BACKGROUND AND FUNDAMENTALS
The private mortgage industry is a relatively young business with roots that can be traced directly to the emergence of seller-backed, or owner, financing. Prior to the very high interest rates of the late 70s and 80s, seller-backed financing was not a common financing option. The only loan option for most real estate buyers was through a bank or savings and loan institution. But with interest rates topping out at 22 percent, financing for real estate was either unavailable or too unattractive for most buyers. Real estate sales plummeted.
Desperate, those with real estate on the market turned to innovative, unusual ways to attract buyers. One of the quickest to catch on was seller-backed financing. The seller would “hold paper" on the property, allowing the buyer to pay a mortgage directly to the seller. Simple and straightforward, the financing option appealed to both the seller and the buyer because it beat the high interest rates and circumvented the unavailability of traditional financing. Often this was the only way to sell real estate in the high interest rate market.
As more and more individuals held private mortgages (called private because they are not held by banks), a need developed for the holder to be able to sell these mortgages. Thus, the private mortgage industry was born. Seller-backed financing has developed into an accepted and standard way to finance real estate. As a result, the private mortgage industry has flourished, earning a place of respect in the financial community.
The amount of private real estate paper has risen dramatically. It is conservatively estimated that over $226 billion in real estate purchases is financed through private (non-institutional) notes.
Seller financing provides many advantages to buyers and seller, but one area of concern to many sellers is liquidity. How do they get cash from the note if they need it or want it? Will they be saddled with a 15-year note or longer rather then having the cash that is needed?
In response to this need, funding sources buy paper from note holders for cash, usually at a discount off the principal balance of the note. This provides a means for the holder to receive cash now instead of having to wait out the term of the note.
The evolution of this secondary market for privately-held paper has increased the attractiveness of seller-backed financing, giving the seller a “fall-back" position. Some sellers turn their notes over directly after the sale; others hold the notes until the cash is actually needed. Selling property, holding a note and then selling the note for cash is the yield equivalent of selling property for cash.
In order to obtain an accurate quote, it is necessary to have up to date information about the note. All quotes will be subject to due diligence by the note purchaser.
The first critical item of due diligence will be verifying the credit worthiness of the payer (mortgagor). The lower the credit score, likely the lower the offer.
The second critical item is a drive-by appraisal or valuation with comparisons of similar houses and neighborhoods. The note purchaser wants to be sure there is adequate value.
One of the key things many people do not realize is they do not have to sell the whole note. The note holder will always receive more money over time if they only sell part of the note. We recommend that a note holder determine the amount of cash needed. A quote can be obtained telling how many payments will be required in order for the note holder to receive the necessary cash.
There are many options available when you have a contract or note and are trying to raise a lump sum of cash: 1) sell the entire balance of the contract; 2) sell a specified number of payments; 3) sell part of each payment, while continuing to receive the balance.
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