Tag Archives: real estate notes

The Wages of Unemployment

The article below appeared in the Wall Street Journal last week and was written by Richard Vedder.  While it does not directly impact mortgage buyers or owning real estate notes, it is an interesting commentary about the effect of government handouts.  Reprinted with permission.

From the mid-17th century to the late 20th century, the American economy grew roughly 3.5% a year. That growth rate has since declined significantly. When the final figures are in for 2012, the annual rate of real output growth for the first dozen years of this century is likely to be about 1.81%.

What accounts for the slowdown? An important part of the answer is simple: Americans aren’t working as much today.  And this trend reflects more than the recession and sluggish economy of the past few years.

The national income accounts suggest that about 70% of U.S. output is attributable to the labor of human beings. Yet there has been a decline in the proportion of working-age Americans who are employed.

In recent decades there was a steady rise in the employment-to-population ratio: For every 100 working-age Americans, there were eight more workers in 2000 than in 1960. The increase entirely reflects higher female participation in the labor force. Yet in the years since 2000, more than two-thirds of that increase in working-age population employed was erased.

The decline matters more than you may suppose. If today the country had the same proportion of persons of working age employed as it did in 2000, the U.S. would have almost 14 million more people contributing to the economy. Even assuming that these additional workers would be 25% less productive on average than the existing labor force, U.S. gross domestic product would still be more than 5% higher ($800 billion, or about $2,600 more per person) than it actually is. The annual growth rate of GDP would be 2.2%, not 1.81%. The retreat from working, in short, has had a real impact.

Why are Americans working less? While there are a number of factors, the phenomenon is due mainly to a variety of public policies that have reduced the incentives to be employed. These policies include:

• Food stamps. Above all else, people work to eat. If the government provides food, then the imperative to work is severely reduced. Since the food-stamp program’s beginning in the 1960s, it has grown considerably, but especially so in the 21st century: There are over 30 million more Americans receiving food stamps today than in 2000.

The sharp rise in food-stamp beneficiaries predated the financial crisis of 2008: From 2000 to 2007, the number of beneficiaries rose from 17.1 million to 26.3 million, according to the Department of Agriculture. That number has leaped to 47.5 million in October 2012. The average benefit per person jumped in 2009 from $102 to $125 per month.

To be sure, we would expect the number of people on food stamps to increase with rising unemployment, poverty and falling incomes in late 2008 extending into 2009 and perhaps even into 2010 (even though the recession was officially over in late 2009). But more is going on here.

Compare 2010 with October 2012, the last month for which food-stamp data have been reported. The unemployment rate fell to 7.8% from 9.6%, and real GDP was rising steadily if not vigorously. Food-stamp usage should have peaked and probably even begun to decline. Yet the number of recipients rose by 7,223,000. In a period of falling unemployment and rising output, the number of food-stamp recipients grew nearly 10,000 a day. Congress should find out why.

• Social Security disability payments. The health of Americans has improved, and the decline in the number of relatively dangerous industrial production and mining jobs should have led to a smaller proportion of Americans unable to work because of disability. Yet the opposite is the case.

Barely three million Americans received work-related disability checks from Social Security in 1990, a number that had changed only modestly in the preceding decade or two. Since then, the number of people drawing disability checks has soared, passing five million by 2000, 6.5 million by 2005, and rising to nearly 8.6 million today. In a series of papers, David Autor of MIT has shown that the disability program is ineffective, inefficient, and growing at an unsustainable rate. And news media have reported cases of rampant fraud.

• Pell grants. Paying people to go to college instead of to work is traditionally justified on the grounds that higher education builds “human capital” that is vital for the country’s economic future. But a study Christopher Denhart, Jonathan Robe and I did for the Center for College Affordability and Productivity (that will be released soon) shows that nearly half of four-year college graduates today work in jobs that the Labor Department has determined do not require a college degree. For example, over one million “retail sales persons” and 115,000 “janitors and cleaners” are college graduates.

In 2000, fewer than 3.9 million young men and women received Pell Grant awards to attend college. The number rose one-third, to 5.2 million by 2005, and increased a million more by 2008. In the next three years, however, the number grew over 50%, to an estimated 9.7 million. That is nearly six million more than a decade earlier. The result is fewer people in the work force. Meanwhile the mismatch grows between the number of college graduates and the jobs that require a college education.

