Getting started in selling notes...

[Darin Wells]

I'm a full time rehabber flipper and became very interested selling notes. I have a few properties that I own free and clear that I would like to get some cash out. But most of all I would like to sell some of my rehabbed properties to homebuyers that may not qualify through traditional banks. I just need direction:

How to structure the note to best sell it to a private investor?
How do I find a investor?
Should I do a 1st and a 2nd?
What factors do investors most look for to get top dollar?

Any help to get started would be appreciated...I only deal in Southern California.

Thanks,
Darin W.

[Bill Gulley]

Darin, there really isn't a single factor that makes a note more valuable, it's a matter of several factors in concert with each other. The loan to value probably tops the list as a 20K note on a 120K property would be a safe bet. But also the term of the note will determine the possible yield, if that 20K note is due in 12 months, it will sell for more than if it were due in 5 or 10 years. The credit of the borrower influences the price as it reflects to credit risk, but this can be off set by the factors mentioned above. If a borrower is at 90% LTV and the note is due in 3 years with a credit score of 825, that will first appear to be a good note.

The best way to structure a note is to the needs of the investor you are generally selling to. Finding your investor (note buyer) first and then doing the note will solve many headaches, they will tell you what they would like to see.

Finding an investor can be tough since there are so many note-dogs out there, many claim to be the investor but they just form a chain to the real buyer. Do your due diligence on the buyer before you spend time with them and shipping documents out.

I always suggest that a note servicer be involved in your note. They adminster the note, collect payments and see to it that taxes and insurance are current. Note servicers are usually buyers and they will probably make a good or better offer on notes that they have been involved with, but don't assume they will pay the highest price.

While institutional buyers are easy to find, individual note buyers can be harder, but it is worth looking for these folks. Generally, they will be local, they will know the area and the neighborhood where the property is located. OTH, many of these investors are really looking for deals that can be easily foreclosed upon to acquire a cheap property.....it's a game and many really don't understand that if they do not sell the property, they may be liable for equity held by the borrower, depending on state laws.

You can do a first and second. I assume you are selling one and keeping the other as your reasoning to do so. Seconds will be discounted more than the first as the risk is higher that additional money will be required to protect the investment. Keeping the second will make the first a little better to spin off as the investor knows that in the event of default, you will step in to protect your second. To command a better price along this line, the investor will need to know you won't walk on the second and that may take a few deals to gain that rapport.

As a note buyer, I will look to the ability of the borrower to pay as agreed and when I get paid off. Not getting the return of my money is foremost, getting a reurn on my money is secondary.

I would always pay a little more for a note that was actually processed. Obtaining a verification of employment, deposit, credit report as well as other documents will establish a loan file. The reason most people use seller financing is that they can't qualify for conventional money, but showing what the problem is can be an important factor and get you a much higher price on your note. Say someone changed jobs last year and while they are making more money than before, 12 months employment won't get them into the secondary mortgage market (notwithstanding a few exceptions). So, if the investor sees that it's an employment seasoning problem and can see that say the borrower has completed specialized training for the new job, it will likely be viewed as a much better note than having no ducumentation at all.
Having an independent appraisal at the time of sale will also be worth the costs.

I would say that most individual note buyers are not too sophisticated in loan underwriting, as they are usually looking for a target yield. Institutional buyers will be looking at actual loan underwriting standards that are acceptable to them. Find out what those standards are and you can then put a better deal together.

Good luck!