What every cash flow note owner and seller financed property seller needs to know about privately held mortgages, trust deeds, land contracts, notes, the secondary note purchasing market and structured settlements.

The Purpose of The Handbook

This handbook was created to provide educational information to current cash flow note holders and potential cash flow note holders. It will cover real estate mortgage notes, deeds of trusts, land contracts, simultaneous closings, and structured settlements.

All of the above notes can be great investments, however they do have some risks and often it makes financial sense for some note holders to cash out of all or part of their note. This handbook will show you a variety of ways that your newly created or well "seasoned" note may be purchased.

Seasoned Seller Financed Real Estate Notes

"Seasoning" refers to the number of payments received by the mortgagee from the mortgagor. If you own a seasoned note, you sold your property some time ago and instead of receiving all cash up front, which you may have preferred to do, you sold your home with seller-carry-back financing. This method of selling real estate, has become, and will continue to be, extremely common.

Seller financed real estate notes (carry-back/owner financed) have their benefits for every party involved in the transaction. The property seller, now also the mortgagee, sells their property quickly, inexpensively, and without the normal hassles involved with institutional or bank financing. The property buyer, now the mortgagor, successfully purchased a property that they may not have otherwise qualified for through traditional financing. Hopefully, you created the note at a good interest rate and are enjoying the monthly income provided by the seller financed real estate notes (carry-back/owner financed).

The seller financed real estate notes (carry-back/owner financed) which you now own is a salable asset. As a cash flow note holder, you should know the value of that asset. Let’s face it, life is unpredictable so you may have to or want to sell all or part of your note now or some time in the future. Real estate note brokers, like the one who gave you this handbook, can explain how the cash flow note is valued as well as the many ways in which it may be sold. Ask the real estate note broker for an appraisal.

When you sell your seller financed real estate notes (carry-back/owner financed) there are not any out-of-pocket expenses to you and the transaction can be completed in approximately ten days if all the proper documents are in order. Again the real estate note broker will assist you in gathering all the proper documents for the closing. Closings are held at a local title company and can be handled in person or by the mail.

Seasoned Seller Financed Real Estate Notes - The Risks

The seller financed real estate note (deed of trust) that you own is simply a pledge of the property as security or collateral for the payment of the debt. Part of the risks of owning a seller financed note like this is that the collateral may go down in value. The other part of the risk is the effect that inflation has on you monthly income.

Inflation - Inflation constantly erodes the purchasing power of every dollar we own. At the time of this writing inflation is extremely low, approximately 3.5%. That means that every year a single dollar loses 3.5% of its purchasing power. Inflation continues to compound upon itself year after year. What will your monthly income purchase five, ten, or fifteen years from now? What will happen to your purchasing power if in the very likely event that inflation goes up?

Liens - A lien is an encumbrance on a property. It is a claim on property for some obligation or debt. For example, a property tax lien. If such a lien is placed on the property because of delinquent taxes, your collateral or security of debt loses value. What if the property owner doesn’t pay the taxes?

Insurance - Property insurance protects the value of the property, which is your collateral, if it were damaged. Do you know if the property is insured? If so for how much? Are you listed as the mortgagee, trustee, or first contract holder with the insurance company? What would happen to you if the property burned down?

Property Value - The property owner should maintain and may even improve the property, but what if they don’t? What if the neighborhood takes a turn for the worst? Will your note be worth anything?

Default - What if the borrower fails to make the payments on time or worse fails to make the payments at all? What are the foreclosure laws in your state? In most cases you must hire an attorney and it could take up to 12 months to have the person removed.

