EP NC 15 – Correctly Creating Owner Financed Notes That Sell with Andi Lemons

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NC 15 | Owner Financed Notes

NC 15 | Owner Financed Notes

Andrea Lemons with First National Acceptance Company, one of the largest buyers of owner-financed notes in the country, discusses the best way to create and structure your owner financed notes to achieve the best possible sale price. Andrea shares that they purchase almost every property type, but their bread and butter are single-family homes which have the lowest risk for two reasons, that being that they maintain value and in periods of distress and they’re the very last asset to be let go. On the other side of it, she shares that commercial properties and land are the two riskiest ones because they’re properties that aren’t necessarily disposable but in financial distress, they’re among the first things that people let go. As part of FNAC, she’s very passionate about closing deals, helping people, and putting people in good situations. She shares that what puts them above the rest and what has kept them doing what they do for 40 years has been their passion for serving.

Listen to the podcast here:

Correctly Creating Owner Financed Notes That Sell with Andi Lemons

I’m excited to have our guest. She always does an amazing job. I don’t think she gets as much credit as she should at where she’s at. I know a lot of people love owner-financing and are creating owner-financed paper, but a lot of times they shoot themselves in the foot by not structuring it properly, not creating it adequately, so that if they need to sell it later on after the tide of the cash flow and they need to bring in some capital, it’s not structured properly. We’re excited to have our good friend Andrea Lemons joining us from First National Acceptance Corporation, which is one of the largest buyers of owner-financed notes in the country.

I am very excited to be doing Note CAMP again, honored to be working with Scott again. The audience is in great hands. Scott has built up a wonderful platform educating people, so I’m very happy to be here. I’m excited to talk about structuring loans, seller-finance notes obviously, pretty much what I do and it’s a huge passion of mine. We’ll talk a little bit about who First National is and then we’ll get into the deals that we look at, the pricing that we’ll do for them, and then how to structure the loan and how to sell with broker alone.

I’m with First National Acceptance Company. I am one of the managers in our area. I run the retail side where we work directly with note sellers. We also have a broker division. They’re great staff. If you ever do broker notes, you’ll work with one of them and they’re awesome. We are a subsidiary of First National Bank of America, which is the national bank, the mortgage company. We are family-owned and our headquarter is located in East Lansing, Michigan. We do have an office in Austin, Texas. We also have a couple of branches around Michigan, but we are mostly located in East Lansing. That’s where I’m at. We have been purchasing seller-financed loans for over 40 years. 1974 is when we started. We are definitely well aged and well stabilized in the industry. What we purchase is first position performing loans. We don’t do any non-performing because we’re a national bank, but there are a lot of good non-performing investors out there. We’re not one of them. The most that we look at, we are pretty adamant that they need to be secured by real estate. We like real estate here. Every now and again, we’ll do one of the secure loan local home only, but general rule is real estate only. We buy in all 50 states. Last year, we bought over 1,300 notes and with balances over $93 million, so it was a good year for us. We’ve been experiencing a lot of growth over the last five years or so. To put that in perspective, in 2013, we bought 612 loans and last year we did over 1,300.

What we would like to buy, we prefer to get C loans with unpaid balances of $20,000 or more. We will go under $20,000 but we will not go any further under $10,000. Between $10,000 and $20,000, there is a mandatory 40% discount no matter the quality of the deal because it’s hard to get profitability out of such small loans. If you have to put any extra money to servicing it, the profitability shrinks away. We concentrate mostly on $20,000 or above. We do look at all credit types. Last year average credit score was 664, but our floor is 525. With everything that I say as I go through this, it’s important to understand that we have rules. We think they’re more like guidelines. We always do it this way, except for when we don’t, but 525 is nine and a half times out of ten are forwarded.

You need to have at least one month seasoning for us to buy the note. We like to see at least one payment made, even if it’s while we’re processing the transaction. Low-seasoned loans will only work if there is a good down payment, so they establish equity right away and they show dedication to the property and to the loan by making that big down payment, we can do lower seasoning. For best pricing, you want your loan to be seasoned for 12 to 24 months. If you did zero down or very small down payment, it’s better to hold out. You can collect payments for a year or two before you go to sell it. On reperformers, I said we don’t buy non-performing, which is true, but we do buy re-performing loans. They need to be reperforming for a minimum of six months, preferably a year or more, and you definitely want to supply verifiable pay history before that time because we want to make sure that they are back on track and can make their payments.