• Extended unemployment benefits. Since the 1930s, the unemployment-insurance system has been designed to lend a short-term, temporary helping hand to folks losing their jobs, allowing them some breathing room to look for new positions. Yet the traditional 26-week benefit has been continuously extended over the past four years—many persons out of work a year or more are still receiving benefits.

True enough, the economy isn’t growing very much. But if you pay people to stay at home, many will do so rather than seek employment or accept jobs where the pay doesn’t meet their expectations.

These government programs are not the only players in this game. For example, a more worker-oriented immigration policy in recent decades would have measurably raised the rate of economic growth and increased the employment-to-population ratio. Taxes are part of the story too: Today’s higher marginal tax rates on work-related income could well lead to further reductions in work effort by those taxed, as well as to slower economic growth.

Most Americans recognize the need to reduce government spending to rein in the national debt. But there is another reason to cut government spending for specific programs: If more people have less incentive to stay out of the work force, they might seek jobs and help spur economic growth.

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!

A hassle-free request to
Get an offer for your note

To ask questions or for a pressure-free discussionCall 1-800-634-4697

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!

Selling a Mortgage Note 101: How to Find a Mortgage Note Buyer

Updated May 2017

Note holders are sometimes not clear about the differences between a mortgage note buyer versus a note broker.  More importantly, they are not sure about the advantages of working with each.  In this article, each type is described, as well as detailing what to look for in both.

 

Mortgage Note Buyer vs. Note Broker

When you sell your mortgage note (also called a real estate note or promissory note) to a direct note buyer, that means the individual that you are working with is the direct purchaser of that note- he or she is the note investor and is responsible for providing the cash for the note sale. Without the involvement of third parties, there are no broker fees or commissions incurred in the sale of your note, and since you are dealing directly with the mortgage buyer, it can sometimes make for a smoother transaction. The discount that is figured into the sale plus the established interest rate on the note will account for how the note buyer makes money.

The main responsibility of the mortgage note broker, however, is not to use their own cash for notes, but to “list” your mortgage note for sale and find the most suitable investor. Mortgage note brokers typically have a competitive network of investors with whom they work closely to find the best match for your note sale. Note brokers make their money from commissions paid to them by the investor when the note purchase concludes.

In some cases, as is the situation with Seascape Capital, the mortgage note buyer may act as either a direct note buyer or a note broker, depending on which is most appropriate for the situation based on the location of the property and the characteristics of the note. As a seller, this gives you the added advantage of making sure your goals for the sale of your note are met.

Either way, it is especially important to work with a reputable mortgage note buyer and/or broker in whom you have confidence and can trust.  The bottom line is that you should be able to receive a competitive offer regardless of whether you work with a note buyer or a note broker, as long as you follow the guidelines below.

What to look for- and look out for- in a note buyer

So how do you know if you can trust a prospective note buyer or broker? Here are some important considerations and things to look for:

  1. Your note buyer or broker may need to be licensed in the state of the property. This license regulates note buyers and ensures that they adhere to industry standards for the seller’s protection.
  2. Look for an established history of note buying- the buyer’s demonstrated experience and expertise will mean less potential for things to go wrong and a more knowledgeable buyer typically has more resources.
  3. Before you commit to anything, be sure to check your buyer’s reputation by asking around and talking to references. Chances are, if enough people have been unhappy with a past transaction with this buyer, there will be signs of it. At the very least, conduct a Google search on the company and individual, check the status of their license, and consult the Better Business Bureau to review their rating.
  4. It is always a good idea to compare quotes. This is especially important for uncovering any hidden fees (such as closing costs) that you may not know to anticipate. If, after talking with a note buyer and getting your questions answered, you do not feel confident in their integrity or trustworthiness, keep looking for someone more to your liking.

How to Find a Mortgage Note Buyer

There are a few warning signs of which to also be aware when talking to prospective note
buyers, such as:

  1. Your intuition (or, “gut check”). Common sense tells us that if it sounds too good to be true, it probably is.
  2. A price quote that you receive should be valid for at least ten days.  If you are quoted a price that is only good for one day, or you are being pressured to commit to a sale, politely tell the person that you will be looking somewhere else.
  3. If you are asked to pay costs upfront, this is usually a red flag. The discount you take when selling your mortgage note should cover most of the buyer’s expenses. Be cautious of hidden fees.
  4. There are four main reasons the value of a note could go down: 1) credit issues, 2) property is valued lower than the sales price and/or is in poor condition, 3) problems with the documents, and 4) defects on the title that cannot be corrected. Be familiar with these so you can be proactive. If you feel that you are being subjected to a bait-and-switch ploy, promptly end your transaction and report the buyer to state authorities.
  5. Generally speaking, any pressure or coercion to accept a lower sales price is reason enough not to sell to that buyer.

