All Forum Posts by: Czarina Harris

Chad, before I start, when I see someone making a loan at 12% interest, it sounds to me they planned to sell the loan at par or very little discount to someone in the industry... big mistake, because industry folks buy at discounts, no matter what the interest rate (at least I do).

Anyhow, here's a quick guideline for you when selling notes:

1. How do I plan to sell this loan? Premium, Par, or Discount
2. Who do I have in mind to buy? Active/Industry investor or Passive investor
3. Does the price make sense? 

The moment you want to sell any loan at a premium, your chances of selling to someone in the industry significantly decreases. By significantly I mean... slim to none.

Industry folks can get their hands on discounted loans fairly easily, so your other option is to sell to a passive investor or someone unfamiliar with the industry.

You mentioned before that the loan has a pre-payment penalty on it, but it isn't over the life of the loan. If the borrower is savvy, they are going to refinance this loan as soon as they can to get out of such a high interest rate. The moment the pre-payment window is done, the investors chances of loss via refinance increase. I would look into selling a partial at a premium if you have your heart stuck on selling at a premium.

Selling a 5-year partial at a premium is a much safer bet in case the loan refinances. You are building room in the backend of the note to cover your investor's entitlement while still making the money you're looking for up front.

If you don't have a passive investor to sell to, then you're going to have to rethink your strategy here.

Sidenote: If this loan is to a consumer at 12% interest, you might have what the CFPB calls a High-Cost Mortgage on your hands, in which, there's a lot more compliance to deal with. You'll have to do your homework on that to see where it falls before you go soliciting this around.

In my experience, finding a real estate agent who is well-versed in seller financing poses a challenge. I'm not a CPA so I won't delve into any tax implications for your portfolio regarding seller financing.

As far as what terms are typical for my area, I am in Ohio, where you can buy houses cheap. So most seller financing takes place on properties banks no longer finance, think 75k and below. A typical deal here may look like:

Sales Price 45,000
Principal 43,500
Term 360 months
Rate 8%
P&I 319.19

I'm giving you the terms folks out here set. A lot of these properties are REO from NPLs or tax foreclosure deals. The underwriting isn't sophisticated, but most of the sellers are copy-cat deal makers, so most don't know any better.

I tend to finance this way:

Sales Price 50,000
Principal 45,000
Term 120
Rate 5%
P&I 477.29

Here's why:

• I want the note to payout as written with very little chance of early payoff
• Low interest rates look good on paper when you're talking to politicians/Congressional staff on Capitol Hill (which I have done twice now)
• Borrowers like seeing an "end" to their debt. Easier to wrap their minds around 10 years vs 30 years
• The P&I makes it worth my time (and servicing fee)
• And lastly, passive investors will gladly take this deal off my hands for $40k any day of the week

Your situation in AZ is drastically different from my market, so the underwriting will go to suit.

Seller financing in general is on the increase nationwide because of regulations. Banks don't see much profit off a 50k mortgage, anymore, which creates a void. Last I heard, 2017 produced 89,000+ seller financed notes with $7BB+ in UPB.

Hope that helps.

I can tell you now, that someone with 30% down payment is not going to want an 8.5%-9% interest rate on their loan with a balloon in 5 years. I mean, would you?

Creating terms is all about balance. And by balance I mean being realistic & compliant.

It's good that you have some idea of the terms you want, but know that because of CFPB guidelines, your borrower has to show they are capable of making whatever payment/terms you set.

There's lots of factors to consider when financing, so I am only going to touch on one to give you some food for thought.

When I see high rates on seller financing it is usually for 1 of 2 reasons:

1. The seller wants a higher monthly P&I
2. The seller plans to offload the loan to an institutional investor later and doesn't want a huge discount

To #1 I say, reduce the term/amortization of the loan. No reason it can't be a 10, 15 or 20 year loan. That'll be more appealing to someone with 20-30% down because the interest rate is lower on the loan, but your P&I is higher.

Regarding #2, I'm curious why you want to offload this loan since this was a cash flow property from the beginning? Also, if it's a chunk of cash that you need, why not take some time to find a passive investor to sell to? (After all, you said you plan to keep it for 2-3 years anyhow). That'll be the smallest discount you can come across in any market, even better than whatever FNAC will offer.

Just my $0.02. This is a good topic, can't wait to see other's input.

 Totally agree, and after I posted I said to myself "mention the markets!" but my post was too long as is.

But considering brokers have no personal interest in the markets they broker to, a cooler market with less competition is a logical strategy. Which we are still not seeing.

Same reason smart brokers solicit older notes, less competition.

