In the current economy we are in Lenders have tightened up their credit requirements and are taking the time to verify every piece of information potential borrowers submit. In fact when you submit an application for a mortgage be ready to run through the gamit and be ready for a frustrating ambiguous process that more than likely will not produce the results you are looking for. It is for this reason we see that many home sellers are using owner financing to sell their home and rightly so. After the note has been created many note holders (home sellers) are selling their notes as they have a need for CASH.
All notes are different, just like a finger print, and each one closes just a little bit differently. Some note transactions are easier to process than others and can close quickly, within a week. Others prove to be more challenging and produce many hurdles that need to be overcome before closing. This is one such transaction where the challenges were many but overcome and closed.
A note holder in Austin, Texas contacted The Texas Note Company to assist in selling her note. She had sold her property using owner financing the previous year, received a 14% down payment(not bad) and carried back the note. Here is what the note looked like:
- Down Payment $38,500
- Face Value $236,500
- Sales Price $275,000
- Interest 8%
- Term 360 mo
- Payment $1,735.35
- Balloon In 36mo
All in All not a bad note. The Balloon is a little short which speaks to the Time Value of Money (TVM,) meaning money received sooner is more valuable than money received later. The note seller wanted the home buyer to refinance by 3 years but did not have a clear exit strategy; I would have advised a longer balloon of 5 to 7 years given the current economy. Another positive aspect to this note is the property appraised at $346,000 which added to the equity of the note. The Loan To Value (LTV) was 68%, Note Balance / the Appraisal. This note has several positive aspects working for it.
Now, what made this note challenging? First, the note was in 2nd position and "wrapped" to the note holder's (home seller) existing mortgage. The 1st position note had a low interest rate and amortized over 30 years with a balance of just over $123,000, so it made it possible for the home owner to sell their property using a "Wrap" strategy and still make a couple hundred dollars a month, plus a nice down payment. In order to sell this note any investor would want the 1st position paid in full from part of the proceeds, ok no problem.
Credit proved to be a big obstacle on this note and cost the note holder several thousand dollars. The credit score of the payors were in the mid to low 500s, ouch! The initial offer with good credit was close to $200K, the offer we received with credit as is was $175. Now many investors on the secondary market will not look at notes unless the score is above 600, but given the right story and right investor a buyer was found and at a price that made sense to the note seller. The Texas Note Company has many such relationships with investors.
It would have been nice for the note seller to have the additional $25K but she was able to get an offer for her note that achieved all her objectives; pay off the 1st lien and still have enough cash to fulfill another project.
We have an offer that was accepted, $175K, and now we move into the due diligence and closing phase. Here at The Texas Note Company we use a North American Title Company to process and facilitate most all of our transactions. I can't tell you the value that a good Title Agent provides. It guarantees that the buyer, seller and payor are protected and the process runs unabated. I have used others in the past as well as attorneys and have gone through a couple of harrowing experiences.
For this transaction several steps needed to be take in order for the deal to work. I am going to run through them quickly without telling a story for each one which I could. Here are the steps:
- Issue a title commitment b/c their was no title insurance cost $1673.00
- Pay off the first lean at note holders bank
- Pay city and county taxes on the property still outstanding (Nice Surprise)
- Issue tax certificate
- Title was clear except for the current HOA dues, had to pay $295.00
- Validate Note Payor payment history - all in order.
The steps above seems just a part of the process and it is, but each item was an expense that came out of the seller proceeds, they add up but did not deter the seller from going through with the transaction.
Here is a list of documents need to process this note sale.
- Promissory Note
- Deed of Trust
- Warranty Deed
- Commitment letter from note seller
- Settlement statement from property sale
- City and County Tax Statement
- HOA certificate - Pay History Verification
- Brokers Pricing Opinion (BPO)
- Copy of Property Insurance (Fire Declaration)
- 1st lien pay off statement
We made it to closing. The buyers had forwarded the closing docs and the seller was ready to sign the bottom line. After all the signing was complete it was time for the seller to hand over the Deed of trust and the Original Promissory note. One problem, the promissory note she had was not the original it was a copy, Uh Oh! The seller did not go home with her check. She had to find the original, only problem she did not no where it was after looking everywhere. Fortunately , the buyer agreed to accept a copy resigned by the payor and note holder. I tell note holder all the time, THE PROMISORY NOTE IS THE MOST IMPORTANT NOTE DOCUMENT KEEP IT IN A SAFE PLACE! Losing the original note document is a REAL potential deal killer. Sound record keeping can mean thousands of dollars if you decide to carry back a note.
The last kicker was when the transaction was funded by the Investor, title company had funds in escrow, they made one last request of the broker(me) in this transaction. The investor wanted a certified copy of the Deed of Trust because the note seller did not have the ORIGINAL Promissory Note. So at 4:00pm on Friday, we made it to the courthouse to obtain a certified copy, which we did. Made back to the tile company with the certified copy and all parties were funded or paid off. My point is, it never hurst to know your way around a courhouse to be able to get a document ASAP.
This proved to be a pretty challanging process once we got through all the steps. There is much we can learn from this transaction as The Texas Note Company moves on to other deals.