The Real Deal on Real Estate Notes: There's Money in Debt!

By Maria Fee

I spent a lot of time and money self educating to understand real estate. I wanted to understand how to better control my investments instead of handing over my hard-earned savings to financial advisors who are still working to make a living. I believe in diversification like so many advisors chant.

A few years ago I was just about to buy an 80-unit apartment complex. I ran my numbers, calculated my anticipated expenses and profits, made plans and knew what yield I should make from my 80-unit nest egg. What I did not plan for was a shooting that occurred on the property two weeks before I was scheduled to close on the property. That same night, 34 families moved out. Had I owned the property, I would have lost a lot of my anticipated yield for many, many months to come.

Regardless of my power planning, I would have little control of my financial returns in the first two years of my investment. I was back to feeling I had little or no control over my investments: I wanted safety, low risk, control, and known returns on my money. I kept studying, asking questions, seeking mentors, and finally found a well hidden area of real estate - the notes business!

I discovered I could own the financing on a real estate
transaction versus dealing with blue collar issues such as:

• Unexpected repairs, expenses, and vacancies
  
• Increasing taxes
  
• Employee theft
  
• Contractor delays and cost overages
  
• tenant lawsuits
  
• trash, toilets, and termites.

I learned that I could use my brains not my brawn to invest in real estate. I could have collateralized investments, name my interest rate return, insure against property loss (my collateral), never receive a phone call in the middle of the night, and still be diversified and invest in real estate!

Owner financing creates real estate notes. It is not a sexy investment topic but it is probably one of the most amazing financial investments we can own. This creative financing technique works in good and bad markets; rural areas and cities; and residential, land, and commercial properties. Owning the financing on the property rather than the property itself allows you to control the property without the risks, hassles, negotiations, and costs of ownership!

No banker or financial planner will tell you owner financing is a great investment. They don't get commissioned on real estate notes! Their sole purpose is to collect your money, invest it with the hopes of increasing your investment, and regardless of their success, earn commissions.

GREAT SALES TECHNIQUE AND ACQUISITION STRATEGY

Owner financing is widely misunderstood by sellers, realtors, and investors alike. People usually think of owner financing (seller financing) a property when they reach the point of desperation (a quick and easy way to get rid of a property). It is, in fact, probably one of the best financial investments and most easily understood investment you can own!

This alternative financing strategy works to quickly:

• Acquire properties
  
• Sell properties
  
• Finance borrowers who may not qualify for traditional bank loans
  
• Finance properties that may not qualify for traditional bank loans.

COMPARING OWNER-FINANCED NOTES TO THE STOCK MARKET

Owner-financed transactions can be very safe, financially sound investments if structured and documented properly. You create a promissory note when you sell a property and "take-back" financing for your borrower.
You become "the bank" for all or part of your borrower's financing.

You control a property without ownership headaches from the beginning of negotiations and contract creation through to the final mortgage payment.

As the "bank," you can control the:

• Documents being created
  
• Interest rate you will receive
  
• Size of down payment
  
• Length of the time the investment will run
  
• Collateral (property) that will be insured against loss (flood, fire, etc.).

Now, contrast that (tangible) investment to investing in the stock market (intangible) where you:

• Incur costs associated with the money manager (regardless of whether the advisor increases your assets)
  
• Have no control of the documents you are required to sign
  
• Have to wait and see what your yield will be
  
• May not understand the transaction
  
• Know the investment is not collateralized and insured against loss
  
• Know the asset is not

Banks and insurance companies are traditionally two of the most conservative investment institutions in the United States and they invest mortgages - so can you!

MORE OPTIONS WITH NOTES

With seller-financed real estate notes a property seller has more options! Unlike most other real estate exit strategies, real estate notes offer these benefits:

• Hold the note and collect the interest through to maturity
  
• Use the note to collateralize other investments
  
• Sell the entire note for cash
  
• Sell part of the note for cash.

OWNER FINANCING SOLVES PEOPLE AND PROPERTY PROBLEMS

Owner financing attracts more buyers because it addresses the top two problems a borrower may have - cash and credit. The myth is that owner financing is only for the no-cash, bad credit buyers. The truth is so many people and many properties don't meet institutional lender standards. This strategy is so powerful because it works on all property types and for many types of buyers.

