EP 207 – The 10-10-10 Formula of Owner Financing with Daniel Malcolm

NCS 207 | Owner Financing

NCS 207 | Owner Financing

Note investors need to see themselves as the bank and think like the bank during deals that involve owner financing a property. Like banks, consider that big downpayments mean a big safety net. Take the risks that banks avoid and offer services they don’t. Learn more about credit scores, note brokering and the 10-10-10 formula with Daniel Malcom of The First National Bank of America.

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The 10-10-10 Formula of Owner Financing with Daniel Malcolm


We’ve got a very special guest. We get a ton of questions not only into the office personally but also on all the different social media websites we have and of course our different Virtual Workshops and Note Camp. I thought it was time to bring our good buddy, Daniel Malcolm from First National Acceptance Company. You also go by something else as well as what you’re buying, don’t you?

Sometimes people call us FNAC.

We’re excited because you are one of the largest buyers of owner-financed notes in the country. I thought it was important to bring you on, just visit, talk a little bit about some of the things that you are doing, what you are looking for and go from there. Talk a little bit about what you do and then about yourself as well.

First National Acceptance Company, we are based out of Lansing, Michigan. We’re a subsidiary of First National Bank of America. We’re an institutional buyer of privately-held land contracts, notes and mortgages, deeds of trusts. We buy nationwide. We buy about 100 a month. We just finished up November and after November, we’ve bought so far this year 1,218 notes. Actually, we’re averaging out to a little more than 100 a month with balances exceeding a lot. I guess around $86 million, $90 million of balances so far this year. We’ve been doing it for about 40 years. We know what we’re doing. We kept good pricing. We’ve become known for our very good pricing. We can sweep notes. We can pay up to $0.95 on the dollar. Our discount is about 15% so on average we pay $0.85 to $0.87 on the dollar.

Let’s talk about that. We don’t want people getting all excited if they get a 4% interest rate loan that you’re going to pay them $0.95 on the dollar of that stuff, because you know how people think. They think of nothing but the best numbers and not of realistic numbers a lot of times too, correct?

That is correct. There are a few different factors that play a part in our pricing that need to be taken into consideration with structuring a note or originating a note. We take equity, seasoning and credit. The creditor or the borrowers, we call them here the purchaser on the note. We take those three factors into account. Credit plays the biggest role because we’ve been doing this long enough that we know that credit scores tell a story. If you’ve got a 560 credit, I don’t really care how well-intentioned you are. You are a much higher risk of default than someone with a 750. Equity is important because the more skin in the game the person has from a large down payment or making payments for two or three years, the more money that they have to walk away from if things get tough, the better because they’re less likely to. Seasoning, the number of payments made. That plays a large part because that also plays into the skin in the game, the equity, and then also emotional equity in the property. If you’ve been there for a long time, this is your home, you’ve raised your kids there or your families there, you’ve got more than just financial equity, you’ve got emotional equity built into the home as well.

One of the things I love is that you have a rough formula, the 10, 10, 10 model that you like to share with people being a loose guide of what to look for. That’s one of the biggest things that we get all the time is folks go, “I owner-financed a note. I want to sell it now to get my capital back.” Most people might go, “Based on what you’ve told me about the note, it’s not a valuable note at this point.” Why don’t we share what that 10, 10, 10 model is and go from there, Daniel?

I’d like to change it to the 10, 9, 10 but it just doesn’t sound as good and it’s not as easy to remember, so I’ve left it 10, 10, 10. The first 10 is 10% or more in equity. When you get a downpayment, try to get 10% or more in your downpayment from the person. Right out of the box, they’ve got some serious equity in the deal. If you can get 15%, 20%, 50%, get the biggest downpayment you can get that is going to still allow the person to have some type of safety net of cash for future living and paying on the note. The most you can get down, the better. That’s the first 10. The second 10 refers to the interest rate. You mentioned before, a 4% interest rate. That’s a very good point. The interest rate is tied in with the discount on the note. The more interest income that we can make off the note while we’re collecting payments on it, the lower the discount can be to the principal balance because we don’t have quite as large of a spread between the discount we buy at and the principal balance due in case of an early payoff or a default.

NCS 207 | Owner Financing

We’re encountering a lot more note originators that are doing seller-financed but they’re doing a large volume.