We certainly hope this has been helpful in differentiating direct mortgage note buyers from
mortgage note brokers, and alerting you to important information about the process of selling a
real estate note. As always, we are happy to answer your specific questions, so feel free to give us a call.

As we continue our series of “Selling a Real Estate Note 101”, next week’s topic will cover more
important information you will want to know when selling your note. We hope you will join us
and feel free to leave comments or questions below- chances are, if you’re concerned about it,
someone else is too.

Selling a Real Estate Note 101: What is my promissory note worth?

As we explore the topic of how to sell a real estate note, one of the biggest questions every note seller has is What is my note worth? To answer this important question, we will take a look at some of the factors that go into determining the worth of a real estate note, what you should know as a seller to get the maximum sale price for your note, and the typical time frame it takes to get your cash payout.

What is my real estate note worth?

The value of your real estate note (also called a mortgage note or promissory note) is dependent upon several variables. While the particulars of each individual cash note and note sale are different, here are the most important factors that determine a note’s worth:

  1. The amount of equity in the property. As a percent of the property value, this includes the down payment and length of time that the mortgage has been paid into (or mortgage seasoning). Generally speaking, the more money that has been paid in, the better the quote you will receive.
  2. The structure of the promissory note. The length of time and payment schedule of a mortgage note is a consideration, since payments received at a future date are less valuable than payments received sooner. Another important factor is the interest rate specified on the mortgage note.
  3. Type of property. Risks are inherent to every property and note type. Single-family houses typically have the lowest associated risk and can usually be quoted higher than real estate notes on commercial buildings, mobile homes, or vacant land.What is My Motgage Note Worth- condition of property
  4. Condition and location of the property. The condition of the property and surrounding areas, and location of the property are important factors in determining both market value of the property and value of the mortgage note. It is beneficial when a property is owner-occupied and when land has access to water, power and roads. For commercial notes, it may be harder to sell the note if the property has a higher potential of liability to the note holder due to its environmental history and potential consequences (for example, if a property was previously a gas station). Commercial notes are also more desirable when they are multi-unit apartments or general use office buildings, as opposed to specialty businesses.
  5. Lien notes. Usually, 1st lien notes are considered more valuable than 2nd lien notes because there is a much higher risk to the holder of a 2nd lien note.
  6. Credit rating and payment history of the buyer. In the case of a partial purchase, it is important that the note seller consider the credit rating of the property buyer. A FICO (credit score) of 680 or better is ideal. A lower credit score with a solid payment history may still work, but a credit score below 600 typically requires the note seller to sell their note at a larger discount.

Again, these are just some of the important variables taken into consideration when determining the worth of a mortgage note. We understand that selling a promissory note at a discount is a common concern for sellers. If you would like additional suggestions on how to structure your mortgage note for maximum value, please read our Tips on Creating a Real Estate Note. As a general rule, however, the higher the interest rate and shorter the term of the mortgage note, the less of a discount a seller would need to take when selling their note. If you would like to talk to us directly to discuss your specific options for minimizing a discount on your mortgage note, please give us a call today- we are happy to help answer your questions.

How long does it take to get the cash payout from selling my note?

Once you have decided to sell your mortgage and accepted a quote from a mortgage note buyer, you will likely need to provide copies of the Deed of Trust or Mortgage, the Note, Title Policy, and Closing/Settlement Statement. If there is no recent appraisal or title policy, the mortgage note buyer should offer to arrange and pay for those services.

Although it may vary slightly by mortgage note buyer, once the paperwork is processed and completed, it generally only takes about 2 weeks to get your money. Your note buyer should give you the option to receive the cash by check or electronically.

If you have sold a mortgage note recently, we would love to hear about your experiences in the comments below and what you found to be most helpful when determining the worth of your note. We also hope you will join us again next week as we Continue our series of Selling a Real Estate Note 101, where we will be looking at the different types of mortgage note buyers, as well as giving tips on what to look for (and look out for) in a mortgage note buyer.