Tag Archives: note buyers

Where Do Home Prices Go Next

Over the past five years, much of the home buying and propping up of home prices in the U.S. has been driven by large institutional investors.  Hedge funds, real estate investment trusts, private equity firms, and similar institutional investors have spent more than $20 billion in just the last two years to buy about 200,000 rental homes.  These investors, sometimes along with note buyers, realtors, and others in the industry, have been handsomely rewarded for their efforts.

However, many of these large investors have significantly scaled back purchases as of late.  For example, Blackstone Group was spending $100 million a week on properties last year, but their pace of acquisitions has slowed down by about 70% since then.  Blackstone is the largest U.S. single-family home landlord, though the second and third largest single-family landlords are also scaling back (source: Bloomberg, March 14, 2014).  These big investors are seeing fewer low-priced deals and are probably getting nervous about the huge uptick in home prices.

Since these investors have, for better or for worse, been a big part of the increase in real estate prices, where are those prices likely to go from here?  Will they continue their upward trajectory, albeit at a slower pace, or should we expect home values to come down?  There are lots of experts on both sides of this argument.  Those who believe that home prices will be lower at the end of 2014 have these arguments:House at sunset

  • The housing market fundamentals are weak.  Unemployment, income growth, and even general economic condition are still less than ideal, and existing home sales have been declining.  In California, only one-third of the population can afford a median-priced home.
  • Interest rates won’t go lower, and are likely to actually swing upward.  As rates go higher, mortgage payments increase, which translates to fewer people being potential homeowners.
  • Young adults are likelier than previous generations to have high debts from college loans and weaker income growth.  If they cannot afford to buy their first houses, then that will limit overall demand.
  • Government has largely subsidized housing’s recovery by maintaining low interest rates, buying mortgage bonds, and heavily supporting the bank industry.  This cannot last much longer.

Experts on the other side of the argument expect home prices to continue their ascent because:

  • The housing market and economy have a lot of momentum, and the sense is that a recovery is under way
  • The government will continue to be a big player in the real estate industry and is likely to step in quickly if housing begins to slide.
  • The risk factors for a housing crash have been minimized since banks have become smarter about how they lend money.

Where will things stand this December 31?  Personally, I am more inclined to go with the first group in thinking that there will be a decline in prices.  I just don’t think that the economy has a strong enough foundation to support a longer housing boom.

That said and  as I have often stated before, the biggest variable is how the U.S. government responds.  If they allow market forces to rule and step back from interfering, some sort of a fall is probable.  However, if they step back in to the fray, all bets are off.  What do you think will happen?

Note Buyers and Investors – Recognizing the Peak of the Housing Market

Hardly anyone was surprised by the news earlier this week that property values had climbed 6.8% from December 2011 to December 2012, according to the S&P/Case-Shiller index.  Phoenix led the group — where 19 out of 20 cities saw value increases – by gaining 23% over that 12-month period.  Note buyers, real estate investors, and formerly underwater homeowners have rejoiced over the trend.  The media and economists see nothing but sunny skies ahead for housing and believe that real estate will help pull the economy to greater heights.  Some of the more skeptical investors and note buyers may wonder how genuine the housing recovery is going to be.  An example of well-founded skepticism is that Georgia, with one of the country’s highest foreclosure rates, still experienced year-over-year price increases of 5% (per Salon, 2/7/2013).

Digging more deeply into the details, we find that a much smaller percentage of traditional homebuyers are participating in the home buying spree than has happened in the past.  Rather, Wall Street private equity firms and hedge funds, aided by the Fed’s full participation, are buying a lot of the foreclosed homes and turning them into rentals, thus fueling the increase in values.  Most of Wall Street survived the huge housing bubble that they helped create a few years ago and now wants to make fresh profits from the newest bubble.

A hot trend in the financial sector is REO-to-rental, in which the firms raise huge amounts of capital to buy foreclosed and otherwise distressed homes, rent them out, and resell them at appreciate prices.  A JP Morgan Chase report states that at least $10 billion has been raised for REO-to-rental – enough to buy 15% of all bank-owned homes.  The financial firms offer up to 10% returns to entice investors to jump in.  Blackstone Group alone is spending $1 billion just in Tampa, Florida for foreclosed homes (New Republic, 2/12/2013).

Money down the drainThese firms are sometimes partnering with large property management companies that do minimal renovations to damaged properties and have little interest in keeping rents reasonable or tenants happy.  At least one of these companies has signed an agreement with credit-reporting company Experian to more promptly do credit reporting on renters.  Worst of all, Wall Street has begun exploring the securitization of rental income, much as they did with mortgages.  We all know how that turned out!  With new REITs and investor types entering the market, the increased speculation is almost certainly leading to another bubble.

How will we know when this housing bubble is about to burst?  When these private equity firms and hedge funds decide to start exiting the market, the sheer size of their holdings will magnify individual actions.  Any hiccup in the economy that threatens more vacancies or hits to home values will send those companies scurrying for the exits like scared rats (an apt metaphor).  Phoenix is a good candidate to see what happens as its home values experienced a meteoric rise, a harrowing fall, and a huge climb again.  Some investors have already pulled out of that market.

So, keep an eye on the financial firms.  Some of them may use alias names, so a large spike in inventory could signal problems.  When they do decide to jump ship, expect another crash shortly thereafter.

The Rising Cost of Government

A few weeks ago in this space, I made the case for why real estate will perform poorly in the medium-term, driven by a variety of factors.  This trend will affect homebuyers, mortgage buyers, investors, banks, and anyone else with a financial interest in real estate.  Mortgage buyers like me need to be especially aware lest our mortgage notes go from having lots of equity to suddenly being underwater.  Fitch, a well-known international credit rating agency, believes that real estate values are overvalued now by at least 10% (per Housing Watch, 1/4/13), and there are good arguments for why it is overvalued more than that.