The reason I would like to change the 10 to a 9 is over the last couple of years, there’s been a lot more scrutiny on this owner-financed industry. We’re encountering a lot more note originators that are doing seller-financed but they’re doing a large volume. They’re doing five or more a year or very large dollar. One or two large dollar can cause you to qualify as a creditor and the high interest rate can cause you to have a high-cost mortgage. Long story short, we’re going to stick with 10, 10, 10 because it’s easier to remember, but just remember don’t go over 10. I would advise most people not to go over 9.5. If you’re just one person doing one note and you don’t think you’re ever going to do another one, you can set that interest rate to whatever you want, as far as I know. That’s my current understanding of the legal landscape, the regulatory landscape. When you bring it to us because we are a regulated bank, we might chop that interest rate down to 9.5 or something to make it legal for us to carry. If you’re not a creditor, that’s a simple thing for us to fix and do.

The last 10 refers to the amortization. We’ve got 10% or more in equity, a 10% interest rate, so a higher interest rate and then a ten-year am. If your note payer can afford the monthly payment and pay it off in ten or fifteen years, go for it. It makes it more valuable to us because it makes it a little less risky because they don’t have to stay performing as long. Also, it allows us to recoup our money faster so we can be a little bit more meaning on the discount and some of the other factors of the note that might not be great can be made up for and the fact that it’s going to pay off quickly. It also protects the note seller in case you decide you don’t want to sell your note. You want to get your money back as quickly as you can as well and you want to decrease your likelihood to default. 10, 10, 10 equity, interest rate and amortization payoff life.

One of the questions we always get from people is, “Ten-year am, can we do a ten-year balloon and do a 30-year am?”

As far as I know, yes. If you’re not a creditor, you can do balloons and that’s not a bad idea. We still see lots of notes all the time with three-year, five-year, ten-year balloons. Because every state is different, maybe before you write a note with a balloon in it, check with a good real estate attorney in your area and make sure that he doesn’t think you’re doing something that is wrong for your state. Let me back up a step before I talk about the balloon. We had talked about credit before. I would highly recommend anybody that’s originating a note. There are lots of good borrowers out there who have good credit, have a lot of money for a down payment, and they still don’t qualify for bank financing because the box has gotten a lot smaller. Whether they’re self-employed or for numerous reasons or it’s an odd property type, you will serve yourself well as a part of considering someone for originating a mortgage with them. Make them check their credit and provide you with a free credit report that they can get themselves so that you know that they’re not 480 credit or 520 credit. There are 650 and 700 credit borrowers out there that want seller financing.

In fact this year, our average credit score that we’ve bought is 652. They’re out there. I would definitely screen people credit-wise and get the best credit borrower you can. Going forward a couple of steps after talking about that, if you start out with a good credit borrower that is say 600, 610 or above, you’re increasing the likelihood that they’re going to be able to refinance at some point in the future. If you decide you don’t want to sell your note, you could end up with an early payoff, which is going to be a good situation for you in most cases. If you bring it to someone who wants to buy the note and it has a balloon in it, us for example, we have two different types of full buyout programs. We have this regular full buyout and then we have what we call the full balloon program where if the borrower has 620 credit or better when we look at it and there’s a balloon coming due, we will pay a little bit more on the full buyout for that note. We anticipate that when the balloon comes due, they’re going to be able to refinance either with us or with someone else and pay us off early.

Part of the reason that we anticipate that is because as a bank while we’re collecting the payments, we report to credit bureaus, which brings me to partials. If you do happen to have someone who is a 600 or a 610 credit and the full buyout offer that you get is too big of a discount for you, consider a partial. We love doing partials and while we own the partial, while we’re collecting those payments, we’ll report the payments on credit. We could potentially help your borrower greatly increase their credit score allowing them to refinance and pay you off early. Or when we get a couple of years into the partial or when the partial is done, we may be able to give you a much better full buyout offer than we were originally.

I love what you’re saying because a lot of people they go to a workshop, they go to a seminar, they hear about owner financing, they’ve got a property. It’s not the old days where you could sell a note off at the closing table and expect to get $0.85 on the dollar conveniently. You like to have a little bit of seasoning too. Don’t you, Daniel?

Yeah. Technically, we only require one month of seasoning. If you’re bringing a note to a note buyer, us or anybody else, that has less than a year of seasoning, they’re going to want to see great equity so a great downpayment and they’re going to want to see a good credit score.

