Tag Archives: mortgage note

A Lousy Real Estate Investment

Will some people never learn?  Everyone should recall the collapse of the mortgage-backed securities market, as real estate prices plunged just a few short years ago.  Belatedly, investors found out that declining home values mixed with homeowners who could never truly afford to buy a house made for lousy investments.  The investors were left holding the bag while Wall Street executives reaped the rewards from making questionable transactions and acting in ways that most of us would consider unethical.  Even the rating agencies made money as they labeled horrible deals as grade A.

Now comes part two of bad real estate investments — this time with a certain type of REIT.  The players are different and the situation twisted slightly, but the ramifications for investors are nearly identical.falling homes in a row

Single-family rental REIT’s are companies that own and manage real estate.  A REIT is a real estate investment trust that is legally required to earn most of its money from real estate and must distribute 90% of the taxable earnings as dividends.  These particular REIT’s did not even exist a year ago.  A number of large companies, some with little real estate experience, started buying foreclosed houses at bargain prices during the downturn.  Many of them bought thousands of these homes, and now they have to figure what to do with them.

On the one hand, they cannot sell large volumes of properties without lowering overall values and thus hurting their own bottom lines. On the other hand, they don’t want to rent out the houses for long periods of time because of their limited experience in this area and the potential for capital losses at some point in the future.  So, they choose the road of other financial kingpins at the big banks — keeping the rewards for themselves and dumping huge risks on unsuspecting investors.  The mom-and-pop investors presumably buy in because of the high yields and the assumption that the collateral is prime real estate.

Silver Bay Realty was the first single-family rental REIT to go public in December 2012, followed a few months later by American Homes 4 Rent and American Residential Properties (note: some REIT’s are actually good investments — just not this particular type).  Investors might jump in for a couple of reasons.  First, because they want to get on the real estate bandwagon of ever-increasing home prices.  Second, they believe that there will be more renters and less owner-occupied houses due to difficult economic conditions, tight lending, and the expectation that younger adults will want to stay mobile.  That first assumption is almost certainly not valid, as real estate prices seem to be peaking and are being artificially sustained by Fed actions.  The second assumption is likely true, but is overruled by the reasons below.  Some of the reasons not to invest here are:

1. First and foremost is the logistical nightmare involved with managing thousands of unique homes in different cities and states.  The structure to manage leasing to quality tenants, general upkeep and maintenance, cleaning, etc. across various geographies is expensive and complex.  This is not like managing large apartment complexes, and using local property managers would severely dent any profits.  The Wall Street Journal reported earlier this year that American Homes 4 Rent had a 42% vacancy rate.  Each house needs to be clean, with well-functioning plumbing, electrical, appliances, etc.

2. Given the overhead of the items mentioned above plus high salaries for owners and for staffing legal teams, any leftover profit is likely to be quite small.

3. With real estate prices peaking and bargain houses hard to find, the longer term model for this type of REIT is not sustainable.

4. An investor in this type of REIT owns small pieces of lots of properties rather than being able to point to a specific property as collateral.  In my own industry of mortgage note buying, we know the amount of equity, credit information on the payer, and loads of other data before we commit to buying a real estate note.  A REIT investor knows none of that information and must trust that others have done proper due diligence.
So, if you want to chase high yields on what is probably a losing proposition, then single-family rental REIT’s might be for you.  If not, keep your cash handy for investments that have a decent chance of providing a good rate of return on your money.

Opening the Dam – Mortgage Note

They’re back!  Late night infomercials are once again seeking the gullible to talk about how easy it is to make money in real estate with little risk.  The newspaper headlines help them, with announcements of skyrocketing housing prices and values reaching their peak in cities like Denver and Dallas.  Savvy investors and mortgage note buyers know that almost all of this boom can be attributed to actions of the Fed.  Their actions include keeping interest rates low, feeding trillions of dollars of “free” money into the economy to create the illusion of prosperity, and assuring everyone who will listen that they have everything under control.

In housing, the reality is quite different.  The percentage of Americans who own their homes is at the lowest point (65.1%) in a generation.  Ownership has been declining among all ethnicities and income levels for several years.  There are a number of reasons why so few people own their homes:

  • High unemployment, especially for full-time jobs.  Ignore the 7.4% rate published by the government, as it is woefully inaccurate.
  • It’s still difficult to get a home loan without good credit and some amount of down payment.
  • Banks have been holding on to houses to keep inventory artificially low, though that is slowly changing.
  • Recent price increases have made it difficult for first-time buyers to get in the game.  The price increases have been driven almost entirely by hedge funds, investors, and foreign money.
  • Volatile market and economic conditions are making some folks nervous, so they stay on the sidelines.

