Written by Jeffrey R. Armstrong – President/Owner of Armstrong Capital
Your favorite Master Note Buyer – Straightforward, Honest, Fair…
A seesaw (also known as a teeter-totter) is a long, narrow board suspended in the middle so that, as one end goes up, the other goes down. In a playground setting, the board is balanced in the exact center. A person sits on each end and they take turns pushing their feet against the ground to lift their end into the air. Playground seesaws usually have handles for the riders to grip as they sit facing each other. So what does a seesaw have to do with the current seller financed note business? Just like a seesaw you will have your ups and downs, there is a center of balance, there is competition on the other side and there are handles you need to hold on to.
In these trying times with the nations economic and real estate markets in disarray the note business is similar to a seesaw. Note Brokers and Note Buyers are going up and down. Some weeks are good others are not so good. As you know, over the last year many of the major players both large institutional investors with many employees, small private note investors and individual note brokers have closed their doors because of the uncertainty in the market, lack of viable outlets and low volume. Since 1991 I have seen the note business fluctuate up and down several times in many different ways. What is happening now seems to me to be that the center of balance between note investors and note holders is missing.
When the note business is going well there are lots of note investors paying good prices for all kinds of notes in all areas of the nation and note holders that are willing to sell at the same good prices. In the current note business we have a couple of dozen actual end note investors paying realistic prices, not always good but realistic and understandable prices. They are buying in particular regional areas, there are note investors buying throughout the entire nation, but no one company is buying everywhere. For a note broker to survive these days he/she must have a good list of both private and institutional note investors across the nation. On the other side of the seesaw we have the note holders who need the money but are still unrealistic in their pricing expectations wanting us to pay more than what the note investors can safely allow with all of the current risks.
All of the normal risks are still there like the payor not being able to pay and the value of the property not being able to cover the investor’s investment in a foreclosure situation, but they are all magnified even more. For example, just today we had to cancel a note purchase transaction because the appraisal came in too low. The property sold for $161,000 the seller got no down payment and the note balance was about $159,000. The buyer’s credit was ok and acceptable but the appraisal came in for $139,000. That is $20,000 less than the balance of the note. In this real estate market with no one knowing if real estate values are going to go back up, go down even further or stay the same note investor are not even going to play ball with that kind of risk. Dead deal.
With the majority of the end note investors, one of the biggest changes in the criteria for buying seller financed notes is that they seller of the property must have owned the property for at least one year before it was sold and he carried back a note OR the seller of the property (note holder) must have held the note for a year before they can sell it. Now if mom and pop who owned a property for 20 years sells their property and carries back the note we can still buy it after they have received the first payment. However, if Mr. Rehabber bought a property 3 months ago, fixed it up and sold it with seller financing he will have to hold that note for one year before it can be sold. Now this is very general and there might a small private investor here or there that would not require this but generally this is the rule of thumb for now.
Let me share some more reality with you, in the last 3 months 50% of my verbally accepted deals don’t even get past the credit check. The credit scores of the payor’s are too low and thus too risky so the note investors pass. Then, of the accepted transactions that we are able to get past the credit check, another 50% of those get cancelled due to low appraisals. On the other side of the seesaw, the good news is that the volume of note holders accepting transactions is going up as well and I am talking to note holders that are being more realistic in their expectations, accepting what are good prices in today’s market and accepting partial options more readily.
The center of balance for a note broker and note investors seesaw is your marketing plan. If you had your 3-5 lines in the water 12 months ago as your core marketing plan I can almost guarantee that if you are surviving in the note business right now some of those 3-5 lines are different today. You must be able to adapt to the current market conditions so that your note business is balanced. Balanced with money coming in and money going out and balanced for marketing that is bringing in responses versus marketing that is not bringing in responses. This business is a much larger numbers games than years past and your marketing plan is the key to your survival.
Remember, success demands action! Keep on marketing, it’s going to work! TWITA! (That’s What I’m Talking About!)