We see a lot of people that they’ll do owner financing. They’ll do like 5%, 6% interest rate because they think that’s what they should to make it attractive to get people in to buy it. Then they think, “I’m just going to sell the note for what I owe and get my money back and go back and do that.” That’s not the case. If you can get credit, great, but if the offer is something for a 5% or 6% interest and you are looking for a 10% to 12% return or greater?

We’re looking for at 8% to 10%, as low as a 7%.

Let’s say you want 10% but they rate it at 5% interest rate, that’s almost a 50% discount right there to get a 10% return. Not that you would be exactly 10% or 7% or 8% because there are other factors obviously: skin in the game, credit scores, stuff like that. That’s a good guideline for people to keep in mind. Look at all the factors versus going ahead in owner-financed. Try to find the best possible borrower versus the very first person that pops up.

If you want to owner-finance a property, whether you’re going to do 1, 2 or 100, what you have to remember is you are the bank so you need to think like a bank and you’re offering a service. If you have somebody come to you and you’re offering to finance them when a traditional bank won’t because they’ve got 550 credit or they were bankrupt three years ago, you’re owed a higher interest rate. You’re taking on a greater risk. That’s exactly what banks do. The higher the risk, the greater return required for the risk. Just because they could go to a traditional bank and get an interest rate of 4.5% or 5% does not mean that you owe them a 4.5% or 5% because if they could get that, they would go to the bank. They’re at there with you because they can’t get it. The market calls for you to charge a 6%, 7% or 8% interest rate. You’re taking out a lot of risk. You’re providing them with the service. You want to make this a valuable asset for you to hold on to and potentially cash out at some point in the future. If you happen to run across somebody who’s got a 50% downpayment and 800 credit and it’s a nice brick ranch in the middle of a great neighborhood, then perhaps you give that person a 5% interest rate but you don’t have to.

We have a question, “Do you all offer cash-out refinancing?” With that we need to ask is this for a mortgage that he’s owner-financed on or is he selling the note? When somebody asks cash-out refinancing, it sounds like they’re looking for new loans. Is that right?

That’s what it sounds like to me.

You don’t do that.

Just clarifying, the bank side does. We have a residential lending department. We originate loans and we refinance loans in all 50 states. We don’t do refis in Texas. We do originations in Texas. Everywhere else, we’ve got a refinancing option. If he’s got someone that is making payments to him and he doesn’t want to take a discount like we would when buying a note, he can certainly contact First National Bank of America, which we’re a subsidiary of and see if his borrower qualifies for a refinance and pay him off in full. I wouldn’t hold it against anybody to try that first. If you can get refinanced and get your full amount of principal, do it. If you can’t, then come and talk to me.

What kind of percentage? Do you keep track of how many notes that you’ve bought that they end up refinancing out after a while?

I don’t have the exact number but it is very high. A lot of the notes that we buy, we will hold them for five or six years and then they’re gone. Either they’ve refinanced with us or they go to Quicken or somewhere and refinance.

Do they sell the property, move on once every seven years like a lot of people do?

Yeah, there’s a lot of that too.

Let’s talk about seasoning. Why don’t you explain what seasoning is, Daniel, because a lot of people don’t get that?

Seasoning is the number of payments that have been made. If you have collected 24 payments then you have 24 months of seasoning. Something that is important to remember with seasoning is to keep track, to keep verifiable proof of those payments. I would strongly encourage folks to check out servicing companies. Especially if you own more than one note, a good servicing company can be worth their weight in gold. They charge you a small monthly fee but they track the payments for you when you need pay history. It’s third party. It’s verifiable. You can provide that to your note buyer and they’ll know that it’s accurate and correct. The servicer handles sending out the interest statements that are supposed to go out each year, which a lot of owner-financed sellers forget about or don’t understand how to do. We’ll help you set up escrow if you want escrow for taxes and insurance, which I would. On my notes, I would definitely have escrow for taxes and insurance because you want to protect your property. That’s what seasoning is. One of the most important parts of seasoning is to keep track of those payments so you can prove the seasoning, or accept cash and give out handwritten receipts.

Some people still do.

I suppose if you have to receive cash, then deposit the cash by itself because it will be in the amount of the payment and then you can provide bank statements. It’s not great but it’s better than copies of a ledger book of a bunch of handwritten receipts.

