Creating High Quality Notes

One of the most important parts of creating a high-quality note has everything to do with the information that the note holder gathers on the borrower. Meaning that when you’re creating a mortgage or a note or carrying back a note or mortgage on a property, you want to make sure that you have a 1003 on that borrower or borrowers, if there is more than one. You want to make sure you have scored credit reports from all three bureaus for every person that is listed on the loan. You want to make sure that their debt to income ratio is in line. We also want to make sure that you have a lender’s title policy. Pay the extra hundred dollars and give them an owner’s title policy. Make sure that the loan is closed through a title company or a law firm, whichever applies to where the property is located.

You want to make sure that you have an appraisal, either a drive by or a full appraisal. Now, people often balk at that idea, but here’s why. If you just base the sales price of a property off of a BPO, or some constant you got from a friend of a friend who’s a realtor friend type thing, that doesn’t really give the true accurate value of that property. Paying an appraiser anywhere from $250 to a drive by to $450 for a full appraisal will increase the value of that property anywhere from 2 to 10%. That 2 to 10% increase in value can also apply to an increase in sales price on that property.

I coach and encourage people to do that prior to putting the house on the market. Now why do I say that? Well one, if you’re going to do a full appraisal, which I highly recommend, you can get the appraiser on the property based on your timeline and their timeline and you’re not at the mercy of a homeowner. The appraiser can go in there and take all the photographs they need. They can do all the measurements they need so they have tremendous accuracy. Especially if you’re remodeling a house and you have added square footage, you absolutely want to do that.

That only benefits you as a seller and it only benefits them as a borrower because you can get the appraisal in a PDF and give them a copy of it at the closing table, which also helps to solidify and substantiate your sales price because when you’re selling via owner financing you don’t want to extend a discount on the value of your property. In other words, if somebody comes up to you and wants you to do sell financing and you are selling your house for $150,000 but now they only want to pay $140,000 and it’s worth $150,000 because you have an appraisal, sell it for $150,000. Don’t sell it for $1400,000.

Create a note and take a discount on the note as well. That means you have taken a double discount on it. It also doesn’t help them as a home buyer. If they want the $140,000 sales price, encourage them to go get institutional financing and pay you the $140,000. Most people would be more than happy to take $140,000 cash on a $150,000 home.

I want to mention here, too, that a lot of time sellers will be able to sell the house for more than market value because they are offering a desperate buyer owner financing and the note holders got to protect himself from that. We have seen that happen on many occasions where the opposite happens. We get note sellers, note holders, who sell the property for less than it’s really worth and we like those deals. We get note holders that sell the property for exactly what it’s worth with an appraisal and then we get note holders that sell it for more than it’s worth. What I tell those people that do it for more than it’s worth is that when they do that, we’re going to base our value off of the lower of the two.

In other words, if they’ve sold a $150,000 house for $160,000, that house is only worth $150,000 with that homeowner putting down $15,000 cash. That ultimately means they are at about a 95% loan to value, which will impact our pricing to the note holder. In other words, our pricing just gets lower. So even though they sold it for more doesn’t mean that they are going to get more. It means that we back off our pricing because the risk factor increases there.

How does it increase? Well very simple. If you sell somebody something for more than it’s worth, and in real estate it happens quite a bit, then that homeowner or that property owner will eventually figure that out. Whether that’s talking to a real estate friend, have it appraised or talking to a neighbor, the minute they figure out that they overpaid for a property and that they were cheated out of their money, they will start creating problems because they were taken advantage of. We know that because we have seen it happen time and time again with those types of deals.

Ultimately what we find ourselves doing when we buy those types of deals is going in there and modifying the loan early on so that in fact that doesn’t happen. Because once again, we are looking at just the cash flow aspect of it. We don’t want to deal with legal issues. We don’t want to be going to court and fighting over the ‘he said, she said’ aspects of the business. I encourage people to not oversell their property. I encourage them to sell it for what its true market value is and not a penny less, but not a penny more. Whatever it is, it is. That way they trade a very clean deal that all of their numbers speak to and cater to.