Seasoned Seller Financed Real Estate Notes - Helpful Strategies

Check the terms of the Mortgage or Deed of Trust to see who is responsible for paying the property taxes and insurance. The most common ways are:

The borrower pays taxes and insurance
The borrower makes monthly payments to an escrow account held by the seller. The seller then pays the taxes and insurance once per year.
Make sure the insurance policy is issued in an amount equal to or greater than the amount that the mortgagor owes you.
Make sure that you are listed with the insurance company as the mortgagee, trustee or first contract holder. This ensures several things
You are entitled receive the insurance proceeds before the property owner.
You get a copy of the renewal notice each year.
You should receive a cancellation notice if the borrower ever misses a payment.
Call the county every year to make sure the property taxes have been paid.
Don’t let the mortgagor make late payments a habit. This will hurt the value of the note.
If possible drive by the property to see if it is being properly maintained.
Keep a payment history log.
Keep photographs of the property on file.
Keep all of your paperwork together and in a safety deposit box.
If default does occur hire an attorney who’s office is in the property area and who is familiar with the foreclosure laws in that area.
Don’t be afraid to adjust the contract, if some of the above items were not properly addressed when the note was created.

Examples - Seasoned Seller Financed Real Estate Notes - Full Purchase

$115,000 Purchase Price

$15,000 Down Payment

$100,000 Note Created for 20 years at 10% interest

$965.02 Payments per month

Two years of seasoning

Balance of note $96,517.25

Assuming the mortgagor has average credit to above average credit, a real estate note investor like Sovereign Funding would pay about $87,000 to purchase the entire note.

Total cash to seller financed real estate note holder:

$15,000 down payment

$23,160 received in payments over the last two years

$87,000 from investor for the real estate note purchase

$125,160 total cash to seller financed real estate note holder

*In all examples the purchase prices are accurate at time of printing but subject to market conditions and individual note qualifications.

Examples - Seasoned Seller Financed Real Estate Note - Partial Purchase

$115,000 Purchase Price

$15,000 Down Payment

$100,000 Note Created for 20 years at 10% interest

$965.02 Payments per month

Two years of seasoning

Balance of note $96,517.25

Real Estate note holder needs $40,000 so the investor buys the next 60 payments only.

Total cash to seller financed real estate note holder:

$15,000 down payment

$23,160 received in payments over the last two years

$40,000 from investor for the real estate note purchase

$149,578 from payments 85 through 240

$227,738 total cash to seller financed real estate note holder

Examples - Seasoned Note - Half Partial Purchase

$115,000 Purchase Price

$15,000 Down Payment

$100,000 Note Created for 20 years at 10% interest

$965.02 Payments per month

Two years of seasoning

Balance of note $96,517.25

Real estate note holder needs $20,000 now and a monthly income stream so the investor buys $500 of the next 60 payments only.

Total cash to seller financed real estate note holder:

$15,000 down payment

$23,160 received in payments over the last two years

$20,000 from investor for the real estate note purchase

$27,900 from payments 25 through 85

$149,578 from payments 86 through 240

$235,638 total cash to seller financed real estate note holder

Unseasoned Seller Financed Real Estate Notes - Simultaneous Closings

Unseasoned Seller financed real estate notes (carry-back/owner financed) are created when a property seller and buyer originate through seller-carry-back financing, a note and then the note owner (property seller) immediately sells the note to a real estate note buyer. The real estate note is normally sold at a predetermined and guaranteed price. This is a creative way to sell a property quickly, at a premium and with out all the red tape and qualifications for bank financing. This can be done with or without a real estate agent.

For an investor to purchase an unseasoned real estate note, certain loan-to-value ratio’s must be met. The real estate note broker will show you how to create a note so that these LTV’s are met. The real estate note broker will also show you how to create a note that will have a high present value. The higher the present value, the more attractive it is to investors like Sovereign Funding Group.

The process is simple really, the property owner advertises owner-held-financing or seller-carry-back financing. Attractive financing opens the buying opportunity to more people so the phone should start ringing off the hook. Have the most qualified buyer sign a purchase contract subject to you being able to sell the note to Sovereign Funding Group. The real estate note broker will work with Sovereign Funding Group to establish the final purchase price of the real estate note. If the purchase price is agreeable, the deal proceeds to closing. First the buyer and seller create the real estate note, then the property seller (real estate note owner) sells the real estate note to the investor at the predetermined price.

