a period of time are called “seasoned” notes. In a “normal” real estate market, if there is such a thing, homes generally appreciate or increase in value over time. As a note is seasoned, the underlying collateral usually increases in value each year. At the same time, the amount owed on the home gets reduced each year as the homeowner continues to pay their monthly payments. The moral of the story is that as the note holder, your risk is reduced each year. If the homeowner did quit paying in year 7 for example, the house probably appreciated in value and the original loan balance has been paid down for 7 years. This is a double win for the note holder and puts you in a much stronger equity position if you ever needed to foreclose on the property.

3. Zero negotiation on price and terms: Back in the days of flipping houses, the one thing we could count on was either the Realtor, inspector, lender or the appraiser would find a way to throw a wrench into our transaction. The Realtor would try to low-ball the offer or the inspector would scare the heck out of the new home buyer with their inspection report. Regardless of the situation, we would usually end up discounting the price more than we had planned or end up dealing with more repairs than we hoped for. With owner financing, you are providing so much value for the home buyer that most of those issues just go away. We sell all of our homes “AS-IS” and our interest rate and prices are firm. We lay down the rules of the game up front and 99% of the time there are no issues. When you offer owner financing, you make the rules.

4. Supply and Demand: There are more buyers looking for owner financing opportunities than there is supply in most cities. The mistake most rookie investors make is that they take the first warm body that shows up and is willing to give them a down payment. Remember, you are trying to create headache-free, long term streams of income. We will discuss our “Character Underwriting” philosophy later in the book. For now, realize that there is a huge demand for owner financing and the wise investor patiently waits for the “right buyer” to come along.

5. Bringing value to the community: Often times when we purchase a home, the neighbors come over and start talking to us. They want to know what we are going to do with the house. When we tell them that we are going to fix up the property, they are ecstatic! Many of our homes have been the ugly duckling on the street for a long time. They also ask if we plan to rent the home or sell it. You should see their faces light up when we tell them we are going to sell the home and not rent it. The neighbors love to know that they are going to have someone in the house that will have pride of ownership, not a rotating supply of tenants.

If you would like to pre-order a copy of the book, please email Mitchell@thenotefactory.com. 

 

Great Questions Asked by a Potential Investor

In this issue of The Note News, we would like to share with you some very good questions asked by a potential investor who recently contacted The Note Factory. This client was asking all the right questions and we think it will be very helpful not only for future investors but also our current investors to read through this conversation. We hope you enjoy and gain value from this post. 

*Investor's questions are in bold and our answers follow. 

1. Who owns the property?

We own the property. No liens on them as we pay cash when we buy. When we sell the note you will own the note free and clear. 

2. What if the borrower defaults?

Out of over 200 notes created we have had only 1 foreclosure and that was due to a death and we did it to clear up title. We have had a handful of “Deed in Lieu’s” and a couple of bankruptcies.

Deed in Lieu- The good thing about this is they sign the house back over to you and you have minimal lawyer fees and get the house back quickly. We would then send our crews in to clean up and maybe do a minor rehab and resell the property for you thus creating another note. In all the cases this has happened our investors actually make out better and increase their return. We provide this service at no extra charge except what the contractors charge us plus a 1k sales fee to our sales team. 

Bankruptcy- When someone files for bankruptcy they still have to make their payments on time or they will be discharged from bankruptcy. 

3. What happens if YOU default/ decide to close your business?

We do not plan on closing our doors anytime soon. If something did happen there are servicing companies all over the U.S. that can service the note for you. They won’t provide the level of service we do but they will do what is necessary to collect payments etc.

4. Why is the rate fixed? Can it be floating?

We do not want to put our home borrowers in a situation that would cause them to not be able to afford the payments. We already charge 11.9% so there is not much room to increase the rate. 

5. Can international investors (non-US citizens and non-residents) buy the notes on offer and what are the tax implications for an international investor like myself?

Yes. As far as I know there is nothing stating you cannot own real estate and or real estate notes in the U.S. I would check with your attorney though.

6. What is the minimum investment

Our notes range from 60k-100k. Minimum investment can be as low as 60k. 

7. Does the rate of return include the tax and insurance cost paid by the borrower or are these payments over and above the monthly payment to the investor?