As far as our discount goes, because as we know there’s always a discount, last year we paid $0.86 on the dollar, which was a pretty aggressive year for us. Usually, it’s more $0.83 or $0.84 on the dollar. We definitely did a lot with our pricing last year to try and make ourselves very competitive and aggressive, give people the most money for their assets and make good deals, so our discount shrank and it’s worked well for us. We will go as high as $0.95 on the dollar. Even though 14% isn’t bad, if you have a stellar loan, you don’t have to assume 14% is going to come off automatically. We will go five.

Remember the guidelines on how we buy loans. We have a few different purchase programs. The most common one is the full bio where we purchase the entire remaining unpaid balance, so we price them out two months in advance. If I were pricing alone, I would price it through June, seller would get managing payments, we will close before then, but they’re still going to collect me managing payments. We will start collecting in July. Once we start collecting, the seller’s completely out of it for the duration of the loan, so we have the whole thing. Another way to do the full bio is if the loan has a balloon and if they have good credit, so 620 or above to where we think that they will be able to meet that balloon. We will pay more for those loans that are a little more valuable because they’re going to pay off sooner, so the longer the loan goes, the higher the risk. We’ll pay more for balloon notes with good credit.

NC 15 | Owner Financed Notes

Owner Financed Notes: When you’re dealing with somebody’s home, if they enter a period of financial distress, that is the very last thing they’re going to let go of.

We can also buy pieces of the loan. It’s called a partial. To put this into perspective, if you own a loan or a note, you have an entire pie and instead of selling the pie for $8 for the whole thing, we will buy a slice for $4, so we will buy a slice and you have the rest of it. You could sell more slices or keep it and collect the rest of the payments if you want to, sell it to another investor or whatever’s the best deal for you, but that’s how partials work where we just buy a portion of your contract. An example of that would we if you had $100,000 note, 40% of that would equal $40,000 and we would pay probably around $36,000. What I like about partials is that generally, unless it’s a 0% loan or 1% or 2% loan, sellers don’t take discounts on the principal. We share interests, but we pay 100% of the principal reduction over the time that we’re collecting payments and maybe even a little bit more. We cut the interest with you. If you do four partials, you’re going to make more than doing two partials to sell your whole note. You’re going to make more money than doing a full buyout, so I like this program.

We can also buy into a balloon payment, to give you a bigger chunk of money upfront. How that works is when the balloon is paid, we would take whatever we’re still owed and then the seller would get the remainder. Another way to do a partial is to buy a balloon partial and this is just everything up to the balloon. We would pay the seller for that portion, whatever that is now and then when the balloon is due, they get the balloon. That’s a nice way to do it as well and it’s usually profitable for a seller. We pretty much look at all property types, but there are always different things to consider with each of them. I’m going to dig into that a little bit so that you’re aware that if you’re selling a home, we’re going to look at it differently than if you’re selling commercial property.

We purchase almost every property type but the pricing does vary. Single-family homes are our bread and butter here. We love them. Reason being, they maintain value, much more than a mobile home does. A mobile home will begin to depreciate from the moment that they’re put together, whereas single-family homes, their value can be maintained and added onto over lots and lots of time. The other thing about single family homes that is true for mobile homes as well is that when you’re dealing with somebody’s home, if they enter a period of financial distress, that is the very last thing they’re going to let go of, their home. They’re going to let go of a business or a rental property or vacant land before they’re going to let go of their primary residence, so single-family homes are the lowest risk for those two reasons. With that, we do definitely take a lot of stocking, whether it’s owner-occupied or if it’s rented for the reasons I just stated.