For a transaction like this to work the property seller must have at least 30% equity in the property.

Unseasoned Notes - Simultaneous Closings - The Risks

On a full purchase, there are no risks! All of the contracts are subject to final approval and the purchase price is guaranteed in writing.

On a partial purchase the risks are similar to seasoned real estate notes. The investor and the seller share these risks.

Unseasoned Notes-Simultaneous Closings - Helpful Hints

The larger the down payment, the more the real estate note is worth.

Sell the property for full appraised value, after all you are offering attractive terms. Most people are willing to pay full price if they can get attractive terms.

The interest rate of the originated real estate note should be several percentage points above prime.

The shorter the term of the real estate note, the higher the present value.

A balloon payment combined with a longer amortization period can lower the monthly payments for the property buyer without lowering the present value that much.

Little and nothing down deals can be accomplished by doing partial purchases.

Work with the real estate note broker to come up with several purchasing options.

The better the credit of the potential mortgagor, the more the real estate note is worth.

Unseasoned Notes-Simultaneous Closings - Full Purchase

$100,000 Sale Price

$20,000 Down Payment

$80,000 Note Created at 10% for 15 years

$859.68 Monthly Payments

A real estate note buyer buys the $80,000 note for $72,000

Cash to the holder of the seller financed real estate note at closing:

$20,000 Down Payment

$72,000 Real Estate Note Sale

$92,000 Total

Unseasoned Notes-Simultaneous Closings - Partial Purchase

$100,000 Sale Price

$20,000 Down Payment

$80,000 Note Created at 10% for 15 years

$859.68 Monthly Payments

A real estate note investor buys the next 60 payments for $39,000

Cash to the holder of the seller financed real estate note at closing:

$20,000 Down Payment

$39,000 Real Estate Note Sale

$59,000 Total

After the five years, the remaining payments of the real estate note go back to the original real estate note owner.

Total cash to seller financed real estate holder:

$20,000 Down Payment

$39,000 Real Estate Note Sale

$103,162 Payments 61 through 180

$162,362 Total

Unseasoned Notes-Simultaneous Closings - Balloon Partial Purchase

$100,000 Sale Price

$20,000 Down Payment

$80,000 Real Estate Note Created at 10% for 30 years

$702.06 Monthly Payments

A real estate note investor buys the next 120 payments for $49,000

Cash to seller of Real Estate Note at closing:

$20,000 Down Payment

$49,000 Real Estate Note Sale

$69,000 Total

The balance of the Real Estate Note in ten years is $72,750

Total Cash to Seller Financed Real Estate Note Holder:

$20,000 Down Payment

$49,000 Real Estate Note Sale

$72,750 Balloon Payment

$141,750 Total

Unseasoned Notes-Simultaneous Closings - Small Down Payment

$100,000 Sale Price

$5,000 Down Payment

$95,000 Real Estate Note Created at 10% for 15 years

$1,021 Monthly Payments

A real estate note investor buys the next 60 payments for $45,894

Cash to seller at closing:

$5,000 Down Payment

$45,894 Real Estate Note Sale

$50,894 Total

After the five years, the remaining payments of the Real Estate Note go back to the original Real Estate Note owner.

Total Cash to Seller Financed Real Estate Note Owner:

$5,000 Down Payment

$45,894 Real Estate Note Sale

$122,520 Payments 61 through 180

$173,414 Total

Structured Settlements -

Structured settlements is a catch-all phrase that includes personal injury awards, medical malpractice awards, product liability awards, motor vehicle collision awards and any other legal settlement. Most of these awards are settled out of court and insurance companies pay the settlement from an annuity.

Once a settlement agreement is made between the parties, the insurance company responsible for making the payments will buy an annuity. The insurance company remains the owner of the annuity and the recipient of the annuity, or structured settlement benefactor, is the person who won the award. Unfortunately, most of these settlements are written in favor of the insurance company, not the structured settlement beneficiary.