Consider all the solutions owner-financed real estate offers:

People Problems Solved

• Are you self employed?
  
• Are you a student without much credit history?
  
• Do you have multiple real estate loans?
  
• Are you an active real estate investor whose income is primarily from rentals and leases?
  
• Do you spend more than approximately one-third of your monthly income on housing?
  
• Are you a non-resident alien living in the states?
  
• Do you or have you ever had any credit problems? Late payments? Unpaid medical bills?
  
• Do your credit card payments and car payments add up to more than approximately one third of your income?
  
• Have you ever had a bankruptcy or foreclosure on your credit history?

Property Problems Solved

• More land exists than improvements (e.g., house on 100 acres).
  
• Liens, easement, and judgments attached to property.
  
• Major repairs are needed on the property.
  
• Property has a specialized purpose (donut shop, church, school).
  
• Ownership in community is weighted towards investors rather than home owners (e.g., condo communities).
  
• Price is too low for an institutional lender.
  
• Zoning issues exist for the property.

DUE DILIGENCE IS A MUST FOR A SUCCESSFUL TRANSACTION

Most sellers and realtors are not trained on how to legally and financially structure a promissory note and the transaction for maximum value, reduced risk, and safety of all parties. With a "desperation" mindset, the seller often overlooks critical aspects of due diligence when evaluating buyers and properly preparing the transaction and parties for success. People who owner finance often assume their transaction is profitable and safe, simply because it's secured by the property! Yes, they can get the property back, but in what condition?

Owner financing is all about due diligence on the front end of the transaction and accurate documentation - including evaluating buyers; adhering to regulatory/statutory ramifications in structuring the note; understanding your role as lender, collections, and administrator; as well as selling the note for cash later. Because it is a financial transaction and the owner-financing individual is in essence the "bank," common sense underwriting is crucial to the transaction. The promissory note created in this transaction becomes a marketable commodity. A well-structured note is liquid like cash. It's a highly salable debt instrument. It can be used to collateralize others transactions as well.

INVESTING IN REAL ESTATE NOTES

A properly structured note is a lucrative investment and as a note investor you must understand what makes a note valuable, secure, and low risk. You will want to consider numerous factors to arrive at the value of the note.

Some factors include:

• Seniority (what position is the note and senior loan terms)
  
• Creditworthiness and payment history of the payor
  
• Protective equity
  
• The term of the note
  
• The type of property
  
• Location and marketability of the property
  
• And much more!

Initially (when a note is first created) as the note buyer you want to see protective equity (a cushion against loss). As the note payor pays over time (called "seasoning" the note) validated payment history becomes very important.

It is very important the note owner be aware of essential factors when creating and maintaining a note to protect their investment when they want to sell it. Some of the factors appear common sense and others are less so. Protective equity, loan-to-value (LTV), payment history, and credit worthiness are key to determining note value.

Whether you are owner financing and creating a note or purchasing an existing note, it is important you understand all the elements that make a note valuable and the rules and regulations to protect yourself and your investment! As previously stated, notes are one of the best financial investments you can own!

All rights reserved, used with permission. Maria Fee is a licensed mortgage professional, note buyer, author, and speaker locally, regionally, and internationally. She is President of REMI KNOX, LLC, a company that buys and sells notes nationwide and trains others to do the same. REMI KNOX, LLC offers complimentary Note Quotes to real estate professionals and consumers. Her FREE Note Appraisal, book Owner Financing Made Easy, and home study courses Owner Financing Made Easy Home Study Course, Note Brokering Made Easy Home Study Course are available at www.RemiKnox.com. For additional information, please call 1-866-871-5914.

REMI KNOX, LLC offers unique purchasing programs for owner-financed real estate notes and loan portfolios. As a full-service note buyer, REMI KNOX can purchase virtually any type of real estate-secured properly structured transaction. Their staff has been helping individuals and companies receive the cash they need by purchasing all or part of their future payment streams. If you are receiving payments from the sale of real estate, let us give you multiple offers today. We also specialize in the purchase of loan portfolios from real estate investors, land developers, builders, real estate investors, and financial institutions.

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