In todays email:

• 💬 State of the market: Update on the non-performing loan market.

• 👀 Featured Video: What is a partial note and what are the benefits.

• 🤑 Show me the money: How to make money with land contracts.

• 🥶 Cool Tools: How to keep track of foreclosure laws in all 50 states.

State of Real Estate

What is the state of the non-performing loan market?

In January 2023, 2.8% of mortgages were delinquent by at least 30 days or more including those in foreclosure. This represents a 0.5 percentage point decrease in the overall delinquency rate compared with January 2022. This has continually come down over the past few years as seen in the graph below.

From this graph, you can see the current state of the non-performing mortgage note market is relatively stable and that we are at historically low delinquency and unemployment rates. This is why I don’t see any tsunami of foreclosure coming soon plus most homeowners have equity and many were originated with strict underwriting in the past years with low interest rates.  

There are a few factors that have contributed to the stability of the non-performing mortgage note market. First, the economy has been strong in recent years, which has helped to keep people employed and able to make their mortgage payments. Second, interest rates have been low, which has made it easier for people to afford their mortgages. Third, the government has taken steps to help homeowners who are struggling to make their payments, such as the Home Affordable Modification Program (HAMP). Forth, the property values continue to rise and the homeowner’s equity is very high. Looking at the chart below you see 61.3% of homeowners have 50% or more in equity and many own their home free and clear.

However, there are some risks to the non-performing mortgage note (NPL) market which could translate into more notes to purchase. One risk is that the economy could slow down, which could lead to an increase in unemployment and mortgage delinquencies. Another risk is that the higher interest rates on the more recent loans could make it more difficult for people to afford their mortgages. Another risk is if more people start selling their houses and the inventory goes up quickly then the prices and thus equity will go down. However, I see the non-performing mortgage note market being in a relatively stable state…at least right now.

Here are some additional details about the non-performing mortgage note market:

• The delinquency rate for non-agency mortgages is higher than the delinquency rate for agency mortgages.

• The delinquency rate for non-QM mortgages is higher than the delinquency rate for QM mortgages. This is because non-QM mortgages are made to borrowers with lower credit scores, who are more likely to default on their loans.

• The delinquency rate for adjustable-rate mortgages (ARMs) is higher than the delinquency rate for fixed-rate mortgages. This is because ARMs have interest rates that can change over time, which can make it more difficult for borrowers to afford their payments if interest rates rise.

The non-performing mortgage note market is an important part of the financial system. It provides investors like us with a way to invest in mortgage notes and helps to provide liquidity to the market.

Featured Video 

Introduction To Partial Notes

The partial purchase of a note is extremely powerful tool available to note buyer and sellers. Both buyers and sellers can benefit from this technique. It is a great option to the “take it or leave it” mentality with a typical full note purchase. Is a great way to recapitalized for the note seller and a low risk, high return opportunity for the note buyer.

Most note holders initially ask for a full purchase. Many of them have just discovered the fact that they have the ability to sell their note and have no idea that alternate purchase options are possible or are even available. As a result, many note buyers or note brokers only focus on full purchases the majority of the time. But in a tight and competitive market, as we are experiencing now, creativity and flexibility are important for a note buyer or note broker. Discovering a seller’s true needs and structuring a transaction specifically designed to meet those needs can mean the difference between success and failure.

Partials are always a great tool to use when the note holder has an immediate cash requirement and only needs a specific amount of money to cover a specific situation or for a specific purpose. Also, when the seller is reluctant to take the necessary discount on the full purchase option. Finally, when the buyer wants to limit his/her investment exposure due to some concerns over the property value and needs a lower LTV (loan to value).

Partials can be much easier to sell to the note holder by emphasizing the combined amount of the price paid for the partial and the residual interest they may receive in the future. You can also stress the possibility of selling the remainder of the payments if additional cash is needed in the future. Finally, you can demonstrate how the specific partial option meets the specific cash need of the note holder.

What Is a Partial Note Purchase?

This is when someone purchases only a portion of the note and not the full note. For example, the note has 300 payments remaining and instead of buying the entire 300 payments you buy only the next 60 payments for a set dollar amount. After those payments are made the note reverts back to the original note seller for the remaining 240 payments. This is called a straight partial.

Types Of Partials

One of the most common partial options is a straight partial (also known as a front partial) which was discussed above. Straight partial is the purchase of the right to receive a number of payments amounting to less than the full remaining term of the note, most importantly, a set number of payments.

There is also a split payment partial. This is the purchase of a portion of each payment for a specified time period and amount with the seller receiving the remainder of each payment.

Finally, there is the balloon split partial. This is the purchase of immediate payments up to and including a portion of the balloon payment with the seller retaining a portion of the balloon payment.

Benefits Of Partials

Seller’s Benefits:

1. Gives seller choices based on needs. If seller only needs $30,000 and has a $100,000 note then does not have to sell the full note.