We see that quite a bit with people, “We’re servicing the note ourselves.” Your value just dropped at $20. You’re going to be spending a month when you could’ve gotten a bigger value in the long run versus you trying to do it all yourself.

In some of the servicing companies, there’s not even a charge for the note holder. The charge is passed on to the note payer and they pay $10 or $15 a month for the service. There are a lot of note payers that would really prefer to do it that way.

You can’t collect payments in specific states. You’ve got to have a servicer do it for you to keep you compliant. I think a lot of people try to slough off on that idea of, “I’ll wait until I get caught.” Do you want to risk your whole note if you get caught in doing something illegal?

I think states like New Mexico, Arizona, maybe Nevada are some of the states that they require third party servicing. It’s too bad all 50 states don’t require it. That way, I would always get it.

We got a question here, “Is there any states that you prefer to buy notes from obviously, non-judicial?” Do you buy in both judicial and non-judicial states?

Yes, we do buy in both. The states that we buy the most in are Texas, Michigan, Florida, California, Arizona, North Carolina. Those would be our top six states.

You got non-judicial states but then you also have Florida in there which is a judicial state. It has a little bit longer foreclosure than the rest of them.

Year-to-date, Florida is actually the one that we bought the most in this year. Our business in Florida has picked up quite a bit this year, as well as Arizona. Arizona didn’t use to be as large of a piece or book of business has become. Part of that is we have a couple of really great note brokers that have joined our team over the last year and they have greatly increased the number of notes being brought to us from Arizona.

Let’s talk about note brokering a little bit. What’s involved with that, Daniel?

Note brokering is a great way to learn the business and to get involved in note investing without putting a bunch of your money at risk. If you’ve never bought or sold a note or originated a note and you knew nothing, you could learn a lot through brokering a note. It’s really simple. Brokering a note is very much like being a realtor helping people sell their homes. Except, instead of helping people sell their homes, you’re helping people sell their note. There are different companies out there that scour the courthouse records and they buy up seller-financed records and they create leaflets and our note brokers will mail those leaflets and say, “Do you want an offer on your note?” When they get a lead come back and say that they do want an offer on their note, they’ll bring the info to us. We provide the note broker with an offer. We pay for the closing costs and the processing costs so when the broker gets our offer, all they have to do is take out how much they want for their commission and they pass on the difference to the note seller. The note seller agrees, then we’re in business and we do some due diligence stuff. Then we pay the seller and the broker about 30 days later. The majority of our deals close within about 30 days but we always say four to six weeks. That’s a better expectation to set with everybody because you’ll never know when something’s going to come up.

You do a really good job with that. It’s very easy to submit in a note to you for sale. Usually you’ll have a counter or a bid back from me within 24 to 48 hours and it’s broken down very easily into either a buying a full note or plan B a lot of times will be the partial. Or if you guys won’t buy the full note you’ll say, “We don’t want the whole note but we’ll buy a partial on that note and here’s the breakdown.” It’s always great. Your whole staff does a great job. If you’re the broker communicating, “What do you want to get out of this? Is this a flat percentage? Is it $3,000? What do you want to make for brokering the deal?” That allows the broker to be able to see what’s really going on and then communicate that back to the note seller.

NCS 207 | Owner Financing

We definitely do our best to develop relationships with our brokers and be as transparent with them as possible.

We definitely do our best to develop relationships with our brokers and be as transparent with them as possible. You’re right about the turnaround time with quotes. Our standard is to have a quote back within24 hours. Most of the time, it’s the same day. If you go to our website, FNACBrokers.com, there’s a fast quote submission on the website and it will ask you for all of the pertinent information. You click that and it goes to everybody. Currently, we have eight new buyers on the broker desk. It goes out to all eight. If you already have a relationship with one of them, they’ll snag it and get in contact with you. That’s another thing that we like about the way we do business is once you start working with someone, you work with that person on all your deals. You don’t have two deals with one guy and three deals with another gal. You’re getting to know your rep. They get to know you. You get to know them.

Everybody in your staff is great over there. We’ve dealt with Jay. Jay is the guy who handled our bids we sent in and stuff like that. Jay’s always responsive and he gets back in a timely fashion. We brainstorm on a few ideas on some stuff, especially going back to the note seller and what they might say and trying to get them to realize what they have or what they don’t have. It’s like dealing with the buyers looking to sell, “My house is worth this.” “It’s really worth this.”

