ford the payments, then it would be won-
derful if they would just walk away. But
normally, they don’t. They wait for you to
foreclose on them. In California that can
take anywhere from 5-18 months, in other
states it can take 2-3 years . . . ouch.
Sure, you’ll get the property back, but
after how many missed payments, and how
much in legal fees? And will the property
be trashed, and/or will the market be even
softer when you finally have possession
again?
Accepting a small down payment all
too often translates into financial loss . . .
there’s just not enough of a financial buf-
fer if something goes sideways. It’s like
sitting on a porcupine and wondering why
you’re not feeling so cushy and cozy.
Take the largest down payment you can
get. Getting a 20% down payment will
greatly reduce the statistical likelihood of
default (and make your note much more
valuable). Remember when that’s what it
took to buy a property? A 10% down pay-
ment is usually acceptable for an owner oc-
cupied single family residence (O/O SFR).
A down payment creates Protective Eq-
uity. Protective equity protects the seller
(note holder) from financial loss if the buy-
er (note payor) defaults.
The larger the down payment, the greater
the instant equity a buyer has. Think of a
down payment as the layer of cream on a
fresh cup of milk. The thicker the layer of
cream, the richer and tastier it is.
If you get a 20% down payment or more,
then you’ll have a note that’s worth holding
or selling. It’ll be rich and tasty, and I’ll
want to have it for dessert, sweetening up
my portfolio of real estate notes.
If you’re going to take a small down pay-
ment, you’ll want to find a way to reduce or
eliminate your exposure to foreclosure (or
the risk that a note buyer will have if they
buy your note).
Perhaps you’ll want to create two notes
instead of one, or use the Title Holding
Land Trust to avoid foreclosure altogeth-
er. There are some very innovative ways
to structure transactions to maximize both
real and paper assets. Sophisticated inves-
tors are using these strategies every day.
Deadly Mistake #2: Don’t ask for the
buyer’s SS# and don’t run a credit re-
port, (or, if you’ve actually done these
things, try to lose the credit application
and report so it’s unavailable to give a
prospective note buyer).
Realty411Guide.com
There have been a few times I’ve been
able to offer a really good price for a note,
just to have the deal fall apart because the
note holders couldn’t come up with infor-
mation like social security numbers for the
Payors.
The investors out there that will pay the
most for your note (ask you to take the
smallest discount) will want you to have a
Social Security number on the buyers (note
Payors), and they’ll want their FICOs to be
620 or above.
There are note buyers out there that will
buy your note even if you don’t have the
buyer’s SS#, but they’ll probably be offer-
ing you less for your note.
And even a great note by all other ac-
counts will be hard to sell if the Payors’
credit scores are low. It’s often difficult to
sell a note where the FICOs are coming in
below 600.
Why? Because, statistically speaking,
the lower the credit score, the greater the
chances that the buyer (note payor) will
default.
Have the buyer provide their SS# by
filling out a credit application and signing
it, run credit, and if it doesn’t come back
above 620, run from the deal, unless...there
are always ways to compensate for the risk
of lending (your equity) to a buyer with
poor credit, but still, it’s a tough conversa-
tion with credit scores in the 500s.
If you’re going to do the deal anyway,
be sure to take a larger-than-average down
payment, and be willing to season your
note for a year or more. If you hire me as
your personal underwriting department, I
will make sure you minimize risk, and have
a note I can buy at the soonest possible mo-
ment for the highest possible price.
And even if you’re not thinking of sell-
ing your note, don’t you want a strong in-
vestment that doesn’t have you addicted
to Milk of Magnesia? Don’t you want to
leave a good asset to your heirs and ben-
eficiaries?
Putting your transaction together in a
way that will make your paper (note) valu-
able on the secondary market, will auto-
matically assure you that you’ve placed
yourself in the most powerful position
possible, no matter what happens down the
road. It provides the most flexibility and
potential liquidity long term.
If the down payment is small, and the
buyer’s credit scores are low, then I highly
recommend that you consider using the
Title Holding (Land) Trust, but only if you
don’t plan on cashing out. You can’t sell a
beneficial interest in a trust the same way
you can sell a note).
Deadly Mistake #3: Lose the original
note
Deadly Mistake #4: Make the interest
rate on the note nice and low
Deadly Mistake #5: Create a short-term
balloon
Deadly Mistake #6: Fail to include a
provision for late payments and a due on
sale clause to your note
Deadly Mistake #7: Don’t keep a care-
ful accounting of the note payments you
receive
A 32-page preview of “Seller Financing on
Steroids” is available as a free download
at www.NoteQueen.com. You can also buy
the full ebook for $9.97, or order the pa-
perback from Amazon for $14.97.
Those interested in learning “The Dance
Between Property and Paper” will want to
consider joining Owner Financing Club, a
virtual real estate investment club focused
on owner financing and notes:
www.OwnerFinancingClub.com.
When banks say NO, I say YES!
Dawn Rickabaugh, Broker, Owner Financing Consultant
http://www.notequeen.com
support@notequeen.com
Seller Financing
on
STEROIDS
(626)470-3477
INVEST IN NOTES
PAGE 51 • 2011
reWEALTHmag.com