Pricing is up... on the retail side, for sure. But dig a little on the pool side of things (Fannie and HUD sales) and you'll see prices are back around $0.55 for NPL in some cases. (They were as high as $0.75 a couple years ago). That just shows where the "deals" went, which is why making the shift to buy large pools is in one's best interest.

But this is just like any other industry when it comes to supply and demand. We have a lot more "note investors" in the retail market, so why not take advantage and sell notes for more? I totally get it. 

(Note: I put note investors in quotations because some of these folks are newbies buying bad deals because of their ignorance or lack of education about the note business. Not meant to offend anyone (: ).

On the seller finance side of things, I don't know what to make of actual competition, but I don't think it's like it was back in the 80s and 90s. FNAC, who arguably is the #1 buyer of seller finance notes, purchased 1,018 notes last year. However, there were over 18,000 notes created in 2017 and I'm sure FNAC was buying stuff with more seasoning than that.

So while @Jay Hinrichs is getting 10+ solicitations per deal, someone like @Bob E. is getting zero. That doesn't paint a competitive market in my opinion.

Also, I agree that most note training out in the market focuses on "how to buy/broker seller finance notes" which by this time and maturity in the industry, should be free information, for no other reason than a lot of that training is outdated. I think the reason brokering itself is still relevant is because not everyone entering the business has capital of their own and they need a low-cost solution in how to make some money.

No harm in that.

But spending $1,500 on a direct mail campaign to get a 1% response rate and (maybe if I'm lucky) closing 1-2 deals is not my idea of fun.

The solution is not to eliminate training people how to broker, but to update it so people can be successful at it.

I recently got an email like this from someone. I turned him down, not because I refuse to mentor folks, but because I'm already engaged in doing so and I don't have time allotted outside of that to properly take on someone else.

So making clear the time that you want to devote to learning, type of communication expected would help someone formulate how to fit it into their schedule.

Be sure that when you are selling these notes to your investors that you don't dip your toe into the securities side of the pool. I'm not a securities expert, but you need to make sure you're on the straight and narrow with that.

That being said, you're looking for more passive folks. Active note investors can get better yields for themselves and even if they couldn't, what incentive do they have to share ownership? (Not saying there isn't one, but you should keep this in mind).

For those with low or no cash for note investments, remember that you also have 2 options to still get into this space.

1. Brokering: getting your hand on some inventory and brokering to a larger company for some fee income. Just remember that the people you sell to have "friends" as well, and you don't want to show them stuff they can get on their own. This is why folks look to source seller finance notes and broker them, low likelihood their buyers are looking there. But it is possible to find pools on your own from credible companies as well and broker them.

2. OPM: learning to use "other people's money" for investments is critical. No matter how much money you have, it will eventually run out or be tied up at the "wrong" moment when a really sweet deal comes across you desk. In those cases, have access to a few folks who are willing to work with you on deals is fantastic. What's even better is that it doesn't cost a lot financially to acquire some of these people. Just your time and professionalism.

Dan, the reason every answer in this industry is "it depends" is because of circumstances like this.

In Washington state, sales are typically done as Deed of Trust and if foreclosure occurs, it is through a non-judicial or statutory process. This is significantly shorter than a judicial process.

The main reason folks like to do seller finance on Land contracts is because of the time to remedy a default. Terminations operate much like an eviction, therefore they are quick. However, land contracts are not viewed as valuable as a mortgage or DOT. So there's a balance to keep when deciding to go with one.

Since this is a land-only deal with no home on it, your note will not be worth as much on the secondary market as one secured by SFR. So you have to consider whether you can live with holding this paper in your own portfolio for the long term if you don't like the prices the secondary market throws your way.

That being said, 25% down is a great place to start and your short amortization of 10 years as well. You may not want to get into the realm of Balloons with Dodd Frank looming around now, especially with it amortized at 120 months (balloons are amortized over 30 years usually). 

The interest rate is a little low for seller finance and if you plan to sell the note, remember that the lower your rate is, the higher the discount will be from your buyer.

I am a part of the SFC and was lobbying with Jeff Watson and a couple other investors back in September. I was also on a panel for the Coalition at the Note Expo 2016, sharing my experiences and I setup a skit to show folks what really goes on on Capitol Hill.

Dodd Frank isn't an issue that we can sit passively on. They lumped seller financing in with their brushing sweep of regulations because of one person's opinion about seller financing.

One person.

Don't be fooled into thinking that "other people" are going to fix this issue for our industry.
The banks are looking out for themselves.
Servicers are looking out for themselves.

We need to come together and make our voice heard on this issue.

Join the Coalition.