There is quite a bit of realistic education that needs to be had sometimes with note sellers. I like that you pointed out the fact that we usually try to make at least two offers. We give you a couple of options. Sometimes we’ll give three or four. Partials are usually a much better deal from the note seller. If they are not desperate to get out from underneath it altogether, if I were a note seller and I didn’t need all of the money right now, I would do three to five-year partials and I would just keep doing them because they’re almost always going to be less from the discount than a full buyout. You don’t lose your complete interest in the note. If you ever want to go back to collecting payments, you haven’t already sold the whole thing, you can wait for the partial to be satisfied and then go right back to having your monthly cashflow. I wish more note sellers were open to partials.

It’s a good way to still raise a big chunk of cash if you’re trying to do things without giving up the full amount. A lot of people don’t need to sell the full note off to raise capital with a partial sell because we’re only giving up three years of payments or five years of payments. It still leaves a ton of backend payments for you but allows for you to get something in and get things moving. Let’s talk a little about some of the things that you don’t buy. Are there loan balances you don’t bid on to give people a good feeling for things?

Unpaid principal balances below 10,000 and lower, we’re not interested in those. If you need to sell a balance that low, get a hold of me. I can get you in touch with a whole network of folks that would love to buy that lower balances. Our bread and butters are residential notes. Single-family owner occupied, that’s what we buy the most of. We buy single-family rentals, mobile homes with land, mobile home rentals. Commercial, we typically prefer partials on commercial notes. This is something I would suggest to folks when they’re originating a commercial note. Remember that the majority of small businesses go out of business within five years. If you originate a commercial note that has a payoff or an amortization longer than five years, you are most likely originating a note that’s going to default. Unless there are certain factors like the business has been around for 20 or 30 years or 10 years or more, we’ve got super great credit with a lot of equity. There are some mitigating factors but typically when we see a commercial note, we’re really only interested in doing a partial. We prefer that the commercial note have a personal guarantee with good credit. There are instances where we’ll buy it without a personal guarantee but we prefer the personal guarantee with good credit. We’ll opt for a partial that is very rarely going to be longer than five to ten years.

Will you buy notes that are written to entities, to the person?

Yeah. We will buy even residential notes that are oftentimes single-family rental notes. The purchaser tends to put the note in the name of an LLC or a trust or something. We’ll buy those. The equity and the seasoning and the condition of the collateral are going to be more important at that point because we can’t go back on the borrower in the case of the default, then we most likely are going to end up with the collateral of the home. It needs to be a home that we feel confident we can resell.

You talked about collateral. Are you looking just at the receipts like the loans are written on a napkin?

We actually did buy a note that was written on the back of a menu. We didn’t convert it. We want to get clear title and title insurance in all of our note purchases. I think another advantage to working with First National or selling a note or brokering notes to First National is that we have a large processing team. Some of our processors have been doing this for 15, 20, 25 years, so they know how to work out problems. If you’ve ever tried to sell a note and you get to the title part and you run into, “We need to release a lien,” and your note buyer backs out on you because you need to release a lien, you’re not going to run into that with First National. We can stick in there with you and work out the processing issues, the title issues. We want to get clear title. We want to get title insurance. In those cases where people bring us documents that are a little less than professionally made or might give regulators a head spin, we will draft up new documents and correct things that we need to.

It’s not that hard to go out and find a copy of a 1003. Oftentimes too, this is where dealing with mortgage brokers is helpful, especially if somebody’s been declined for a traditional loan because of either seasoning or DTI or they’ve not been employed long enough. Go ahead and get that. If you’ve got a loan officer, have them go and run everything through a 1003 or a Calyx Point or something like that. That makes for a clean initial file for due diligence and things like that to keep in the collateral file, right?

Yeah. Having a licensed mortgage loan officer, loan originator, they’re called all kinds of things, they’re also like a servicing company, worth their weight in gold. They don’t charge you too much to help you originate the documents. Also, use a title company or a title attorney. If nothing else, at least get a title search so that you can see if the title is clear. If it’s not clear, try to work it out. That’s eventually going to come up. Just because you ignore it when you originate the note, it does not mean that that title issue has gone away and you now have clear title because you have a new note. The title issues are going to follow the property. It really does pay to do your due diligence. Get your own BPO so you actually know what the market value of the property is, hire a licensed mortgage loan originator to help you with the documents and use a title company or title attorney to help you get clear title and work out title issues. They’ll make your life so much easier down the road when you want to sell the note or when the note is paid off and now you’re supposed to produce a clear title. You can work it out at the beginning or at the end. Your choice, I guess. I would suggest the beginning.