These structured settlements are normally written with the structured settlement benefactors long term financial well being in mind, little consideration seems to be given to the structured settlement benefactors short term financial well being or their current investment opportunities. Most structured settlement benefactors would like better control of their structured settlement but often these court cases are drawn out for years and the structured settlement beneficiary wants to end it and move on with their lives.

By selling all or part of a structured settlement the beneficiary can take advantage of investment opportunities and control short term financial difficulties. In almost all cases the benefits of a structured settlement partial sales outweigh those of a full sale of the structured settlement. The present value calculations and inflation are two of the reasons why partial sales or incremental partial sales make financial sense with regards to most structured settlement sales..

Structured Settlements - The Risks

Inflation

Inflation constantly erodes the purchasing power of every dollar we own. At the time of this writing inflation is extremely low, approximately 2.5%. That means that every year a single dollar loses 2.5% of its purchasing power. Inflation continues to compound upon itself year after year. What will $20,000 purchase five, ten, or fifteen years from now? What will happen to your purchasing power if in the very likely event that inflation goes up?

Default

It’s very unlikely that an insurance company will fail to make a timely payment or miss payments completely, however it is possible. Be sure the company you settle with has an extremely good rating.

Structured Settlements - Missed Investment Opportunities

What interest could you have been making on your money if you received it in a lump sum instead of an installment? How much money would you have accumulated five, ten, or fifteen years from now?

Structured Settlements - Full Purchase

Structured settlement benefactor has received $10,000. The next payment to be received is $50,000, five years from now.

A real estate note investor would pay any where from $20,000 to $28,000 dollars depending upon several factors such as whether the note may be assigned or not.

Structured Settlements - Half Partial Purchase

A structured settlement beneficiary will receive $1000 per month for the next 240 months, period certain. He needs $20,000 to pay off high interest debt and needs some monthly income. He has received the first two years of the structured settlement payments.

An structured settlement buyer would pay about $21,000 for $500 of the next 68 payments.

Cash To Seller

$24,000 already received (Payments 1-24)

$21,000 from the real estate note investor for payment 25-91

$34,000 for half of the payment for period 25-91

$150,000 for $1000 per month for payments 92-240

Structured Settlements - Partial Purchase with Life Insurance

A structured settlement beneficiary receives the following:

$250 on the first day of each month from May 1st 1981 and every month for as long as she is living
$30,000 on April 15th 1985, guaranteed
$40,000 on April 15th 1990, guaranteed
$60,000 on April 15th 1995, guaranteed
$65,000 on April 15th 2000, guaranteed
$70,000 on April 15th 2005, guaranteed
$75,000 on April 15th 2010, guaranteed
$80,000 on April 15th 2015, guaranteed

In order for the structured settlement beneficiary to make a decision to satisfy her current goals, the real estate note broker gets the following purchase quotes for the structured settlement beneficiary:

$38,000 for the 2000 lump sum payment only
$57,000 for the 2000 and 2005 lump sum payments only
$70,000 for the 2000, 2005 and 2010 lump sum payment only.
$91,000 for the $250 monthly payments for the next 240 months, the 2000, 2005 and 2010 lump sum payment only *.

*Because the monthly payments are only going to be paid if the structured settlement beneficiary is alive, the structured settlement buyer requires that she buys a decreasing term life insurance policy with the structured settlement buyer listed as the structured settlements beneficiary. Decreasing term is very inexpensive and the value of the policy is written just to cover the structured settlement investors return-no more.

