In todays email:

• 💬 State of the market: Seller financing market volume and MCAI.

• 👀 Featured Video: Typical mortgage note returns.

• 🤑 Show me the money: How to calculate offers for desired yield.

• 🥶 Cool Tools: Get your lawn cut anywhere with click of button.

State of Real Estate

SELLER FINANCE USA STATS  

This is a 30,000 foot view of the seller financing real estate market in the USA.

First a refresher for those who are not super clear on what is meant by seller financing...also known as owner financing or seller carry.

Seller financing is a type of real estate transaction in which the seller provides financing to the buyer, rather than the buyer obtaining a traditional mortgage from a bank or other lender. This means that the seller acts as the lender and the buyer makes payments to the seller, rather than a bank. This can be a useful option for buyers who may not qualify for a traditional mortgage, or for sellers who want to move their property quickly and are willing to provide financing to the buyer as an incentive.

Top 3 States For Seller Financing: TX, CA, and FL. Texas usually comes out on top.

Who creates the notes: 84% create 1 note per year and 16% create 2 or more. So lot of "mom and pop" notes.

Dollar Volume/year: Total (residential and commercial) around $27 Billion of which approx $14-15 billion is residential real estate.

Volume has increased in recent years and I think it will increase even more so now due to higher interest rates and people unable to qualify for traditional mortgages. See chart below (data sourced from ASDS).

The MBA (Mortgage Bankers Association) has an index called “Mortgage Credit Availability Index” (MCAI) which is a barometer on the availability or supply of mortgage credit at a point in time. A decline in the MCAI indicates that lending standards are tightening (i.e. getting harder to get loan), while increases in the index are indicative of loosening credit. The index was benchmarked to 100 in March 2012.

I bring this up since the harder it is for someone to get a loan, the more owner financing will occur and that is what we are seeing now.

The bottom graph really puts it all in perspective by looking back nearly 20 years. 2007-2008 great financial crisis really changed things!

Featured Video 

Mortgage Note Investing Returns

In this video, I talk about 3 types of mortgages and the expected returns based on performance. The 3 types are institutional mortgages, private lending mortgages and seller finance mortgages.

INSTITUTIONAL MORTGAGE NOTES

So first of all we're going to talk about what I call institutional mortgage notes that are originated from the big institutions like the Wells Fargo, Bank of America, Chase, etc. These types of institutions generated many of the notes that became non-performing after the crash of 2008. But first lets talk about performing institutional notes. These are ones performing for several years and the default rate is very small…less than 1%. This is high quality paper that is typically held by a moneycenter banks such as Bank of America or a Chase. There is usually very little discount when banks sell these notes and are usually bundled into MBS (mortgage backed securities) and sold. There is not much upside and the yields are low so we don’t get involved in this arena.

The next category is re-performing mortgage notes. A re-performing note happens when a homeowner stops paying for several months or even years and then something occurs and they get on track with their payments. That could be a reinstatement or they got a loan modification or some workout. Typical returns are in the ball park of 8-12% but change wildly with the conditions of the housing market. Now if I bought the note in default (non-performing loan) and I got it re-performing by doing a loan modification then my returns would be much higher (15-25%) depending on the note discount price. I consider a re-performing note as one that has been paying for at least 12 months after it became re-performing. Remember these long term notes give you cash flow and payments not for months but for years…up to 30 years.

The next category is sub-performing mortgage notes. These are notes where the borrower pays but not consistently. The borrower pays for awhile and then suddenly stop paying for a period and then maybe catches up the back payment to become current again. Many stops and starts. You can buy these at a bigger discount but these sub-performing mortgage notes requires more management since you have to stay on top of the borrower to make payments. In other words, you have to babysit or what I call ”adult daycare”. The returns are higher since higher risk. The exact returns vary dramatically but usually between 10-15% but I have gotten much higher on some because I was able to get a good discount on price.

The next category is non-performing mortgage notes. These are notes that are not paying and could be a few months to multiple years behind on payments. I have purchased notes that had not paid in 7 years. These are ones for the experienced note investors and not a place to start. The note discounts for these types are in the range of 25-50% of UPB (unpaid principal balance) as long as the property value supports the price. In general, I am looking to pay up to around 65% of value and up to 75% of UPB. The target yield varies dramatically but typically are 20-50%. I have many notes that make a lot more than 50% but the returns are many times determined by the overall market conditions.

