All Forum Posts by: Dan Deppen

 Buying for $40K and selling for $80K with no improvements doesn't make any sense. As Jay said, someone is getting screwed. Most likely, it's a home with serious problems and an unsophisticated borrower who is probably a first-time homeowner who doesn't know what they are in for. Any attorney general is going to frown upon this seriously.

Contracts for deed are not what they used to be. The CFPB made it very clear recently that all of the same consumer protections apply to them: CFPB Takes Action to Stop Contract-for-Deed Investors from Setting Borrowers Up to Fail There are very few if any places these days where you're just going to easily toss a borrower out with a land contract. Even if you can, why do you want to create a note that has such a high risk of default?

That system is basically: 1/ take advantage of PMLs who don't understand the market, 2/ Take that money and use it for a predatory lending scheme. All the various consumer laws exist specifically to stop bad actors from doing stuff like this.

1. There are a number of loan servicers who cater to individual and small investors. FCI, Provident, Madison Management, Allied are just a few. There are larger loan servicers who cater to institutional clients you won't be able (or want) to use.

2. Yes, if you are doing more than 3 per year. What state(s) are you working in?

3. No, you don't need an appraisal, it's not really a compliance issue. But it's in your interests to make sure the property value makes sense and the borrower has skin in the game. For example, if someone takes a small down payment and inflates the value and the borrower figures out later they are upside down the loan could default. Being able to document the collateral value increases the value of your loan.

4. There are some things that will always disqualify a borrower, like bankruptcy, foreclosures, being 60 days late on mortgage payments, etc. Most credit issues can be addressed in some way. If they are self employed and their income on their tax returns is understated because of deductions you can use data from bank statements. This is a deep topic.... But if the borrower is doing everything in cash and not running it through a bank and paying taxes on it, then there isn't much you can do to create a compliant loan.

This is a big topic with many sub-components, so there is no way I can address it all in one post. But I'll try to break it down a little.

Whether you are doing 1 consumer loan or 100 there are certain rules you still need to follow. Depending on the state there may be max interest rates you can have on the loan (people violate this all the time..) You need to send Loan Estimates and Closing Disclosures on the appropriate timelines so the borrower has the opportunity to review everything before closing. You need to avoid certain high risk features, which include balloon payments within 5 years, excessive fees, validate that the borrower has the ability to repay the loan, make sure they are likely to repay the loan based on their credit history, excessive late fees, long loan terms, etc, etc. 

If you are originating more than 3 per year, then an RMLO should be involved.

Debt collection and following other consumer laws after the loan is created are other topics. As Chris mentioned, use a licensed servicer and let them handle it. 

The situation you are ultimately trying to avoid is the one where: the borrower defaults, you start foreclosure, the borrower fights the foreclosure and says they didn't understand the loan / could never afford to pay it / you didn't follow the consumer rules, etc, then the judge asks if you followed those rules and you can't show that.... 

As you mentioned, many people have been originating loans for decades and not following any of the rules, just letting it rip like its still 1980 or something... There's another set of people who go to pains to cross every T and dot every I. There are a lot of investors who land somewhere in the middle. Then some people are frozen with fear of regulation and who don't do any deals or stick to investor loans.

It's not actually difficult or scary to get it right. You just hire the right vendors and attorneys to make sure you are compliant with the federal laws, not violating any state specific rules, and have a borrower who is going to repay the loan, and are servicing the loan properly. A lot of people cut corners out of cheapness, but most of the costs can be passed on to the borrower, and if you do it right, your new loan will be more valuable should you decide to sell it.

My suggestion is to build a spreadsheet and include the net cash flow to you for every month of the deal, then use the IRR function to figure out your return.

Everyone else has laid out the factors that will influence the price of the loan. My advice is to gather all of that information and present it to the potential buyers up front. Don't make them play 20 questions or hunt through the docs to figure it out for themselves. The easier you make it for your counterparty, the more time and effort they'll put in to making an offer on your note.

EDIT: Just realized I read that wrong and thought the poster was the seller. 5% rate and 5% down is a sweet deal, take that if you can get it!

First, if you resell the note, most investors will want a 10%+ return. So if you create it with a 5% rate you would need to take a large haircut to sell it. Most seller finance notes have interest rates in the 9-10%+ range.

Also, 5% down is very little skin in the game for the borrower. I recommend at least 10%, and obviously, something closer to 20% is a lot better.

Is the borrower going to live in the home, or is this an investment property? If it will be owner-occupied, there are a number of compliance issues to ensure you address (Dodd-Frank, etc). 

An attorney or title company can draft the legal docs. If you DM me, I can send suggestions.

Yes, you'll want to record the docs after you execute the transaction.

Also, don't self-service the loan. You'll want to hire a licensed loan servicer to take care of that for you (Provident, Madison, FCI, etc). You can write into the agreement that the borrower pays the servicing fee.

If you have ~$130K equity in each and $260K total, can you just sell them and move the cash into something else?

I've never done one of these, but I would reach out to someone like Jeff Watson for assistance getting solid paperwork in place.

One that I've seen a few times is people thinking they can sell a note based on the sum of all the remaining payments instead of the principal balance. 

 Whether you are getting a continuous stream of income depends on the deal. I believe Chris mentioned this was a non-performer when he went into it. Buying cash flowing notes is certainly a lot easier :)