You mentioned something that you buy land contracts. Is that correct?

NCS 207 | Owner Financing

Most of the purchasers understand that having a mortgage or a deed of trust puts them in a better position.

Yeah, we do. We also buy contract for deeds. With land contracts in some states, we’ll have to convert the document to a traditional note in mortgage or note in deed of trust. In Michigan, we don’t have to do that, so we can buy the land contract as is. Contract for deeds, we’ll buy those but we are finding that there are almost no title companies anymore that want to insure a contract for deed. We’re basically saying now, if you have a contract for deed, we will have to convert it to a note in mortgage or a deed of trust, which does require the note payer to sign conversion documents, but I cannot think of an instance in which someone has said, “No, I don’t want to do that. I don’t want to have the property deeded to me.” Most of the purchasers understand that having a mortgage or a deed of trust puts them in a better position because the property is actually in their name unlike with a contract for deed. We buy contract for deeds nationwide. We buy land contracts nationwide, I suppose in the states that do those. I don’t think Texas even will do a contract for deed like a new one, right?

Yeah. We don’t do contract for deeds down here. It’s too much like a lease option for the base part. They violated that things in any lease option encounter for a deed that’s over 180 days. If you’re an investor, you can do a lease option and things like that to an entity but you can’t do it to a traditional borrower. It’s illegal.

You bring up another good point, lease options. We will buy lease options as well. They’ll need to be converted to a mortgage or a deed of trust. The only think I suppose I should comment on with lease options is they need to be set up like a contract. There are some lease options where there’s no property sale price, there’s really no interest rate. It’s really just a rental agreement. If it’s settled like a rental agreement, we’re not interested in those. If it’s a lease option that actually has a property sale price each month that person is building up equity so they’re making a payment supplying their both principal and interest, we can work with those and convert those to a mortgage or a deed of trust and buy them.

We have a question, “The problem with CFDs is that they can’t get approved because they may not show income. Does that cause an issue?” Their debt to income is being too high.

We don’t look at that when we buy notes.

You’re not looking at DTI. You’re looking at payment stream, credit score, equity and the property then basically?

Correct, because we’re not getting a loan application. Legally, when we’re buying a note, we can’t force the borrower to provide us with any information. Unless they willingly give us a loan app or tell us all about their income, their debts, we don’t know that information.

That’s a valuable thing to keep in mind when you’re looking through the collateral files. We buy a lot of contract for deeds that were originally by Harbour and things like that. We know there are going to be some title issues that we accrue up. If you look at the collateral files, if you’re purchasing an existing contract for deed, seeing if there is a financial document in there of some sort, seeing what the borrower makes, seeing that kind of stuff. A good rule of thumb is to stay away from people that are paying more than $0.50 of their income towards a mortgage payment. That’s a high default rate when it comes down to that. Right, Dan?

Yes, that is pretty high. While I say we don’t see that and we don’t consider that, we would love to because it is important. If you’re originating a contract for deed, or not that you should anymore, don’t originate a contract for deed, in my opinion. If you’re originating a note, I would take that stuff into consideration. You need to think like a lender, think like a bank. This person is applying for a loan with you. If they don’t want to tell you anything about where they work and what their income is and they can’t find the time to provide you with a FreeCreditReport.com credit report, then they’re not the borrower for you. There’s a better puppy out there.

We have a question, “Wouldn’t they have to get underwritten by NMLS to get a seller financing and a note?” You are licensed and MLO is all across the country, right?

Yeah, we are a subsidiary of a national licensed lender.

If they’re going to convert it from a lease option or a CFD to a traditional mortgage, they would have it underwritten by an MLO?

Yes. That brings up a very good point or makes me think of something good. That is, if you’ve done a lot of lease options to try to avoid the Dodd-Frank origination requirements to meet the requirements for being a creditor, when you start converting those lease options, those conversions do count. Or at least our compliance attorney, his current understanding is that those conversions are going to start to count towards your number. If you’re holding 200 lease options, you’re not going to be able to convert all 200 of those in one year and not be considered a creditor. You’re going to need to convert three to five, we’ll say.