2. Minimizes discount to the seller. The discount is larger when selling a full note versus a partial note.

3. Seller can participate in future payments since the note reverts back to the seller when the buyer collects their designated number of payments.

4. Opportunity to sell another portion in the future since established a relationship with note buyer.

5. Shared risk for buyer and seller.

Buyer’s Benefits:

1. Since buying a partial the ITV (investment to value) is lower which reduces the risk and exposure to the buyer.

2. Residual income opportunity. The note seller may become a repeat customer.

3. Typically, buyer can structure higher yields since seller is happy to get back end note payments.

4. Limits the amount of money you need to invest.

5. Shortens the term for the buyer. Not “stuck” in one note. Spreads buyers’ risk among more notes.

Full and Partial Examples

Example of seller finance note sell: Mrs. Jones wants to sell a note in order to help pay for a new car. However, she does not want to take a large discount.

Mrs. Jones’s property is a seller financed note where the property is valued at $90,000. The current balance of the note is $78,591.58; payments are $538.90 at 7% interest with 327 payments remaining. We could structure a partial purchase of 120 payments of $538.90 at a 14% yield for $34,707. The residual balance after the ten years of payments would be approximately $64,668.

Mrs. Jones gets the money she needs now for her new car and retains the residual balance on the back end of the note for the future. Ms. Walker is happy; she got exactly what she needed to buy a new car. The investor is happy with a 14% yield and an ITV of about 39%. If there was a note broker involved, as an example, maybe the note broker might have offered Mrs. Jones $32,207 and been able to make $2,500.

Successful note brokers and note buyers know how to offer partial purchase options to get more transactions closed.

Show Me The Money 

Making Money With Land Contracts

Many people ask me to explain exactly what is a land contract and how does it differ from seller financing. A land contract (also called contract for deed or installment land contract) is a form of seller financing. The major difference between land contract and traditional seller financing is that the deed does not transfer until the loan is paid in full. The buyer gets possession of the property and makes payments over an extended period of time to the seller and when the purchase price is paid in full then the seller conveys legal title of the property to the buyer. The buyer has "equitable title" under the contract and has the right to receive "legal title" upon paying off the balance of the loan.

Think of it like buying a car. You go out and buy a car and put some money down and get financing for the rest and when you payoff the loan you get the legal title to the car. In the meantime, you have equitable ownership and total responsibility for the maintenance, insurance, taxes, etc. of that vehicle.

Like a mortgage, the land contract is a security device, but it lacks many of the formalities of the mortgage law. Many land contracts have a forfeiture clause (if allowed by that states laws) which allows the seller to get the property back upon the buyer defaulting on the payments. This process is typically much faster than a mortgage or deed of trust foreclosure. In a few states a land contract must be foreclosed like any other mortgage.

So, let’s take a look at an example:

House purchase price including expenses: $82,800

House Sales Price: $125,000

Down Payment Collected: $12,500

Unpaid Principal Balance: $112,500

Loan Rate and Term on UPB: 8.95% and 15 years

PI Payment:   $1137.71

IRR (Internal Rate of Return): 18.1% for next 15 years

Cool Tools

Do you need a quick and easy way to get a summary of the foreclosure laws in a certain state? Here are 2 great ways to get that information:

Realtytrac and Nolo both have a summary of the laws in all 50 states.

The foreclosure process varies somewhat from state to state and depends primarily on whether the state uses mortgages or deeds of trust for the purchase of real property. Generally, states that use mortgages conduct judicial foreclosures; states that use deeds of trust conduct non-judicial foreclosures. The principal difference between the two is that the judicial procedure requires court action on a foreclosed home.

Realtytrac has a table that represents their current knowledge of which states use mortgages (judicial) or deeds of trust (non-judicial) or both. The table also includes estimated foreclosure timelines for each state. Always check with your local county government or real estate attorney to verify this information.

Realtytrac has this simple one-page chart (see below - part 1 and 2) and you can click on the state name to read about detailed foreclosure procedures for that state.

Nolo is another option which also has a 50 state chart with information like the common foreclosure process, whether deficiency judgement allowed, whether redemption allowed, etc. An example of a few states is shown below. You can click on the state link and get more details of the process and laws in that state.

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

Last weeks POP QUIZ was…Can I buy a partial note instead of the whole note?

ANSWER: Yes! This newsletter explains all the details.

This weeks POP QUIZ: What is right of redemption when a property goes to foreclosure?

Check out next weeks newsletter for the complete answer.

PLEASE RECOMMEND THIS NEWSLETTER TO OTHERS. THE BIGGER THE COMMUNITY THE BETTER FOR ALL. NO SCARCITY MINDSET HERE!

We would love to get your feedback and thoughts! Let us know what questions you have and topics of interest. You can just respond by replying directly to this email…we like to make it easy 😌.