However, in the short-term, which I define as the next two years, housing should do well.  Certainly, real estate values improved significantly in many regions during 2012, and I expect the trend to continue through 2014.  A combination of low interest rates, limited housing inventory, and Wall Street and an influx of foreigners jumping in as investors have made near-term prospects look good.  Because the Feds have their mitts all over this change and have succeeded only in artificially propping up housing temporarily, another precipitous drop in property values is still in our future.

Interest rates have been kept low by the Federal Reserve, which has promised to keep them low for another couple of years.  Housing inventory is constrained by banks still holding shadow inventory, by Wall Street firms buying huge portfolios of properties, and because many underwater homeowners are unable to move.  Of course, once interest rates move up, Wall Street types get panicky, or any number of other events occurs, housing will return to its slide.  High unemployment, higher taxes, and economic uncertainly all suggest that the housing recovery has no legs.  The current economic mess is almost entirely caused by partisan bickering over the debt and related policy decisions, and shows no sign of changing.  The politicians know that any changes to spending and programs will infuriate some special interest group, which directly affects their chances of being reelected.

Congress and the President have shown no inclination to make any spending cuts, so seem destined to continue deficit spending well into the future.  The Democrats refuse to cut entitlement spending while the Republicans won’t consider reducing defense spending – both areas will need to be slashed to significantly reduce the debt.  The entitlement side is especially pressing, as CNS News reported that Social Security ran a $47.8 billion deficit in fiscal year 2012.  The number of workers collecting disability benefits hit a record of 8.8 million people in December – apparently, not having a job is quite detrimental to one’s health.  The ratio of workers to beneficiaries peaked in 1999 at 2.93 to 1, and now stands at 2.36 to 1.  Social security, like Medicare, is on an unsustainable exponential growth path of misery.

The federal government has greatly increased spending from 2000 to 2012.  Here are just a few examples of the percentage increase during that time (per Mish, 12/21/12):

Dept. of Defense                                          194%
Dept. of Education                                    160%
Dept. of Energy                                         160%
Dept. of Health & Human Services    128%

Meanwhile, Medicare and Medicaid have each risen about 140% during that time.  While there are certainly opportunities to increase revenues, by far the biggest problem is the greatly increased expenses and government infrastructure that goes with it.

Japan had a crisis with some similarities to ours over twenty years ago and is still a mess.  They were slower to throw money at the problem than has been the U.S., but their results have still been dismal.  The U.S. has a much larger economy than Japan and has certain advantages (like still having the world’s reserve currency) that will probably keep our fall from being as severe, but it is still interesting to see how Japanese real estate (per Dr. Housing Bubble) and its stock market (Nikkei 225 on the right, per tradingeconomics.com) did over the past few decades.

japan real estate land pricesHistorical Data Chart

This is what unconstrained spending and a dismal economy will do for you, and the U.S. is following the same path.  Keep this in mind when certain politicians and economists start yapping about how the government needs to spend more to get the economy healthy.


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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Selling a Real Estate Note 101: Can I only sell part of my mortgage note?

Can I Only Sell Part of My Note?Selling a mortgage note (also called a real estate note or promissory note) can be confusing, especially if you are a first-time note holder and have never worked with a note buyer before.  This “Selling a Real Estate Note 101” series is designed to be a resource for those people.

In a previous post, we covered the common reasons why people sell their mortgage notes and how that process works. What we haven’t addressed yet, however, is the option to sell just part of your mortgage note (also called a partial). Here are some of the common questions about partials.

Why only sell part of the note?

  1. In tough economic times, the note seller may not be able to find a buyer for the full value of the note (or the seller would have to take a bigger discount). For more information on how the value of a note is figured, please read What is my mortgage note worth?.
  2. Sometimes the seller only needs a small sum of cash for a particular purpose (college tuition, unexpected medical bills, to reinvest, or pay down debt, for example).
  3. Selling a partial note provides the seller with immediate cash flow now while getting the note back in the future (once the partial sale’s terms have been fulfilled) to collect remaining scheduled payments.
  4. The seller also gets the flexibility to sell another part of the note at a later time, if they wish.
  5. A partial note sale will often yield the seller more money for their note in the long run.
  6. Another advantage to the partial note seller may be the delay in some of the capital gains taxes.
  7. It is easier to find a mortgage note buyer since buying a partial note is considered a less risky investment.

How does a Partial work?

  1. In a full note sale, the buyer purchases the entire amount of the note, meaning all of the remaining payments. In a partial, the buyer agrees to buy part of the note, usually in the form of a specified number of payments (e.g. 60 monthly payments), or a specified amount of the balloon payment. There are even partial sales (called a split partial) where the note seller and note buyer split the monthly payments. For more information on the different options for partial note sales, please contact us.
  2. Typically, note investors require a minimum note balance of $50,000 before they will consider investing in a partial note.
  3. The process of selling a partial mortgage note is very similar to selling a full note. Please refer to our post on Should I Sell My Mortgage Note? for more information on the process and paperwork required to get started.

The bottom line is that a partial can be a win-win when it reduces the amount of discount the
seller takes and makes for a more secure investment for the buyer. To talk about your options
with a partial sale or just have your questions answered, please give us a call.

Next week, we will be covering more important tips for selling a mortgage note. Please
comment below to let us know if you have found this information helpful or if you have been able
to share it with someone who has. We invite any and all feedback!