Sell Promissory Note – Challenging Note Transaction
Lending practices in todays current market have changed dramatically and make it more and more difficult for lenders to get approved after a long and ardgous process. For this reason alone we see more and more home buyers and sellers turn to owner financing as a solution to get the results needed.
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.
Last year a property owner used owner financing to sell her home in Central Texas. This spring she got in touch with The Texas Note Company to purchase the note after 8 payments had been received. The details of the note look like this:
Sales Price $275,000
Down Payment $38,500
Face Value $236,500
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
Closing finally arrived, the buyer forwarded the closing docs(The Assignment & Estoppel) and the seller was ready to sign on the bottom line. The seller then arrived without the Origninal Promissory note, on NO!. The seller signed all the necessary paperwork but now she was tasked to find the Original Promissory Note, which she was unable to do. This fact alone could have very well killed the deal. Fortunately the buyer accepted a copy that was resigned by the Payor and note holder so the transaction was able to go through, not always the case. I inform note holders all the time, THE MOST INPORTANT NOTE DOCUMENT IS THE PROMISSORY NOTE, KEEP IT IN A SAFE PLACE. I have written an article on that subject alone.
About the Author
Robert E Young is the Founding Director of The Texas Note Company. He is a Real Estate Investor who puts real estate transactions together using proven seller financing strategies and techniques. He Purchases and brokers private real estate notes often getting home sellers the cash they need to move on to the next transaction. Robert enjoys teaching and educating real estate minded people the advantages of Seller Financing and what it can bring to a real estate transaction while dispelling it’s myths. When traditional financing methods fail to provide the benefits buyers and sellers are looking for, often it is seller financing to provide a solution.
TMNT S01E13 Notes from Underground, Part One (2/2)
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