When we “discount” the note to you in order to get the 12-12.5% yield is net to you. If you want us to service the note that is an additional 25$ per month per note and it will drop your yield to around 11.5-12%. Taxes and Insurance are escrowed and do not affect your yield.

8. What happens to the contract if the property is damaged/destroyed due to a natural disaster? 

All our homes have insurance and are escrowed so that they will always have insurance. 

9. What if I want to liquidate my investment before the mortgage matures? Can you find a buyer for the investor who wants to cash out?

Yes we could try and help you find a note buyer for your notes or even possibly buy them from you. 

10. What's the location of the property?

Most of our properties are located in San Antonio Texas. San Antonio has and I feel always will be a great real estate market due to the demographics of the area.

11.  How have the home prices behaved in Texas in the past 5 years and what's your outlook?

Texas, San Antonio in general has been fantastic and I see no reason for it to decline. My outlook is very optimistic and I personal invest long term in the San Antonio market. I feel that overtime the area will only continue to get stronger and stronger.

12. How do you guys make money/what are your fees for servicing?

We make money when we sell the note that we created. It is the difference in what we paid for the house and what we sold the note we created for. Servicing is 25$ per month per note.

 

Why Notes?

Note Investments compared to other investments. 

The primary reason why most note investors advocate notes over other types of investments comes down to two words. Collateral and Returns. With note investments you are often earning much higher returns relative to other types of real estate and stock market investments. With note investments you are also secured by the collateral, which is the piece of property. This is a major positive for many investors and often the primary reason why they choose to invest in notes. The fact that there is a tangible asset backing the investment that you have control of is extremely appealing to many investors. Once we tell them this, many begin to question the large amount of capital they have sitting in the stock market where they have absolutely no control over their investment. 

Owning a rental property vs. owning a mortgage note.

What happens if a tenant in your rental property doesn't pay rent? For those of you who have had the misfortune of going through this process you know that it can result in a painful series of events including losing rent, having to file to take the tenant to court for eviction, pay court costs, make any repairs to the property and marketing to re-rent the property. Many times with renters you will not be able to collect recourse because of the minimal assets that renters typically have.

However, when you choose to own notes, you will be dealing with a homeowner instead of a tenant. The mindset of these two types of people is drastically different. When dealing with a homeowner there is typically a pride of ownership mentality and they will often take measures to preserve their image as a creditable borrower. This will result in fewer missed payments, if any, and more predictable payments. If the homeowner of your note happens to miss a payment (this happens on very rare occasion you can collect the missed payments, late fees and attorney fees from the equity of the property. Bottom line is there is a tangible asset that you have leverage over. As an investor, it will allow you to sleep well at night knowing that your investment is secured and you have control over how your money is working for you

What are the main advantages of buying and owning notes?

1. Passive Monthly Cash Flow Without Having to Deal with Tenants

If you are graduating from rental properties to notes, you will notice the abundance of time that is freed up in your day to day life. The pressures and burdensome demands of dealing with tenants and property upkeep will be alleviated. 

2. Collateral 

When you own a note, you own collateral (the property) and you have a secured lien. This lowers the risk dramatically compared to other types of investments. The bottom line is you can do something about your investment if anything happens. If you are graduating from the stock market to notes, you will feel a new sense of control and peace in your life knowing that you have collateral (the property) in the investment. 

3. You Can Manage More Notes Than Properties

It is very easy for a typical note investor to manage and hold a large amount of notes. Compared to the demands of typical property/rental investments that require constant attention and upkeep, a note investor is entirely passive. This will free up your most valuable asset... your time. 

4. You Can Feel Good About Your Investment 

You will be investing in a responsible endeavor. By investing in notes you are providing an opportunity for a family to own a home.

5. You Can Purchase Notes in Your IRA

Purchasing notes in your IRA is a great strategy for retirement. When you do this, you are allowing your money to accumulate tax free in your IRA. Your returns will snowball and when you come to use your fund, you will be astounded at how rapidly your dollars have compounded. 

 

 


Mortgage Underwriting: Managing Lender Risk

Understanding the process of mortgage underwriting is critical for any serious note investor. A thorough understanding of the basic concepts and process behind underwriting, will allow you as the investor, to feel safe and secure in your investments and obtain a more complete picture of how your investment operates. From the viewpoint of a mortgage loan originator (loan officer/account executive), mortgage underwriting is simply approving or rejecting a loan application; and of course the originator believes that every loan s/he takes is a great loan and therefore should be approved; which means that when a denial letter comes back from the underwriting department, the loan officer inquires about reasons for such denial and whether anything can be done to reverse the underwriter's decision. On occasion such a reversal may be possible, but quite frequently the underwriter's decision is final.