Mobile homes are the same thing, but it has a little bit more that we have to consider. The status of the mobile home title is very important to us because we want to make sure the titles are perfected or re‑titled appropriately, so we can service and release those loans appropriately when it’s that time. A huge thing is if it has land. We like real estate here, so if it’s mobile home only, sometimes we’ll do them, but it’s not very often. Most of the time we don’t do them because we won’t have land to take back and resell rather than just having a piece of personal property. Location is huge. It definitely makes a big difference if the mobile home is in a park or if it’s in a rural area or if it is an area that mobile homes are very popular or it’s an area that mobile homes aren’t very popular. All those situations tell us something different and they all have their own risks. That’s important to us as well as, where it’s at.

We do unique property types. We have done loans on tiny homes and whatnot and then we’ll get into that aspect a little bit more, but some other property types that we do are rental properties and multi-units. Our biggest concern with that is the cashflow. Is the purchaser collecting enough rent to not only cover their payment but be profitable? Are they able to make those loan payments if they have occupancies or vacancies in their units? Then occupied status is very important to us. If you have a vacant rental property, that’s a lot more risk than a rental property that has had the same tenants for ten years, so we like to dig into that. Condos and second homes are similar in the occupancy thing. If you have a second home that you visit twice a year or you really are attached to it as second home that you visit twice a month, how the property is being used and what the plans for those are also important. Is your condo somewhere that you plan to live for the next five years before you buy your forever home or is it your forever home? Those are some things we think about with those.

Commercial properties and land are the two riskiest ones. We definitely dig into those quite a bit. For all of them, remaining term length is important to us. If you have a long M with 30-year M that’s a lot more risk than a five-year M, and especially when you’re talking commercial, you’re talking of property that isn’t necessarily disposable, but in financial distress, that’s going to be among the first things that you let go. Term length is important but we generally only do partials unless the remaining term is seven years or less for commercial. Occupancy is obviously important.

Is it personally guaranteed? We prefer to see commercial loans personally guaranteed. We want a person on the hook for it. Then how the property is used, we’re going to look at an auto shop a lot different than we’re going to look at a hair salon. There are some businesses that are inherently rough, even if you’re doing good. Think about the restaurant business, people got to eat, so you think that’s a great business to have in a property, but it’s tricky because even if people love your place and business is going well, that can change in a minute or people love your place but the purchaser or the person that you rent it to isn’t that great a businessperson, they can still go down. We see it all the time. Property use is huge and the risks are varied based on how it’s used.

Land, raw versus improved is a huge distinction to make. Improved land is obviously going to be a lot more valuable. When I say improved, I don’t necessarily mean structures. I mean utilities. Does it have access to water, sewer, electricity? Those are huge. Those are a lot easier to resell than raw land which is just starting. We’ll do raw land. We prefer improved land if we’re going to do a land deal. Property use of land is very important to know, especially if the plan is to eventually one day build a house, there’s not a whole lot of timeline or idea or logistics behind that. We definitely want to make sure that we’re not buying loans where people are buying the dream. We want to buy loans for people who are eyeing a dream that can be fulfilled. Location, this goes for all property types but especially land.

All property types, we take the resellability of the property into consideration. Even if you’re a purchaser who is paying wonderfully, you never know what’s going to happen in a person’s life and if they’re going to enter a period of financial distress. It is important for us to make sure that our collateral is something that we can resell quickly and get a good price on and hopefully not lose any money on if it does get to that point. If it’s in a limited market, that’s a risk. If it’s in a saturated market, that’s a risk. Also, trendy properties like a tiny home. Two years ago, tiny homes were all the rage. This year, they’re still popular but not like they were two years ago, and in five years they could be obsolete. We definitely take the resellability factor very heavily when look at loans. Think about these things when you’re putting together your loan. Think about what kind of property it is and what the risks are that go with that and how to structure your loan to accommodate for that or the kind of buyers that you want to get into that place that can accommodate for those risks or maybe you want to do some work to it before you sell it, those kinds of things.

NC 15 | Owner Financed Notes

Owner Financed Notes: We want to buy loans for people who are eyeing a dream that can be fulfilled.

I’m going to talk about some examples of some loans that we have purchased and where they came in on the price points. Then we’ll look at a bad one that is a compilation of things that we hear all the time that we won’t touch. We’ll start with the good loans. Two examples of good loans that we buy $0.95 on the dollar, only 5% discount. First loan was a single-family home in Georgia. It had a nice balance of $136,000 remaining. This loan started with no credit, nothing. Not even their library card, but they had 17% equity, which is a pretty good amount of equity. The thing that got us this loan why we were able to payout so much is they had a ton of seasoning. They’ve been there for forever, 150 months. Generally if you’ve been there that long, you will stay till the end, especially if you only have another 150 or 120 months left. If you are around halfway through your loan, the risk factor for default does decrease quite a bit.

