Proper Note Creation is Vital if You Ever Want to Sell

Note Creation Factors:

• Collateral - Collateral is one of the first things that will be looked at by any investor looking to buy a note. A Single Family Residence (SFR) will be considered the most secure property type. Vacant land or Commercial properties will require more strength in the other factors.


• Down Payment - The down payment or equity will help strengthen any note. This is particularly important with vacant land and commercial property types. For a SFR note the down payment should be at least 10% on a longer seasoned note, and 20% on a newly created note.
  
  The down payment on commercial and vacant land should be more like 20% or higher. If enough equity can be shown then the buying investor will not be as worried about the other factors.


• Buyer/Payor Credit - The buyer’s Credit should always be checked. This can be done by 1) having the buyer obtain their own credit report so the inquiry won't show on their credit report, 2) having the buyer complete a standard 1003 credit application and a credit authorization form and presenting it to us for each potential buyer (this method will cost $35.00 for each buyer). We will have our underwriting company check the credit to determine the best possible buyer.
  
  The Credit does not have to be perfect. In fact, we are much more lenient in this industry than the standard loan industry. However it is still a factor and needs to be verified before finalizing the deal. If we have credit below a 650** score then the interest rate or down payment needs to be HIGHER to maintain the quality of the note.
  
  Credit is a critical factor in evaluating any note in today's economic climate.


• Interest Rate - The Interest Rate may vary depending on the other factors. If the credit is 650** or more and the collateral is SFR with 10-20% down, then the interest rate can be set at 8% and our investors will discount the note less. If the score is lower than 650** then the interest rate should be slightly higher (9%-10%).
  
  The higher the rate on the note, the higher the cash amount will be from the investor at purchase. If the property is vacant land or commercial, then the interest rate should be no lower than 10%. If credit is not 650** or if the payor is a business then the interest rate should be put at a higher rate to compensate. Remember, all factors play on one another.


• Amortiztion Term - Note buyers like to see short amortization terms of 10 or 15 years. 30 years will work if the interest rate is higher and the payor's credit score is high. Typically, however, longer amortization will mean a higher discount on the note balance.


• Clauses - The last thing to consider is the Clauses for the note. Most investors want to be sure they are going to be working with one payor the entire time. Therefore a Non-Assumability clause will be needed. It will also be important to add a late payment fee clause and DO NOT put a pre-payment penalty clause in the note.

**NOTE: We are using a 650 FICO as a par national standard. In today's volital market, the FICO standard for buying notes will vary depending on local economic conditions. In Michigan, for example, payor FICO scores must be 700 or higher before we will quote; some investors are not quoting/buying notes in any "Rust Belt" states.

To find out how your note rates, please call us toll free 24/7 at 1-800-349-6119 - Ext. 300. We also recommend downloading a copy of our updated FREE Financial Report, "What's The Value of My Real Estate Note?"... you can download it HERE.

To your success...

Steven W. Hammons
President & CEO
Real Estate Note Buyers Group
a division of National Real Etate Buyers & Associates, Inc. How to Create a Sellable Mortgage Note