It is that finality which is often the source of a borrower's disappointment and a loan officer's dejection; but is at the same time, the source of an underwriter's power and influence within a mortgage lender's organization. Once a mortgage loan application lands on the desk of an underwriter, chances are that it is worthy of approval based on the process it has undergone to reach that stage, since it could have been stuck in the processing department for any number of reasons, including lack of required documentation.

However, having reached underwriting it will be reviewed, assessed, scrutinized and determined to be an acceptable risk or not. Most important among the steps taken to make such a determination is what the underwriter deems adequate enough income to meet guideline ratios or – if income threatens to stretch guideline ratios – highlight other areas of the loan application which can be used as compensating or redeeming factors (probability of continued employment, strong employment history, expectancy of promotion, etc.) to strengthen the loan.

Income requirements of the underwriting approval processes are most important because it matters less that a loan applicant's credit score is 780, if the income s/he will use to repay the loan is inadequate. Moreover, recent studies show this to be the case as reported by Kenneth R. Harney, in his Washington Post website article, 'Debt ratios, not credit scores, are the most worrisome factor for mortgage applicants,' in which he states that “Nearly 60 percent of risk managers in the FICO study rated excessive DTIs as their No. 1 concern factor; that’s five times the percentage who picked the next biggest turnoff.”

The survey referred to in this July 18 article was conducted by “credit-score giant FICO,” and questions were directed to “credit-risk managers at financial institutions.” DTI (Debt to Income) ratios are established by banks and other secondary market agencies (Fannie Mae, Freddie Mac, and FHA) to determine acceptable income requirements for mortgage lending. But it is a well-known fact that underwriters evaluate more than income to make an approval decision.

This fact was best expressed in the article 'Mortgage underwriting in the United States,' in which the writer states that “Most of the risks and terms that underwriters consider fall under the three C’s of underwriting: credit, capacity and collateral.” Having discussed one of these C's, capacity or ability to repay based on income, it is time to shed some light on the other two; and even though the collateral is as important as any other component in the approval process, it is more the function of a certified appraiser than the underwriter, to determine its adequacy. So the appraisal underwriting will be discussed later while we turn our attention to underwriting the credit report.

Since the introduction of credit scores to real estate financing, manual underwriting has been employed less, and the criteria for this underwriting method have, to a certain extent, been incorporated into the automated models. However, the ability to manually underwrite a mortgage loan is still relevant, since it is a requirement for being certified as an underwriter, and it is used to process FHA-insured mortgages, and mortgages to Veterans and their eligible spouses; mortgages which are guaranteed by the VA (Veterans Administration).

Guidelines established by the FHA (Federal Housing Administration) permit an underwriter to consider a borrower for approval whose median credit score on a tri-merged (the 3-bureau combined) report is as low as 580, a score that is taboo to conventional loan underwriters. According to HUD Mortgagee Letter 2013-05, issued last year, a borrower with a “credit score below 620,” and “debt-to-income ratio [which] exceeds 43.00% must be manually underwritten. And in order for an underwriter to adhere to this guideline, s/he must make “common sense” evaluations and use discretion to approve or deny a loan, while keeping in mind the risk s/he has to balance.

Manual underwriting requires an underwriter to ask for more documentation and explanations based on a variety of findings in a borrower's credit report. These additional requirements could include: explanation for all late payments of 30-days or more; any existing or past collection accounts; satisfied judgments; repossession of an auto, if applicable; discharged chapter 7 or 13 over two years; insurance loan repayments; loan appearing on a pay stub (maybe from the union); rent payment lateness(es) as evidenced by canceled rent checks/rental verification; and any other piece of information the underwriter can gather to strengthen a loan with lower than the recommended scores.

Underwriting the property appraisal report requires an underwriter to confirm or dispute certain representations made by the property appraiser. S/he reviews data collected by the appraiser on the basis of adjustments made to justify value; relevance of comparable properties; number of rooms as they relate to family size; whether basements and attics are suitable as living units; and whether the overall collateral is enough – based on value and condition – to support the loan. There are other aspects to how mortgage loan underwriters do their jobs, but the three mentioned in this article receives most of their attention.