Our second example is a single-family home in Texas. The balance on this one was over a $141,000. This loan had two months of seasoning, so they only made two payments and had a 358‑month remaining term. That’s huge. That is really long and not a lot of seasoning. However, we were able to do this loan at such aggressive pricing because they put a huge down payment. They have 41% equity right out of the gate. This is what we call a buyer having skin in the game. We want the buyer to be invested, especially if we’re going to do it at the beginning of a loan. Generally if you make that large of a down payment, you’re not going to scram. You’re going to stay. You’re going to protect the investment that you made as a buyer. That helped us with the low seasoning. The other thing was that they had wonderful credit; it was over 700. It was very good credit. Those two things helped us to be able to get to that small discount.

This is an ugly note but we bought it at 19% discount, so we definitely factored for the risks. $0.81 is a bit under average, but it isn’t too much of a haircut. This one was a single-family home in Michigan. Balance was over $169,000. This one had a touch of negative equity, negative 0.3% equity, so basically none but they have 43 months of seasoning. They’re in there for a good amount of time, but they have 315 remaining months. You see how we go through these things, we’re weighing back and forth. We like that they’ve been there for a long time, we don’t love their return, we don’t love the low equity. This person had low credit score and that was also a little concerning until we looked at the credit when we realized that the number did not represent the person fairly. I don’t remember what the numbers were, but it was more like 600 credit from the report. This was a case where having proof of $30,000 down payment and a verifiable proof of over a year of pay history saved the day. We were able to get the loan done because we had a few strong things that offset the negatives. Even though there is some hair on a deal, it doesn’t mean we won’t buy it. We have to have positives to help us overcome and that down payment and verifiable pay history definitely helped us overcome. We were able to speak with the purchaser and that helped settle a lot of concerns. We had a very happy underwriter that day. It was a good meeting.

This is the bad one. This is a fake example, but these are our top red flags that we see. Even if there’s one that’s generally a no, but if there are multiple of these red flags that show up in a deal, it’s usually a no. We’ll call it a single-family home in Badville. Let’s say the investor buys a house for $9,000, does minimal improvements, minimal repairs and leaves substantial repairs for the homeowner to deal with. One month later, the investor sells the house for $25,000 more than the market value, so not just $25,000 more than what they put into it. $25,000 more than what it’s worth. The investor structured the note with 3% rate and a 30-year term with no balloon. That’s not so great. That on its own doesn’t necessarily mean no, but it does usually mean that the discount is going to be a little bit on the heavy side, maybe not 30%, but that usually will be a heavier discount on its own. The investor sells the house to the first person who is looking for a place and he doesn’t do due diligence. He doesn’t do a credit check. He doesn’t realize that the purchaser got kicked out of his last place for not paying or maybe he knows and doesn’t care because he thinks, “I’ll just get the property back and resell it again. There’s no risk in that.” There is risk in that.

You don’t want to be in the habit of foreclosing. The purchaser has no money, so his down payment is only $150. With all of this, the investor comes to us after collecting three payments and wants $0.90 on the dollar. Not going to happen. This is an exaggeration, but some very common red flags that we see. If you are brokering the loan and you see a situation like this, it’s probably not a great loan to invest in or try to get invested in. If you are a seller, try to stay away from this. If you’re able to buy a property at auction or something and get a good deal on it, that’s great for you, but make sure it’s in good condition before you sell it. Put the time and money into it and do your due diligence, make a good deal out of that. Don’t oversell it.

We have a big note. This one we bought at a 10% discount, single-family home in Florida. If you notice the trend, single-families. The balance was over $624,000, so it was a pretty sizable loan. They have excellent credit, 11.5% equity, which is a good amount of equity. It’s not stellar, which is probably why the discount was at 10% and not lower. We like to see 25% or more for optimal pricing, but 11.5% is pretty good. They have fifteen months of seasoning and a balloon in 45 months. The home was beautiful. This was nice because they’ve been there for over a year and we didn’t have a long way to go. We only had a little less than four years to go before we could expect to be paid off, and with that credit, we could expect to be paid off, so we were able to purchase this loan for a 10% discount.