Or go out and get licensed to do it. It’s not that bad to do that in a state that you originate in. It’s taking a test. It’s getting licensed. It’s passing an FBI background, checking your fingerprint. It’s not that difficult.

If you’ve got 200 lease options and this is going to be your daily business, you’re right, it really would be reasonable just to get licensed. It’s your livelihood, so you should probably be licensed.

We have a question, “During the conversion, are there no qualification requirements from the borrower? Is there a minimum P&I that you will buy?”

No, not that we’ve encountered.

That goes into the balance. If you’ve got a $10,000 balance on a loan and the payment on that is less than $80 a month most of the time or cheaper than that, so that’s where it comes under the UPB bit.

I would agree with that.

Stay above 10. Have you ever had the borrowers who pay extra to get their loan balance down to buy a little bit of equity so that the loan can be sold, or the note holder forgive a chunk of the UPB to get a deal done?

We have had note holders forgive chunks but that was usually the result of a dispute over a balance discrepancy. The note holder will be like, “I thought they owed $3,000 more. They were pretty convinced they don’t. I want this to close. Fine.” Typically, our underwriters don’t feel like having the big chunk of the balance forgiven in order to create equity necessarily as a positive thing. I see scenarios in which they would be fine with that. If it’s an affordability issue, then that really doesn’t solve it. It’s still an affordability issue. You either have the money to pay your loan or you don’t. The last comment made me think of something though with a minimum P&I payment, non-amortizing interest-only loans. We will typically not buy those unless they have a balloon. We either cannot have or we can only have a certain amount as a bank, open-ended or non-amortizing loans on our books. In that case, we wouldn’t maybe reject a P&I payment based on the size just because it’s not large enough to am it out.

That’s not a P&I payment. It’s just an interest payment.

That’s true. That’s an I payment. One other thing, don’t originate notes for more than 30 years. There’s really no reason to give somebody a 480-month or 600, I think the largest one we’ve seen was a 750-month am. Just 30 years. If they can’t afford the payment on 30 years, then they’re not going to able to afford the payment on 480 months and just find a new borrower.

480, that’s 40 years. 600-month, that’s 50 years. You see occasionally it will slip through. I saw something where a bank was selling a loan that had a 650-month remaining. I’m like, “What?”

I wonder how a bank got that.

It’s a non-performing note to begin with so they figured something out. Are you buying non-performing stuff?

No, we do not buy non-performing notes. You buy non-performing notes, don’t you?

I buy non-performing institutional loans. I don’t buy owner-financed non-performing notes.

If anybody out there has non-performing owner-financed notes, give me a call or email me. All my info is available on our website, FNACBrokers.com, as well as a wonderful video that I star in is on there as well. You can get a hold of me and I can give you some referrals for folks that buy non-performing seller-financed notes. Sometimes I forget to tell people we buy first position reperforming notes. If I didn’t say that before, I apologize. We only buy first position notes. Basically, if you need referrals for anything, give me a call because I know somebody. I’m more than willing to help you out. We buy first position performing notes and we also buy reperforming notes. We prefer that they have been reperforming for a year or more. If there are extenuating circumstances, I’d much rather see it than not see it, so bring it our way even if it’s only been reperforming for six, nine months.

If they brought a chunk to the table or things like that too and it’s all dependent on what the note buyer bought. They know that too. If they bought it non-performing and picked it up at $0.25 on the dollar, they’ve got some room to get moved if they’ve been performing for a while. You are rock and rolling and it’s been a good year for you.

It has been an excellent year. The last three years have been great. I manage the broker desk here where we’re buying notes primarily as note brokers. We have seen astounding growth over the last three years, each year over the last year. In 2018, I expect the same. I expect to at least do it within 2017, but I’m expecting another 10% or 20% worth of growth above.

You see what happens with the President Trump, the Congress changing up Dodd-Frank and all that stuff.

That has not had a drastically negative impact on us overall other than we’ve looked at some packages from people who are considered creditors and we weren’t able to work out the issues in order for us to buy it because we’re regulated by the OCC and whatnot. Some of those folks, they didn’t even know they needed to do it at the time. They weren’t originating bad paper. They just didn’t necessarily know what needed to happen then. Nobody really knew what needed to happen because Dodd-Frank has been so confusing. I still don’t really know what’s going on with it. I have a compliance attorney which is good news because I’m not spread enough to keep up with RESPA and Dodd-Frank and all the other stuff. I’m a salesman.