 


Documents in a Carry-Back Mortgage Sale

Over the last two decades there were periods during which real estate property owners found it difficult to sell their properties by utilizing traditional financing methods and were compelled to assume the role of lenders and provide financing themselves by way of the “carry-back” mortgage. On some occasions – if the property was free and clear (having no outstanding mortgage balance) and without any other liens or encumbrances – the seller carry-back could be in the form of a first mortgage, and on other occasions this type of financing would have to be placed in a secondary or junior position.

As stated in the article, 'Seller Carry Back Financing,' On the Allie Mae Website, it is stated that “The seller carry back mortgage is a tried and true method of facilitating the sale of your house.' And there is little doubt that during the pre-FHA era seller financed real estate transactions occurred at a more frequent pace than today when mortgages are readily available through institutional lenders (banks) and other companies (licensed mortgage lenders) specializing in mortgage lending. However, despite the availability of more mortgage choices, the seller carry-back still plays an important role in real estate property sales.

An important development resulting from the many seller carry-back transactions that have occurred over the years, is the sale of such notes to investors who assumed the duties of payment collectors and mortgage servicers; and as this type of transaction became more popular, the activity evolved into a more specialized process which required documents customized for these transactions. However, before elaborating on the types of documents required for one of these transactions, it is important to point out that most of the seller carry-back mortgages purchased by investors were discounted (bought at less than face value), depending on some very specific features (terms) of the particular mortgages.

It is because of the terms and conditions of seller carry-back mortgages that documentation had to be customized. According to Elizabeth Weintraub, in her article 'Selling Seller Carry-back Mortgages - How to Sell Seller Carry-back Mortgages,' investors (mostly private) buying seller carry-back mortgages would likely ask the seller to pick up certain expenses associated with closing such transactions. These expenses might include: a “Title Policy, Escrow Fee,

Document Preparation Fee, Appraisal Fee, Beneficiary Statement, Courier / Wire Transfer Costs, Recording Fee, and any Commission” that might be due and payable.

While preparing documents for a seller carry-back mortgage sale from the seller to a private investor might be prepared by a real estate attorney, the list of documents to be prepared is usually less extensive than those involved in a closing and subsequent assignment of most traditional mortgages, including FHA and Conventional; so the process is much simpler in a seller carry-back transaction but documents are just as important to the parties involved, as they are in traditional mortgage closing and assignment transactions.

Among the documents required to complete a sale of the typical seller carry-back mortgage to an investor are: Mortgage or Deed of Trust, The Promissory Note, Estoppel Certificate, and any affidavits that may be necessary. The mortgage – or deed of trust is a legal document in which the borrower transfers the title to a third party (trustee) to hold as security for the lender. When the loan is paid in full the trustee transfers the title back to the borrower. The promissory note is a document that promises the borrower will repay the loan according to the terms to which s/he agreed to when ther seller and buyer closing occurred. It also explains what can happen if the buyer fails to make a payment, or payments on time. The  estoppel certificate is a signed document establishing certain facts which the signing party may not later contradict, dispute, or recant.

The estoppel certificate in the case of a mortgage, for example, is issued by the mortgagee (lender) to the mortgagor (borrower/home owner) stating that the unpaid principal balance of a mortgage, its interest rate, and any other related information may not be later contradicted, disputed, or recanted by the person who signed it in agreement to the terms. It is used to preclude the possibility of a claim that the actual unpaid balance or applicable interest rate is different; and under circumstances where the entity to whom payments are made changes, this document becomes even more important than in the original mortgagee / mortgagor transaction.

Affidavits may serve to solidify any additional terms and/or agreements; or to identify certain individuals as having relevance to the transaction. An affidavit might also be used to declare that all the information provided by the mortgage seller is true. While there may be seller carry-back mortgage selling transactions that require additional documentation, those listed above are among the most relevant and frequently used for these types of seller-to-investor deals.


Best Investment – Mortgage Notes or Stock Market?

Among the most important factors to consider when investing is managing the risk, whether dollars are being spent in real estate, stocks, oil, or other commodity; and since investments are made with the expectation of earning a return on the money invested, managing risk is a skill the investor should possess or, if he/she hasn't yet acquired such a skill, refrain from spending large sums of money – especially on Wall Street stocks – until obtaining the appropriate skill level, or alternatively, find “safe,” or less risky investment vehicles.