Structuring loans, I’m going give you a rule of thumb. Keep in mind that the numbers that are represented here or stated here are not the end all, be all for structuring a loan. We call it the 10/10/10 rule, but what that means is get the biggest down payment possible. If you can get 10%, that’s amazing, go for it. If you can get even more, that’s great. Establish that equity as soon as possible, make sure that our purchasers are invested in the property, but if you can’t get 10%, not all is lost. If you can get 8% or 7%, it’s still a pretty good down payment.

You want to get the best interest rate possible. If you can get a 10% rate and you’re serious, it’s not an illegal interest rate for your state, then go for it. If you can’t get 10%, 9% is still a good rate, 8% is still a good rate, 7.5% is still great. It’s getting the best one you can get and I would definitely try to figure out what usury laws are. For individual note sellers, you don’t have to worry about usury, but if you want to sell it to an institutional investor like FNAC, that is something that we have to worry about as being regulated. Don’t go for 15% and think that’s going to be, “Everybody’s going to want to buy this.” We wouldn’t be able to or we would have to seriously omit that.

The best rate possible and the shortest term possible; if you can get five or ten years, that is good. We like those short terms. We like that quicker return for our money and not having a huge long loan. 30 years is a long time. Anything could happen in 30 years. You can have the best buyer in the world, but you don’t know what’s going to happen in a person’s life. Try to get the shortest term possible. If you can’t get ten years, fifteen is still great. If you are going to get anything over fifteen, personally, my advice would be to put a balloon on it. If you’re going to do a 20, 25, 30-year loan, I would put a balloon on it, but don’t put a balloon on somebody with 520 credit. That’s not fair and it’s never going happen. If you can check their credit and see what their likelihood of being able to refinance and pay off that balloon would be, then I would do that.

NC 15 | Owner Financed Notes

Owner Financed Notes: We want the buyer to be invested especially if we’re going to do it at the beginning of a loan.

What if you want to sell notes? If you are a seller already, if you have notes that you want to sell yourself or if you’re a brokering notes, the process is pretty similar. We work with both here. Submit a Fast Quote on our website, the Broker Fast Quote form or you can give us a call at our contact information. When you contact us, make sure to mention our good buddy, Scott Carson, so we know where the leak came from and we can thank Scott for that. Don’t expect to get anything for it.

What does a typical deal look like from start to finish? The beginning process is we provide you with an offer. These are note offers that we provide always. We pay for all of the closing costs, so you don’t have to worry about that. If you accept that offer, then gather some due diligence items to pass onto us, like verifiable pay history, proof of down, proof of insurance, prior title, those kinds of things. After we get the commitment documents back, which we would send out or the person that you’re working with that we also work with that we’d provide, then we order a property valuation. It usually takes a handful of business days to come back. This is a BPO, Broker Price Opinion. It’s a drive-by and then a market comparative analysis of recent sales and current listings to help us get an idea from the exterior what that property would be worth in that market.

When the value comes back good, then we like to speak to the purchasers as often as we can. Sometimes if it’s a high credit borrower or they don’t want to speak to us and cooperate, we can get those away, but we do like to take the time to talk to the purchaser. Not only is it a good way for us to establish our relationship with them since we’re going to be servicing the loan moving forward, but it helps our underwriters come to the decision if we want to make this investment or not. What we cover is we make sure we’re on the same page with them as far as the terms of the loan and the balance, we explain who we are and how our servicing works, and then we dig into the condition of the property, what improvements have been made, what still needs to be made, are the taxes paid, is it insured, all of those sorts of things. After we have all of that, then we will send the file to underwriting. We generally have an answer within 24 hours. Sometimes we need to go back to another underwriter if the first one says no or wants a different purchase program that the seller doesn’t want, that can take a couple of days, but it generally takes about 24 hours to get an approval.