Mortgage Note BasicsIn my view, high unemployment is the biggest issue and it seems unlikely to improve soon.  Nationwide, full-time employment is down by 5.17 million jobs and total employment down 2.2 million jobs since 2007.  According to CNN Money, 76% of Americans are living paycheck-to-paycheck, meaning that they have no savings or, at best, a 3-month cushion.  About 36% of millennials (ages 18-31) are still living at home with their parents.  Rising college enrollment and delayed marriage contribute to part of this figure, but I believe that the lack of well-paying full-time jobs is by far the biggest factor. 

And yet, you may be wondering, how does this jive with the headlines showing that the housing market seems to be doing well by all of the traditional measures?  In California, home prices are up 25% over the past year, and someone recently paid $82K just for a parking spot in San Francisco.  Interest-only loans are increasing and housing mania is back for the financially able.  And there is the issue, as “financially able” refers mostly to hedge funds, investors, and rich foreigners.  Those groups have been driving home sales and prices upward – not the middle class or lower income groups.

At some point in the near future, markets and consumers will realize that the positive economic news is largely a façade.  Nobody knows exactly what the trigger will be or when it will happen, but the results will be ugly.  It is like all of the bad news and economic weaknesses have been hidden behind a big dam.  When that dam springs a leak and eventually collapses, you don’t want to be downstream holding a lot of stocks or risky real estate.

Take the Stress Out Of Selling a Mortgage Note

Life changes, often exciting and sometimes challenging, at times can be overwhelming. This is especially true when it comes to financing them. If you have made the decision to or are considering selling a mortgage note, it may feel like it falls under that umbrella of overwhelming, but it doesn’t have to.

The very first step for ensuring a stress free mortgage note sale experience is choosing a trusted and reputable note buyer.  A seasoned note buyer can answer your specific questions, assist you to determine the best course of action when selling all of a real estate note or a partial note sale, and then walk you through each step of the note buying process.

As a note buyer and note broker, one of our main goals at Seascape Capital is to make the mortgage note selling process as easy and stress free as possible.

The Process:

Although each situation is different, there are common steps involved in selling your mortgage or real estate note. Below is our typical process.

  1. Contact Seascape Capitalwith important information about your note and property, such as type of property, sale price, payment amounts, etc. We can assist you to determine the information required.
  2. We will usually respond within one business day with a quote for the full amount of the mortgage note or part of it , depending on your desire for the mortgage note sale.
  3. Upon approval of the quote there is just a small amount of paperwork to complete, and if there isn’t a recent appraisal or title policy we can take that off your to do list by making the arrangements. Most importantly, you pay no closing costs, fees, or commissions.
  4. Once we have the documents, the process generally only takes 2-3 weeks for you to receive the money. It’s that simple!

More significant than the process, is how a note buyer conducts business. Please see below for testimonials from some of our valued clients:

Your invaluable assistance helped me close out the estate administration of the residential note that was the last remaining asset in my father’s estate. I appreciate your persistence and ingenuity in overcoming problems and obstacles to bring a difficult transaction to a successful close. I’ll recommend you highly to anyone who faces a similar challenge.

Tom M.
California

I do consider you a friend now, and I would give you a Gold Star, A+ for your great work and communications.

Ilena R.
California

Doing business with Alan was a successful experience. He is diligent, responsive and does a nice job following up through the conclusion of the deal.

Thanks Again.

Rick H.
Idaho

Whether you are ready to request a mortgage note quote or would just like to seek advice on how to proceed with selling a note, please give us a call. As always, if you have additional information to offer or general questions you think others might have as well, please enter them in the comments below and we will be happy to respond.

 

Planning in the New Year – Is It The Right Time To Sell A Mortgage Note?

It wasn’t long ago that we celebrated the coming of new year –  we watched the ball fall, made some resolutions and some noise, and toasted to 2013.

Starting fresh is what the new year is all about. While we do reflect on the past, for example how we capped off 2012 with a tumultuous presidential election and concerns about the fiscal cliff, the new year is really more about planning for the future. As we look ahead and consider changes to come, it’s a good time to review finances and consider the best use for our investments.

The decision whether to sell all or part of a mortgage note (also often called a real estate note, deed of trust or promissory note) usually boils down to two main categories.