In his article, 'The Inherent Risks of Investing in the Stock Market,' writer Nick Cruit points out the many variables that could have an impact on the performance of a particular stock ranging from business risk where the investor must rely on company management, interest rate risk, as it relates to bonds, and inflation risk in the sense that rising prices decreases investment value; to market risk because when the market loses value stock portfolios loses value, and regulatory risk whereas a new tax on capital gains impacts return on investment.

In view of this reality, the question a first-time or unseasoned investor must ask him/herself is, “can I effectively navigate the perilous waves of stock market fluctuations?” If the answer is no, there is a strong possibility that available investment dollars belong in a safer haven like real estate – or to be more precise – real estate mortgage notes. Consider for a moment that you recently sold a house, and are now in possession of the proceeds in the amount of Four Hundred Fifty Thousand Dollars ($450,000) from that sale, which you intend to invest in the safest, most reliable manner.

Your investment options are purchasing shares in a number of Wall Street-traded companies, or in a number of real estate mortgage notes, and you have very limited knowledge of both areas. Your first step might be to obtain as much information as you can about these two areas of investment opportunity; and while your research will probably include stock brokers and traders, it will also include mortgage note sellers, real estate professionals and mortgage lending companies to familiarize yourself with procedures on how to get started with both.

It is almost a certainty that what you will find are considerable differences in every aspect of the two areas of investing; from the educational aspect to the acquisition and risk aspect. You will learn that with $450,000 invested in five real estate mortgage notes at an average of 7.5% interest rate for 15 years, will yield a return of $4,171.56 in monthly payments, which can begin as soon as 15 to 35 days after the transaction is closed; and at full maturity of the investment (loan maturity or satisfaction), you would have received your principal back plus $300,880 in interest paid for a total of $750,880. Note that this example only accounts for a 7.5% interest rate. In many cases our investors at The Note Factory are able to see returns of up to 12.5%. 

What's important about the above calculation is not the return on investment, but the fact that you start reaping benefits almost immediately, whereas an investment in stocks will require you to wait a period of time for the stock(s) to appreciate in value – which as we know is not a certainty – before you can think about selling to recapturing some or all of the investment money if  it appreciates. How long will you have to wait is anybody's guess, and whether the value of your stock(s) increases is also anybody's guess; but there is one thing we can all be sure of, and it's this: if the market loses value, the stocks will most assuredly be affected in a negative fashion.

Do you relish the thought of sitting in front of your computer on a daily basis hoping that your poor performing stocks regain value? And when do you decide to sell if the value of your stock(s) is down 30, 40 or 50%? Will you decide to cut your losses and get out with something? Or will you stay the course in hope that the market rebounds? And what if it doesn't? The possibility also exist that none of the above scenarios will occur while you own stocks, and the market is performing (stocks appreciating in value) in a satisfactory manner, thereby allowing you to realize a profit, get your principal back, pay the broker's commission and breathe a sigh of relief. But at what cost? Stress, anxiety, anger, and declining health?

One last point which must be made about this comparison, is the action a real estate note buyer can take when a note-buying deal goes bad due to non-payment of the agreed-upon installments; and that which a stock buyer can take when a stock price crashes for any number of reasons, as mentioned above. In the note buyer's case, s/he can initiate foreclosure proceedings to seize the collateral property and resell it at a high enough price to recover the investment money. In the stock buyer's case, there is no practical suggestions of how to recover lost money except hope for the stock to regain value enough to break even.  

San Antonio Real Estate: Ideal for Investors

The City of San Antonio can be seen as an ideal location for individuals specializing in real estate and mortgage note investments. This declaration can be made due to the stunning performance of the local economy over the past several years, driven by a wide range of amenities and resources offered by this city. The unique economic and cultural characteristics on display in the city has made San Antonio one of the fastest growing cities in the two decades from 1990 to 2010. It should be noted that there are niches of real estate professionals and investors, including the investors at The Note Factory, that have been quietly taking advantage of this steady and thriving economy.