Once it’s approved, we order title. It can take five to seven business days to come in. It depends on the title company. If the deal takes a little bit longer, it is usually because we’re waiting on the title commitment, but it usually takes about a week or so. If it comes back and it’s clear, we’re good to go to close. If it comes back and it’s not clear, then we will work with you to clear the issues and then we’ll close. We could close at the title office that we order it from or we can close by UPS to send documents. Once it’s closed, the very best part is that you get paid. Whether you’re a broker or a seller, you get paid and that is always the end goal. That’s what we want to do for people is to get you your money. That’s how the process looks.

It generally takes us about four to six weeks to close a deal from the time that we get the paperwork in. Sometimes it takes less. I’ve seen deals close in ten days, sometimes it takes longer. I’ve seen deals close in six months. They’re usually the ones with awful title issues and they have to go through probate or things like that. The general timeline is four to six weeks. Most of our deals close within that timeframe. Last year our average days to close was 30 days and we do keep a close eye on our days to close. We want to make sure that we’re working through the process in an efficient and timely manner so that we can help this set and get everybody paid.

We’ve got a couple of questions, “Do you buy bank-created notes?”

We have an area in the bank that does buy bank-created notes. My area does not, but that is something that First National could entertain. If anybody has anything like that, you are free to send it to our broker desk and let us know that this is a bank-created note and we can get you in contact with the right people.

Do you also buy contract for deeds if they’re performing?

We do. We do buy pretty much any contract type, so whether it’s a contract for deed or a real estate contract, varies on the state, land contract. They are all the same things. It’s just what state you’re in depends on what it’s called. We’ll buy deed of trust, mortgage, security deeds. They all mean the same thing. They all do the same things and we understand how each of them is different. It just depends on where you’re at.

You mentioned something about whenever you’re buying owner-financed notes, you want it to be personal guaranteed. If somebody creates a note in a corporate meeting where it’s a corporate borrower on that or an LLC, is that going to affect the discount or will you still take a look at it?

We will still take a look at it, but it will affect the discount. We price it with no-credit score and credit is a heavy part of how we determine the quality of the loan and how we determine how much we’re going to pay. If you have no credit score on there, it does bring it down. Then if there is nobody liable for the debt, that’s just an additional risk. The discount is generally higher, but we do still buy them.

If someone’s got a contract for deed they’re selling you, the fact that it’s a contract for deed, does that reduce the discount some or does it increase it or it just varies?

It makes no difference to us what your contract type is. If you have a loan that needs to be converted because it wasn’t put together to a tee how that state or county would want it to be put together for recording and whatnot or if it’s just not put together in a way that a bank can fill the shoes of what it says, we will convert those, but we usually assume those costs. The contract type doesn’t affect the pricing.

Somebody who has been self-servicing a loan instead of having it with a licensed servicer, will that affect the discount?

It does not. We buy deals all the time that have servicers. That’s completely fine. We like that because we can get verifiable pay history and we can know exactly what the balance is a lot easier for everybody because there’s a servicer. There’s an escrow that makes calculating that a lot easier. As far as the servicers go, it’s up to the purchaser if they want to stay with their servicer or if they want to come to us. The benefit for them canceling their servicing and coming to us is that we don’t charge for servicing. They don’t have to pay us a monthly fee like most private servicers would require. We have a professional servicing staff that services thousands of loans, so we got that down. Servicer does not affect the discount. We can work with it either way.

If they’re self-servicing though, they don’t have servicer. They are the ones collecting everything. That will affect the discount though, won’t it?

No, it won’t. Either way, whether it’s serviced or not, we’re going to pay the same amount. If it’s self service, make sure that you’re keeping good pay record and you have an idea of what the balance is and you and the purchaser are on the same page about that, but it doesn’t affect the discount. We buy tons that are both ways.

We have a question, “What’s the minimum credit score advisable for a note with a seven-year balloon?” The question I’m going to ask the audience is, “What’s the interest rate on the loan already?” If there’s down payment or anything or like that too.

That’s good to know. If you have any kind of balloon, especially if it’s a shorter one where they’re going to hit sooner, I would say 620 minimum for credit because you want them to be able to refinance. The minimum score for that is generally 650 in your area, but to get started, if you have somebody at 620 and the balloon is in seven years, that means they have seven years to get their credit up 30 points, which isn’t too tall of an order, 620 at minimum.

