What Are Promissory Note Buyers Looking For In A Note?

Question

Hey, Everyone!

I found a mobile home lot in a good neighborhood that has everything ready for another mobile home to be moved on and hooked up. I'm going to purchase it cash ($16,000) and originate a loan at $25,000 at 8% for $209.11 per month (which is the cost of renting a lot in the area).

My goal is to hold this note, but I also want to keep my options open by making sure it's a quality note that I CAN sell if I deem it necessary. I'm planning to use this education for all of my future seller finance deals as well.

If you are a note buyer and know what you like, please post it below. If you know of any educational materials I can review or paid programs that you've found valuable, please let me know!

Two of my guiding questions are:

• What do you look for in a quality note?
• What percent of face value do you normally buy your note (if that's even the measure that you look for)

Thanks in advance!

Jay Hinrichs · Answer

@Chris Seveney  Chris is an active note buyer  maybe he can chime in as well.

Jay Hinrichs · Answer

I think what he is trying to explain is a seller carry back  not originating a new loan as a lender to a third party..  in most jurisdictions bare land is exempt from the mortgage origination rules like a 1 to 4 unit is.. As this would be owner occ unless the buyer is an investor going to rent the MH out.

I grew up in this business my dad probably originated no less than 5k of these notes over a 35 year period.. Its the land game.. its nothing new.. or unique.. and it all comes down to  PV yield for a note investor.. all the other things are great but bare land notes if everything basically checks out trade for 20 to 30% apr return for the note investor.. you start there and work backwards.

Give you an example.. when I was starting out all I sold was seller carry back land.. and then boom interest rates hit 15 to 20% remember those days.. probably not most of BP members were just being born LOL..

So as a seller we played with our PV and to combat the uber high interest rates ..  Datsun  ( what Nissan used to be called) was the first car manufacturer to come out with 0% interest .. you see that now and again even today when dealers/manufacturers need to move inventory.

So I thought HM  what would the PV of a zero % seller carry back look like to yield an investor a return.. turned out a 30 month no interest note has the same PV value as a 7 year 15% note which is what our go to notes were in those days we then sold those notes at a discount to yeild the note investor 20 to 30% return... so I rolled it out and sold a lot of land that way.

And when i take back houses from failed landlords I will often sell my REO this way with zero % short term notes.. my PV is sky high the notes are rock solid.. Buyers NEVER default since they are gaining equity so rapidly and these lower end rentals when they are paid for is the place you want to be long term.. its a win win.

So start with the PV  investors will look at the values as was stated above.. you may sell for a premium to a buyer but a note buyer is still going to look at what the true cash value of the asset is and does not want to be upside down day one..

Adam Schneider · Answer

@Scott Johnson. As Stephen Covey says, Start with the End in Mind. I recommend you contact FNAC (First National Acceptance Company) and ask what they would buy this note for. They usually (at least used to) look for 10-10-10 on properties with a house on it as the collateral. 10-10-10 = max loan of 10 years, minimum interest of 10%, minimum borrower deposit of 10%. I'm not sure what their box looks like for just land. Your deal looks way to tight to me at first glance.

Rob Gillespie · Answer

@Scott Johnson looking at what you have going, my honest opinion is that it is just too tight to be a deal.

You are selling a note with a 19 months of seasoning and it is still almost 90%LTV. The 10% is ok, but if there was an issue with payment, the note holder would be upside down with attorney and legal fees.

I would try to get your LTV below 65%

Make sure your borrower has some skin in the game.

Make sure it is non owner occupied.

Make sure you are not just lending on raw land.

Seasoning is less important if the deal is solid.

I think the risk on this deal far outweighs the amount of potential profit for you or a note buyer.

That is just my 2 cents. it could work out great. However there is not enough profit to even cover legal fees if there is an issue.

Scott Johnson · Answer

@Rob Gillespie, here are my thoughts based on your response:

• Property Value: $16,000
• Sale Price: $19,000
• Down Payment: $3,000
• PV: $16,000
• Rate: 10.0%
• Duration: 120 Periods

Season for 19 periods (PV: $14,399) and put note up for sale.

What are your thoughts on that? There are still 19 periods where the interest is higher than the principle if that matters. Like I said, still a N00b to notes :P

Patricia Taveras · Answer

@Scott Johnson

Hey Scott and everyone involved in this discussion.  I'm intrigued by the post and have a question of my own. Who sevices the note when you sell with seller financing - who tracks the payments and interest, etc.?

Scott Johnson · Answer

That makes TOOOOOOOTAL sense! Thanks so much for all of that information! It's golden! For whatever reason, I didn't even think about LTV and its implications. So a secure note would look more like this:

• Lot Value: $25,000
• PV: $16,250 (65% LTV)
• Rate: 8%
• All documents correct
• High borrower worthiness
• Seasoning (1 to 2 years maybe?)

I'm going to have to learn about RESPA and loan originator requirements here in North Carolina. I don't even know what those are yet!

How long do note buyers like loans to season prior to their buying them?

I'm also looking at a "Rent to own" play with this one, which may work out a bit better than seller financing. NORMALLY I buy properties at below market value, but in this case you are correct. I'm purchasing it AT market value.

Rob Gillespie · Answer

@Scott Johnson

If I understand you correctly, you are buying a Mobile home LOT? Do you mean in a park? I am a little confused on that. I assume you are buying a piece of land that its outside of a park and the local municipality is ok with you putting a Mobile home on it.

There is so much to go over on a deal like this, but here is just a basic answer to your question.

1. Security Security Security.  What is securing the note? What is the loan to value. Note buyers want to be sure the money is secured. On a deal like you are discussing, the challenge I would have with buying that note is you are over 100% LTV. if you purchased the property for 16k on the open market, then that is most likely the value. if your note is for 25k, that is great that I can earn 8% on my money, but if I need to take it back, it is most likely gonna sell for 16k again. Which leaves me to my next concern....

2. Is this a consumer loan or a business loan? There is a big difference in paperwork when lending to an owner occupant vs. an investor.  The note with an investor could be a Cognovit note and easier to obtain a judgment in the event of default. If it is a consumer transaction, you will need to have all necessary RESPA docs and in most states a Mortgage originators license to handle the transaction.

3.Assumning that LTV is good and Docs are correct The story on the borrower is good. Tell the note buyer all about the borrower. Have they done deals before? do they have money invested into this deal? do they have any pending legal issues that could result in a lien on the property? Are they making payments on time? ETC... you get the idea

4. Payment history. Can you PROVE the payment history? is there seasoning on the note? (this means has it been active for a while) How are the payments being collected? Will there be a break or change in payment method to transfer the note or is it able to stay with the same servicing agent?

5. What is the term? Is there a balloon or is it a fully amortized mortgage? Obviously on this one it is a shorter term, but I am seeking in general. I have the opportunity to buy a 30 year note right now, but have no desire to be collecting on this in my 70s! LOL

Hope that helps. I would not call myself a note buyer or broker, but Have done quite a few note deals and been on all ends of the table.

Good luck!!!

Scott Johnson · Answer

"...sell for yields in the 20 to 30% apr range." is a bit foreign to me. So I'm putting the 30% into the interest spot on my financial calculator along with the other same origination terms and having it calculate the PV?

To clarify, this land has all hookups required for a mobile home, including septic.

Thanks for that quick response! Much appreciated!

What Are Promissory Note Buyers Looking For In A Note?

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