The growth is projected to continue in this south–central Texan city well into the next decade, based partly on its inclusion in the “southwestern corner of an urban region known as the Texas Triangle,” one of eleven megaregions in the United States. According to the article 'Texas Triangle,' a megaregion is an urban area which is much greater in scale than a metropolitan statistical area (MSA), as defined by the US Census Bureau.

However, it is important to point out here that seventy percent (70%) of all Texas residents – equating to approximately 13.8 million in population – called this section home in 2004; and five of the twenty largest cities in the US were located here in this triangle, which derives its name from the connecting of the three main cities by a highway system “Interstate 45, Interstate 10, and Interstate 35, which form a triangle when connected.”

It is said that the population of this section “has been projected to grow by more than 65%, or an additional ten million” people in the next 40 years to total 78% of all Texans; and San Antonio, also the county seat of Bexar County, will be a major beneficiary of this growth. But so too will be the real estate investors and members of other professions who currently resides here and those who will decide to relocate to the area and make it their home.

The San Antonio Board of Realtors (SABOR), the largest professional trade organization in San Antonio which represents over 7,500 REALTOR members, in its July 2014 statistical release, reported a six percent increase in the average home price over the same period last year to $232,839; and an increase in the median sales price to $188,200 over the same period last year, while the total number of sales for the month grew by 6% to 2,474; and the average number of days a home remained on the market unsold, decreased by 12% to 65 from the 74 recorded in June 2013.

The data is a clear indication that San Antonio is trending upwards in all areas of the real estate market. In fact, the SABOR 2014 Chairman of the Board, Missy Stagers, is quoted in the release as saying that “The number of homes priced between $200,000 to $500,000 has shown considerable growth this year with those homes making up 41 percent of the sales.” The real estate market activity reported in this SABOR release document can be attributed to continued low interest rates, but it might also be a sign that SA has fully recovered from all recessionary symptoms, since growth was not restricted to just mid-range home prices.

There were also increases in upper/lower-priced areas of the market, which is described by the “release” as follows: homes “priced over $500,000 accounted for five percent of sales, while homes priced below $200,000 made up 54 percent of sales. Year-to-date 11,655 homes have been sold in San Antonio, a three percent increase over the previous year.” It would be somewhat dismissive however, of other factors that contributed and continue to contribute, to the appeal of this city to investors, since medical professionals, educational professionals, and even the US government are well represented here.

In his article, 'Strong local economy spurs San Antonio housing market' published to the Independence Title Company website, writer Mark Sprague poses the question, “What is causing this surge in interest in the Alamo City?” He uses the “Alamo City” to colloquially refer to San Antonio, but perhaps also to suggest that there are other aspects of the San Antonio community and lifestyle that may be as attractive as, or more appealing than, the real estate investment opportunities.

For example, San Antonio is, after all, home to the Alamo, the River Walk, the Tower of the Americas, the Alamo Bowl, Marriage Island and other “commercial entertainment attractions, which include SeaWorld and Six Flags Fiesta Texas theme parks; as well as the five-time NBA champion San Antonio Spurs and the annual San Antonio Stock Show & Rodeo, one of the largest such events in the country; not to mention the numerous military facilities, and the South Texas Medical Center, which is the only medical research and care provider in the South Texas region.

The San Antonio Convention and Visitors Bureau reports that approximately 26 million tourists visits the above mentioned San Antonio attractions each year, so the city also boasts a robust tourism economy as well. It is an area that is also credited with their creation of over 90,000 jobs annually, a statistic job seekers will be happy to hear, and real estate investors can continue to relish.

Buying Mortgage Notes Equates to Smart Investing

To the average person with an eye towards investing in real estate, buying mortgage notes might not readily come to mind because this type of investment purchase has not traditionally been as popular as the buying and selling, or buying and renting, of real estate properties for profit. However, on those occasions when individuals have acquired comparatively accurate information about mortgage note investments, almost always their investment dollars were put into mortgage notes instead of the previously mentioned alternatives.

It is almost common knowledge that in order to profit from buying and reselling a piece of real estate – whether it's a single family residential property, or a multifamily dwelling – the investor must lay out the money for purchasing, then lay out additional money to repair or completely rehabilitate the property, before putting it on the market in an effort to recover the money invested via a sale of said property at a price sufficient enough (sometimes market value) to satisfy the investment dollars and anticipated profit.