NC 15 | Owner Financed Notes

Owner Financed Notes: Establish that equity as soon as possible, make sure that our purchasers are invested in the property.

If somebody creates a note whether they’re self-directed IRA, whether they are the borrower or they’re the lender, you’ll buy those from self-directed IRA investors all day long, right?

Absolutely. Also it does not affect the discount and we do it all the time.

If you start pulling out, “What about this?” If you have a specific example of a deal that you have or your finance, best thing is go to the broker desk. Go and fill it out. We’re not going to give you pricing or estimates on a webinar.

I would love to give quotes all day, but I don’t have my financial calculator on me at the moment, but definitely send those in to the broker desk and we would love to look at them.

One of the great things I’ll bring up here is when somebody is brokering loans to you, because you have quite a few brokers out there, who are coming across owner-financed notes, they send you in the numbers, you come back with a quote and then you will ask, “What are you looking to make?” Jay is good at this and Daniel has done this before as well. Sometimes you will even talk to the seller in figuring the bids or figuring the profit to the broker as well and make sure everything’s hunky-dory, right?

Absolutely. We love our brokers. We want to make sure that they’re being paid for the work that they’re doing. If that means taking the extra step talking to the seller to negotiate the deal, lending the extra support, we will absolutely do that. Something that’s important to note for brokers is that we don’t have caps on commission. If you have a $60,000 offer and you want to take $20,000 off, we wouldn’t love them, but you’re probably not going to sign that deal up anyway. The only thing about commissions that I would say is we don’t police them, take what you think you deserve at the amount that you can still get the deal signed up for the seller. If you’re coming out way too big a commission, you’re not going to sign anything up, be smart about that. However, don’t think that you have to take a tiny commission, $500 commission or something to get the deal. Generally, people mostly take over all 3% or 4% of the offer and that’s usually a pretty good chunky change and covers your overhead for getting that lead in the door in the first place.

An audience says “I’m working with FNAC and they respond quickly with the notes. Grace is wonderful over there.”

She is wonderful. I hired Grace and I trained her and I’m so proud of her. She’s killing it on the broker desk, so I’m happy to hear that you like her.

You are good about getting bids back in 24 hours or less and the beautiful thing is it is coming back with options, “Here’s what we buy for the full note. Here’s what we’ll do on a 60-month partial buy and break it down,” or, “We won’t buy the full note, but we will buy the partial.” “Here, we won’t do a partial. We want to buy the full note.” You give great options to those that are looking for doing stuff. We had a guy in here who was going out and getting quotes for us all the time and help run that stuff and then he flaked off after the first three days and I was very upset with that guy, but it is what it is.

You are going to come across owner-financed notes all the time. You’re going to see stuff, especially when you start advertising on LinkedIn, “I’m a note buyer.” I can tell you the number of deals we get sent our way on a regular basis. People are asking if we’re buying and I’m like, “No, reach out to FNAC. Call Andi, call Dan, call Jay over there, call Grace. Get a bid directly from them because they are the best at what they do.” You are buying a tremendous amount. You got Fred, the main man, the man, the myth, the legend, The Note Educator of the Year a few years ago too.

Working for Fred is a wonderful experience. You just learn so much and he’s definitely one of the most influential people in the market. We love what we do here. We are very passionate about closing deals, about helping people, about putting people in good situations, being able to pay our brokers and help their businesses flourish and helping a seller get out of an asset that they didn’t realize had as much risk as it does, and helping a purchaser get with a professional servicer and have their credit reported on, and start building their credit to be able to move forward in their life. That is our main goal here and that’s why we do what we do and we’ve been doing it for 40 years and do more than anyone else because we are very passionate about serving.

If somebody is offering owner financing on a property that they have, would you recommend that they run the deal for you to see if you’re interested in selling and want to make sure they run it through you to get an estimated price at some point? I see so many people that are like, “I’m going to do 5% financing for 30-year mortgage,” with somebody who’s got 485 FICO. They haven’t checked the FICO and then they want to sell that note for 30 days later, 60 days later or 90 days later and it’s unsellable for awhile, right?