Glossary

Abstract of Title - Condensed history of title to real property consisting of a summary of links in the chain of title extracted form documents bearing on the title status.
Accounts receivable factoring - see invoice factoring
Accounts receivable management - see invoice factoring
Accounts receivable factoring - see invoice factoring
Agent - A representative; one who is authorized to act on behalf of another.
Agreement for deed - see Contract for deed
Amortization - Payment of a debt by regular installments payments.
Appraisal - Professional service provided by a licensed, registered or certified appraiser to produce an estimate of value.
Appraised Value Estimated worth of a property or note determined by someone qualified in valuation.
Assessed Value - Worth established for each unit of real property for tax purposes by a county property appraiser.
Assignment - Written instrument that serves to transfer the rights or interest from one person to another.
Assignor - Person who gives his or her legal rights or interests to another person.
Balloon Payment - A financing device requiring periodic payments of a smaller amount than is necessary to fully amortize the principle borrowed. A single large payment at maturity is required to pay off the debt in full.
Borrower - The mortgagor; one who gives a mortgage as security for debt.
Broker - Generally, a special agent who acts as an intermediary between two parties and negotiates contracts between them.
Business note - See real estate note. Same thing except a business has been sold instead of a home.
Buy structured settlements - see structured settlements
Cash Flow Note - A note with a future cash value
Cash for structured settlements - see structured settlements
Closing - Final settlement between buyer and seller; the date on which title passes between the buyer and the seller.
Cloud on title - any defect, valid claim or encumbrance that serves to impair or curtail owner’s rights
Collateral - Real or personal property pledged as security on a debt.
Contract - An agreement between two or more competent parties to do , or not do , some legal act for a legal consideration.
Contract for Deed - A financing technique wherein the seller agrees to deliver the deed at some future date and the buyer takes possession while paying the agreed amount (also called a land contract, installment sales contract or agreement for deed).
Deed - A type of conveyance; a written instrument to transfer title to real property from one party to another
Default - Failure to comply with terms of an agreement or to meet an obligation when due.
Discounting - A method for increasing a lender’s yield.
Down Payment - A portion of a purchase price paid prior to closing the transaction. Ernest money may be a part of or the entire down payment.
Due-on-sale clause - A provision in a conventional mortgage that entitles the lender to require the entire loan to be paid in full if the property is sold.
Encumbrance - Any lien, claim, or liability affecting the title or attaching to real property.
Equitable title - The right of the vendee to obtain absolute ownership of property to which the vendor has legal title; the interest held by the vendee under a sales contract or contract for deed.
Equity - The market value of a property less any debt against it.
Factoring - see invoice factoring
Factoring company (plural) Factoring companies - see accounts receivable factoring
Foreclosure - A court process to transfer title to real property used as security for debt as a means of paying the debt by involuntary sale of the property.
Free and clear - Title to real property that is absolute and unencumbered.
Grantee - Party who receives a deed or grant; buyer.
Grantor - Party who signs or gives a deed; seller.
Hazard insurance - Coverage by contract whereby one party undertakes to guarantee another party against loss resulting from physical damage to real property.
Hypothecate - To pledge real or personal property as security for debt or obligation without giving up possession of the property.
Installment - Sales contract see Contract for deed.
Interest - The price paid for the use of borrowed money.
Invoice factoring - factoring is the selling of a company's account receivables to a financial institution normally at a discounted rate. Factoring is usually performed to increase cash flow, instead of waiting for the normal terms associated with selling to customers (ie. net 15, 30 or 45 days ).
Judgment - Decree of a court that not only declares that one party owes another but also fixes the debt amount.
Just value - The fair market value.
Land contract - see Contract for deed
Land description - A definite and positive written identification of a specific parcel of land and its location without any additional oral testimony.
Lien - A claim on property for payment of some obligation or debt.
Life settlements - create immediate liquidity from a non-performing asset, allowing policy owners to cash out of unwanted, unaffordable or obsolete life insurance policies.
Loan-to-value ratio - Relationship between amount borrowed and appraised value (or sales price) of a property.