In other words, buying and selling real estate is a process which involves money, hard work and time; but it is a process that also involves risk of great loss if the investor lacks the kind of knowledge, experience, sophistication and liquidity (available cash assets) to deal with setbacks or unforeseen occurrences. This is not to say that there are no requirements for such skills and abilities when dealing with other types of investments.

On the contrary, depending on the type of investment an individual decides to put money into, it will most definitely require a different set of investment skills; as in the case of buying real estate for long term investment return via rental income. As a landlord, the investor will need some knowledge of landlord/tenant laws and ordinances for the locality or jurisdiction (state and city) in which the property is located.

Depending on the location, there might be rent stabilization, rent-control and environmental control ordinances with which to contend, and therefore a good working knowledge of, or some experience in, dealing with the local department of buildings will be required if such a(n) investor/landlord expects to realize a positive return on investment. But once more, this type of investment is a process – albeit much longer than that of buy/repair and resell – which involves money, hard work and time, with no assurance of realizing a profit.

Profit is the primary concern of any investor, despite what investment vehicle s/he decides to put hard-earned dollars into; but whether that profit is realized through money, hard work, and time – or just money and time – is an important consideration. If the investor expects to do most of the work (physical/leg work) necessary to earn a profit then perhaps buying and selling or rental properties may be the way to go. However, if an investor prefers the money invested to do the work and yield a profitable return, then buying mortgage notes seems the logical choice.

An investor's money works best when it is earning interest income, as in the case of a bank, or mortgage lender which lends money at various rates, depending on the purpose of the loan; and every investor has the opportunity, via real estate note buying, to put their investment dollars to work in as smart a manner as banks do.

Anyone who has ever owned a home, or has knowledge of the amount of interest a home owner is required to repay on the mortgages he borrowed to finance a particular home purchase, would be aware of the substantial sums of money paid in interest over a thirty year period – the 30-year fixed rate mortgage loan having been among the most popular in recent history – based on amortization of the loan.

One important aspect of the note-buying business that has a direct impact on the kind of return a note investor will get on investment dollars, is whether or not the company with which s/he invests is a knowledgeable, reputable company that is well-established in the note buying business. Also, if you – the reader of this article – are contemplating this type of real estate investment, but you're new to the note-buying business, it will quickly become apparent to you you the importance of working with a well established and seasoned team. At The Note Factory, we work to develop trust and a strong bond  while you build your investment portfolio and acclimate yourself to the note-buying process.

When compared to other real estate investment methods – two of which were previously discussed – one important aspect about note-buying that cannot be denied is the immediacy with which the investor begins to collect payments. As stated earlier, the buy/repair and resell investor does not receive a return on investment – or the original investment dollars – until s/he resells the property, a period which could be three to six months.

The landlord, having a mortgage to repay, may be required to use every penny collected in rents for the purpose of mortgage payments, and therefore might not be in a position to claim a profit for several years. The note buyer begins to collect interest payments as soon as the note buying transaction closes, which takes about fifteen to thirty days. The contrast is evident.  


Compounding Interest

At The Note Factory we advocate our investors to become fully educated on the nuts and bolts of their investments.  The deeper their understanding and the more familiar our investors are with these finance fundamentals, the more they feel in in control and comfortable with their investment. Lets discuss a concept that lies at the foundation of note investing, the effects of compound interest.

At the core of financial analysis there is the simple truth that a dollar today is worth more than a dollar tomorrow. The farther off in the distance that "tomorrow" is, the fewer dollars it is worth. The term interest is used to describe how much you will pay for money today and the method in which you will pay the interest back is referred to as compounding.  Compounding describes the mathematical operation of taking the interest and adding it to the initial principal, which will then generate a new principal. The most common type of compounding that you as the investor will see in your investments is annual compounding. Meaning that the interest owed to you on the note that you hold will be calculated on a yearly basis.  So what does this mean for your investments? Understanding the concept of compounding and the time value of money will help you as an investor, be aware of your "dollar earning power." When your dollars are stagnant or sitting in a savings account, the compounding that is happening is only a fraction of what it could be if you were to invest your money in a strategy which fully capitalizes on the high interest rates that you will be collecting on your investments. At The Note Factory we feel that educating prospective investors on the magnitude of their money's interest earning power with notes through sample calculations is an eye opening experience. We will often compare the interest accrued over a 10 year span with a mortgage note investment vs. the interest accrued by a typical savings account. If you would like to discuss the interest earning power of your money, please visit our contact page and fill out the contact form and request a time to meet with us or view our testimonials page to hear about a few of our current investors.