Let’s go through some things. You are only buying first liens. You buy just about anything with a balance of $10,000 or more preferred. You want it close to 10 and then 10. You have a 10, 9.5, 10 model. You will buy reperforming notes with twelve months of seasoning preferably. You prefer that it’s been with a servicer so that there’s actually some paper. You prefer that there’s actually paperwork with like a 1003 app and equity filled out on more than just a napkin that Dan Zitofsky does. You are glad to buy from brokers all the time. The website is FNACBrokers.com.

NCS 207 | Owner Financing

If you’ve got something you want us to look at, please bring it and we’ll look at it.

You mentioned the things that we prefer and I’d like to talk about the things that we prefer because everybody likes to live in a preferred world. We deal with what comes to us. If you don’t have a third party servicer or you did write your note on the back of a napkin, still give us a call. I’d rather see it than not see it. That’s what we’re here for. We’re here to look at notes, so don’t shy away. If you’ve got something you want us to look at, please bring it and we’ll look at it. If we can work it out and make the numbers work for you, we want to buy it from you.

Andi Lemons have spoken on Note Camps in the past, virtuals and stuff like that. You missed out the last one here in October, but you’ll be speaking in April in Note Camp 5.0, right?

Yes, that is correct. I’m hoping to talk a lot more about how to break into the industry as a note broker. There seems to be a lot of interest in that. I get a lot of calls, a lot of emails about, “How do I become a note broker?” I’m going to plug somebody here real quick. If you’re looking for lead lists, if you’re thinking about brokering notes or just buying notes yourself, there’s a fellow in Oregon his name is Scott Arpan. He’s with Advanced Seller Data Services. I’ve heard he puts out a great list. I’ve heard that from several note brokers. He can give you lists that are state by state. I think he can even get down to certain counties and ZIP codes if you want them and they seem to be very high-quality lists. I would definitely look for a guy like Scott Arpan or someone else and go out and get yourselves the list and do some mailers. If you want an example of the type of marketing mailers that we use, I’m certainly willing to provide that. We have quite a few resources on our website for new brokers.

Do you have a big plan for the first quarter of 2018 or does your business stay level throughout the year? Does it peak or drop? Do you have different valleys?

Yes, we do have peaks and valleys. This year was a little odd. I don’t know if anybody else experienced this but normally, we slow down quite a bit in the summer and then we have a big spike in the fall. This year, it was flip-flop. We had great numbers all the way through summer and then we saw an unexpectedly big dip in September and October. That got me a little worried about November and December, but then we saw that pick back up and we’re spiking again. We had a great November and we’re anticipating a great December as well. As far as the first of the year, the first of the year is actually usually pretty busy for us because people are getting ready for tax season. They either need to sell partials to raise some money for taxes or they want to get off from underneath the note around that time. The spring is a little bit of a dip for us. The summer is typically a real big dip. Fall and first of the year are probably the big spikes for us, but we’re pretty consistent too.

It’s been pretty consistent throughout the year too. I agree with the same things. A lot of people take off during the summer for the holidays and stuff like that or summer vacation but not so much this year for the most part. It’s good stuff. I want to say thank you for joining us here on The Note Closers Show. Lots of good stuff. Lots of people liked it. I think you hit everything on the head that a lot of people asked questions for, which is great.

Thank you so much for having me. Anytime, I’d love to do it. Please go to FNACBrokers.com. Give me a call. If you want to chat, email me. I prefer a call. I like to talk on the phone more than email, so call me.

Check out FNACBrokers.com, Dan Malcolm will be there for you. I’ve known Dan for a long time. We were road warriors for quite a bit, going from different events to events. Once again, thank you so much for tuning in. If you’re listening on iTunes and any of the podcasts, Stitcher, Google music player or anything like that, make sure to leave a review. Make sure to share this if you enjoyed the show and you enjoyed the information because you’ll never know who might ultimately become a note investor with you or may have a note available for sale that you could potentially broker and make some money on. Otherwise, go out, be merry and we’ll see you all at the top.


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About Daniel Malcolm

NCS 207 | Owner Financing

As a subsidiary of First National Bank of America, FNAC has been purchasing real estate notes nationwide for over 40 years. We purchase notes in all 50 states. In addition to great pricing on single family homes, we specialize in unique property types – mobile homes, mixed use, commercial, etc. We process the transaction and cover the closing costs.



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