Yes. If you can get three years of seasoning, maybe that’ll work. If you have a hypothetical that you want to run bias, we are always happy to have that discussion and give you some pointers or at least an idea of what we would pay for the current terms that you’re looking at. It happens all the time. The only thing that I would say about that is if you do want to run it a hypothetical bias, just make sure it is something that you intend on following through on. We have definitely been burned by saying, “We do hypotheticals,” and then we get a ton of calls and those deals never come back. We’re happy to help you if you bring some over back.

They should not be burning your candle at both ends and never deliver anything. That’s how you get blacklisted in this business relatively quickly.

I’m not trying to say don’t call us. Please do.

Reach out, have a bid. If you do any marketing, if you’re doing any type of online stuff, you’re talking to your local real estate investment clubs, and you find deals, do you want to share any insights on where some of your top brokers that are sending deals to you from or where they’re finding stuff?

The consistent thing that they always say and it’s been true for decades is mailers. It is mailing people letters in the mail that is still one of the top ways that we get our leads and our brokers as well, buy lists of names and market them with nice professional-looking mailers, and then copy Scott on this whole internet platform thing and build up as much of a presence online as possible. The last few years, I’ve seen a big increase in the internet leads after we build up that platform. In the 21st century, there’s no reason why you shouldn’t. Most people are online, do most of their stuff online. We have online submission forms because some people don’t have the time to call. We’re getting anti-social as a society, sometimes we don’t want to talk on the phone. Build up that online platform as much as you can, and then network, network, network some more. If you are in cahoots with people who are respected in the industry, people will follow.

NC 15 | Owner Financed Notes

Owner Financed Notes: Build up that online platform as much as you can and then network some more.

An audience asks, “Do you ever sell any non-performers?”

We don’t sell our loans very much. Occasionally, we will clear out some seconds to free up some capital to reinvest in performing first, but not typically.

You have a little default rate anyway based on my discussions with Fred. You are so good in the underwriting side, you don’t have too many non-performing for the most part.

Our default rate is pretty low and we’re a weird bank. The fact that we participate in this niche market alone should show you that. We do things a lot differently than most banks do, whereas we do everything ourselves. We do all of our own production. We do all of our own servicing. We foreclose on our own. We resell our inventory properties on our own. If the buyer wants to finance the house, we’ll do that ourselves too and bring it back in and service it. We typically take care of our non-performing on our own, but thank you for the offer. If you’re a broker, be aggressive.

10/10/10, if you get 10% down, roughly about 10% interest rate, and then a 10-year term is a very easy process to have. It’s a very easy and simple formula to have and then go from there. If you can get more than 10% then great. That will allow you to drop that interest rate a little bit below 10. The biggest thing to keep in mind everybody when you’re doing owner‑financing is not give the borrower something that they couldn’t go out and get themselves.

We do sometimes see loans where because it’s a land contract, the seller thinks that they can choose the sale price a lot. The sell price is expected to be juiced a bit in the land contract market or the seller-finance market, but I’m talking $2,000, not $20,000. That will be $20,000 overvalue. The terms, set them up with something that they can afford. Don’t stick to the 10/10/10 rule so much that you are crossing out buyers off your list or that you’re bringing people in that can’t afford those payments. You want to set it up in a way to where you have a good borrower coming in that can make the payments that you’re setting up for them, something that they could get on their own. Obviously, high interest rates are great. We pay good money for 5% or 4% rate loans too. I’m not saying only 8%, 9%, 10%. Lower rates are good, 5% or 6% is still a pretty good return on money, especially if you want to do a partial or if you are looking to create the loan and maybe you’ll sell it, maybe you won’t. Don’t price yourself out and don’t price the purchaser out.

Anything you want to leave them with before we wrap it up with you?

I want to thank you so much, Scott, for having me. This is always a blast. All the Facebook marketing, my aunts are so proud of me, so thank you for that. Thank you to the audience. I love what I do here. I love this market. It is the most interesting industry anybody can fall into and it’s constantly changing. If you want to learn more, if you want to get involved in the market, keep following the sky, call me and the two of us will get you set up.

Thanks for joining us.

Thank you.

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