 

Investing in Mortgage Notes Inside Your IRA

All too often we come across investors who are unaware of the interest earning power of their IRA dollars. Many of them are under the impression that they cannot touch the money inside of their IRA. When asked to invest, they often reply with “I would, but all of my money is tied up in my IRA.” This is a very common misunderstanding and a very tragic one for those potential investors who are not in the know. By using a tool called a Self-Directed IRA, you are able to use the money inside of the account to purchase mortgage notes. Your IRA will act as the entity to hold your mortgage note and all of the notes should be in the name of your third party administrator or custodian for the benefit of your IRA. Every month the payments from the payor of the note will be sent to the custodian, who will then by contractual agreement, move the funds into your IRA. If your current IRA is not a Self-Directed IRA, you will need to open a new account that is specifically meant for self-direction. Self- direction just means that you choose what investment vehicles your money is invested in rather than having the fund manager choose. When you invest in mortgage notes in your Self-Directed IRA you are allowing the money earned by the note to build either tax deferred or tax free. This depends on if your Self Directed IRA is a Roth IRA or a Traditional IRA. We highly recommend using the Self-Directed Roth IRA as this is what most of our investors have set up. Please contact The Note Factory if you have any questions or if you would like recommendations on our preference for particular companies to help you set up your Self Directed IRA.

The Time Value of Money: Mortgage Notes

Understanding the time value of money is a concept that you must wrap your head around in order to become a successful investor of mortgage notes. There are two reasons why your dollar will buy less tomorrow than it can buy today. The first is inflation.  Inflation is the culprit of the rise in prices of goods and services. Think of it this way, how much did you pay for a candy bar when you were six years old and how much do you have to pay for that same candy bar today? The second reason why your dollar is worth less tomorrow than it is today is due to the inherent interest earning power of every dollar. If you invest $100 today at a 10% interest rate annually, you would have $110 after one year. If you had to wait a year before you invested your $100 you would have lost the interest earning power of that $100 and lost your $10. If you choose not to invest your $100, you may even actually be losing money in the long run due to inflation. The moral of the story is to be certain you have your money secured in an investment that is making you money rather than having your money become stale and slowly seep out of your bank account due to the high rates of inflation. The concept is one that the “wealthy” have mastered.  Every day that you let your money sit in bank account that is earning a sad 3%, then you are losing the interest earning power of every dollar. It is in your best interest to take control of your money and begin investing today.

Note Investing 101

We are often asked for the most basic explanation of note investing from those that are completely new to the concept. Our response commonly uses the analogy of the investor (you) to the bank. If you think of yourself as being the bank or the lender, and you are lending to an individual then often times this will bring clarity to the mystical concepts that new investors often times have trouble conceptualizing. Effectively, you are receiving payments plus interest on a mortgage that your payee (the person paying you the mortgage) owes to you. Lets break it down even further.

Let's Simplify

Think of a mortgage note as a piece of paper that gives you the right to collect monthly mortgage payments from an individual occupying a piece of real estate.

Become The Bank

When you hold a mortgage note from our network, simply put, you are operating as the bank. What do I mean by this? Traditionally, when a potential home buyer goes to purchase a home, they go to the large banks to obtain a loan. What if home buyers took their loan out from you? You would then be operating as your own private bank.

How Can You Become the Bank?

Contact our Internet Investor Relations Coordinator, Mitchell by “clicking here” and let us know how much you are wanting to invest. We find the property, find the home buyer, set up the mortgage terms, and simply transfer the note into your name. You are now the bank.

Alleviating Complexity of Investing

Lets face it, the last thing you want is to be spammed with different investment opportunities all of which become exponentially more complex as you delve further and further into the options. Many of us have sifted, or are still sifting through, the gimmicks, sales pitches, and bait and switch tactics that the real estate investment community has been polluted with. Many of you out there, including myself have been burned by these "get rich quick" schemes in the search for a solid and profitable investment that will genuinely produce great returns. We have gone to great lengths at the Note Factory to make sure that your investment experience is as straightforward and simple as possible. We are truly dedicated to providing our investors with a painless, clean and clear investment process that will leave you feeling comfortable and secure about your financial future.

 

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