First: Simplifying Life

While holding a mortgage note can be a good investment and receiving monthly payments beneficial, managing the responsibilities and risks inherent to holding a mortgage note can feel burdensome at times. If you find any of the below to be stressors, it may be a good time to consider selling your mortgage note:

  1. Managing payments, insurance, and taxes for your mortgage note.
  2. Planning your estate for heirs.
  3. Settling finances in the event of a divorce.
  4. Assuming the risk of non-payment of a mortgage note or bankruptcy of the payer.
  5. Unexpected changes due to the divorce or death of the payer.
  6. Worrying about default and foreclosure.
  7. Concerns with the real estate property becoming devalued.

 Second: Cash Requirement

There is no question that life changes, planned or not, often come with expenses. Selling a mortgage note is a fairly simple way to raise a lump sum of cash quickly, and can be significant depending on the value of your mortgage note. Types of life events that may warrant selling a mortgage note are not limited to, but include the list below:

  1. Covering medical expenses
  2. Paying for college tuition.
  3. Planning a wedding and/or starting a family.
  4. Buying new real estate.
  5. Making a career change and/or investing in a new business.
  6. Transitioning into other investments or reinvesting at a higher interest rate.
  7. Purchasing a vehicle and other high cost items.
  8. Funding travel plans.
  9. Managing retirement expenses.

If you are in the process of deciding if selling a mortgage note makes sense for you, you may want to contact a  reputable mortgage note buyer for further advice and information.

 

Selling a Real Estate Note 101: Best tips for selling and buying a mortgage note

Welcome back to our series “Selling a Real Estate Note 101”. If you have been following along, hopefully you have gained a basic understanding of what is a mortgage note, the process of selling your mortgage note, how the value of your note is determined, what to look for in mortgage note buyers, and some knowledge of your note sale options. If you would like more information on any of the above topics, please call us directly so we can help answer your questions.

Now that we’ve covered the basics, we wanted to summarize the most important tips for selling a mortgage note (also called a real estate note or promissory note), and helpful tips on how to create a mortgage note for a future sale.

Best tips for selling a mortgage note:

  1. Familiarize yourself with the process of selling a mortgage note, how the worth of your note is determined, and what to look for in a mortgage note buyer- BEFORE you start requesting quotes. Having your paperwork and questions on hand when speaking with potential note buyers will facilitate the process of negotiating the sale of your note.
  2. Explore your options; every mortgage note is different. For example, selling only some of your payments (known as a partial) may be more advantageous for you and may offer a higher rate of return. A trusted and reputable note buyer can help you determine your best options.
  3. Verify that there are no upfront fees to the seller (with few exceptions), as these are already figured into the purchase price.
  4. Make sure the mortgage note investor checks the credit of the payor/buyer upfront to avoid any sudden drop in purchase price quotes due to unforeseen credit issues.
  5. Review your written purchase agreement with a Real Estate Attorney, if possible.

Seascape Capital Best Tips for Selling and Buyer a Mortgage Note

Tips on creating a mortgage note for owner financing (also called seller financing):

If you currently hold a note that you may consider selling in the future, one option is to sell your real estate note to a buyer using owner financing. Some of the common reasons people choose owner financing include: attracting more potential buyers for your property, offering more flexible terms (often the case when working with buyers who are not able to obtain financing through a bank), or managing a sale between family members or as part of a divorce agreement. These tips can help you create value and structure your mortgage note for an optimal sale through owner financing.

  1. The larger the down payment, the better. For residential, a down payment of 10% is ideal, 20-30% for commercial notes.
  2. The more equity in the property, the better. This is achieved, in part, with the down payment mentioned above, as well as principal payments received. This adds value to the mortgage note.
  3. Consider the credit of the buyer and always obtain a current credit report. Ideally, the credit score should be 600 or above (the higher, the better). Their credit rating can influence the value of the note and can play an important role in determining a down payment to protect your property.
  4. Make sure that the sales price is aligned with current market values and that interest rates are comparable to bank rates.
  5. As with most real estate, the condition of the property is another important consideration when creating value for your note. A note will be worth more when the property is in good condition, located in a desirable area (with access to power and water if it is a land contract), and is currently owner-occupied and well maintained.

Whether you want to sell your mortgage now or in the future, we hope you find these tips helpful. If you have any insight that you would like to offer our readers based on your experiences with selling notes, or would like us to address any particular topics of interest, please share them in the comments below. As always, thanks for reading and please feel free to pass this information on to others!

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