PRIVATE MORTGAGE NOTES

Here I have lumped together private lending mortgage notes and seller finance mortgage notes. The seller carry back note is when a seller acts as the bank or lender and carries a mortgage on their property. Private lending or hard money lending usually involves an individual or some entity loaning money to someone for a fix and flip, fix to rent, buy to rent or some type of bridge financing.

• SELLER/OWNER FINANCING

  • When a seller acts as the bank or lender and carries a mortgage on the subject property.

  • RATES - 7-12%. Depends on amount down, note position, borrower credit, loan to value, etc.

  • Buy these notes at a discount and get an even better return.

• PRIVATE LENDING/HARD MONEY LENDING

  • Fix and Flip financing

  • Fix to Rent financing

  • Buy to Rent financing

  • Refinance and Bridge financing

  • RATES - 10-18% plus points

I love to buy these notes at a discount which allows me to get a better return. For example, if there was a 20 year note at $100,000 at 7% and you got a discount on the note where you bought it at 80,000 (i.e. 20% discount) your returns go up from 7% to 10%. The other benefit with private lending is you can charge points (1 pt equals 1%) as a fee for doing the transaction. The amount of points a lender charges varies but typically in the range of 2-4 points depending on the credit, experience, collateral, etc.

Show Me The Money 

How do I determine how much to offer?

One of the newsletter subscribers emailed and asked “How much do I offer on this note to get a 10% return? Please show the steps to calculate using a financial calculator.

Here is the mortgage information provided:

1. Current UPB (unpaid principal balance) = $127,500

2. Note rate = 7.75% fixed

3. Term left = 236 months

4. Payment = $1054.16

Here are the steps to take on a 10bii financial calculator. I reviewed this calculator app in a prior newsletter.

STEP 1: Insert the UPB into PV as negative number (-$127,500), insert rate of 7.75 into I/YR and then insert term of 236 into N. Then solve for payment (PMT) to check if the numbers given are correct. This is what I call a sanity check. If the payment is way different that what the note seller said then I need to get further clarification. See below screenshots on the 10bii calculator.

STEP 2: Then type in 10 for the 10% desired yield (1st pic below) and then click on I/YR (2nd pic below) and finally click PV to get the amount you would pay to get that desired yield of 10% (3rd pic below). Now you see that to get a 10% yield you would offer $108,654.

Now don’t get hung up on the negative number. It represents money going out. I hope this step by step example helped. This is just one of many calculations you will be doing as a note investor. We will do more calculation examples in future newsletters so stay tuned.

Cool Tools

LAWNSTARTER is the cool tool of the week. What is lawnstarter?

Lawnstarter.com is affordable lawn service at the click of a button. I love it and use it all the time. Why? I have property in several different states and it takes alot of time and effort to find and vet a lawn care companies and then schedule the work and then make payments, etc. This is all taken care of in the Lawnstarter App or online. It is affordable, fast and guaranteed.

My personal experience has been great and find it less expensive for my needs. It is especially useful when I have a vacant property and want to keep the lawn maintained to give the appearance that someone is living there which reduces vandalism. Other times I am ready to sell a home and want to make the house look good to a potential buyer. You can pick and choose your level of maintenance and can even get things like the bushes trimmed.

They also have a referral program that allows you to refer friends and family for a discount on both your mow as well as theirs. You can obtain your personal referral link which can be shared with friends and family to give them a $15 discount on their first mow.

The best thing about Lawnstarter is that you can start and stop with click of button and no need to call to cancel or restart if needed.

Click here to get $15 discount on your first mow!

🖐️ IF YOU HAVE A QUESTION, PLEASE RAISE YOUR HAND AND ASK BY SIMPLY REPLYING TO THIS EMAIL.

Last weeks POP QUIZ was…What lien position is an IRS lien on a property?

ANSWER: It depends. The IRS lien is not a priority lien but gets in line like all other liens depending on the date of recording. The priority of a lien is determined by the date and time it was recorded. The main difference is that the IRS lien has 120 days right of redemption after a foreclosure sale.

This weeks POP QUIZ: What is forced placed insurance?

Check out next weeks newsletter for the complete answer.

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