Maintenance clause - A provision in a mortgage agreement that requires mortgagors (borrowers) to maintain mortgaged property in good condition.
Marketable title - Rights to real property that are so clear that a buyer may have peaceful and quite enjoyment of the property free of litigation.
Market value - The most probable price a property will bring from a fully informed buyer, willing but not compelled to buy, and the lowest price a fully informed seller is willing to accept if not compelled to sell.
Mortgage - A written agreement that pledges property as security for payment of a debt.
Mortgagee - A lender who holds a mortgage on a specific property as security for the money loaned to the borrower.
Mortgagor - A borrower who gives a mortgage on his or her property in order to obtain a loan from a lender.
Note - Legal evidence of a debt that must accompany a mortgage; a legally executed pledge to pay a stipulated sum of money
Opinion of value - An estimate of a property’s worth given by a licensee for the purpose of a prospective sale.
Origination fee - A charge by a lender for taking a mortgage in exchange for a loan.
Personal injury settlements - see structured settlements
Prepayment clause - A provision in a mortgage that allows the mortgagor to pay the mortgage debt ahead of schedule without penalty.
Present Value - The worth of all future benefits of an investment in terms of today’s dollars.
Promissory note - A written promise to pay a specific amount (see also note).
Property insurance - see hazard insurance.
Quitclaim deed - A type of deed that will effectively convey any present interest, claim or title to real property that the seller (grantor) may own.
Ratio - The relationship in quantity, size or amount between two things; proportion.
Real Estate Notes - A note that has been financed by the seller rather than by a bank. In other words no mortgage was created since the payments are paid usually monthly to the seller.
Real property - Any interest or estate in land, including leaseholds, sub-leaseholds, business opportunities and enterprises and mineral rights; real estate.
Risk - The chance of loss of all or part of an investment; the uncertainty of financial loss.
Sales contract (purchase agreement, contract for sale and purchase) - An agreement whereby one party agrees to sell and the other party agrees to buy according to the terms set forth.
Secondary lender - Agency or financial institution that buys mortgage loans previously made by primary lenders.
Secondary market A source for the purchase and sale of existing mortgages.
Second mortgage - A loan that is junior or subordinate to a first mortgage, normally taken out when the borrower needs more money.
Sell structured settlements - see structured settlements
Seller financed real estate note - see real estate note
Structured Settlements - A financial package permitting a settlement to be paid in regular installments either for a fixed period or for the lifetime of the claimant. Because it is tailor-made for individual cases, the structure may also include some immediate payment to cover special damages. The payment is usually made through purchase of an annuity from a Life Insurance Company.
Tax clause - A provision in a mortgage that requires the borrower to pay all legitimate property taxes.
Tax lien - A claim against real property arising out of non-payment of the property taxes.
Term loan - A non-amortizing mortgage that normally calls for repayment of the principal in full at the end of the loan term.
Title - The group of rights that represent ownership of real property and the quality of the estate owned; evidence of ownership of property; legal title.
Title insurance - A policy of insurance that protects the holder from any loss resulting from defects in title.
Trust - A right of property, either real or personal, held by one party for the benefit of another party.
Underwriting (loan qualification; risk analysis) - The analysis of the extent of risk assumed by a lender in connection with a proposed mortgage.
Vendee - The buyer of real property under an agreement for sale.
Vendor - The seller of real property under an agreement for sale.
Viaticals - enable someone facing a terminal illness to utilize the present day value of their life insurance policy to ease financial burdens and create peace of mind
Warranty deed - A type of deed containing the strongest and most comprehensive promises of further assurance possible for the grantor to convey to a grantee.
Wrap-around mortgage - A financing technique in which the payment of the existing mortgage is continued (by the seller) and a new, higher interest mortgage, which is larger than the existing mortgage, is paid by the buyer/borrower.
Yield - The rate of return; the return on investment or the amount of profit stated as a percentage; the ratio of the annual net income from a property to the cost or market value of the property.

Feel free to contact us anytime for a free no-risk consultation toll-free at (877) 836-4661 or email us if you have any questions.