In the past, owner financing was rare because of low interest rates on real estate. Credit unions and banks had to compete on rates and lower their lending criteria in order to attract more customers. This allowed nearly everyone to get a loan for their home or business. After the real estate crisis, banks became reluctant to lend money for anything not practically gold-plated. Foreclosures rose for many years as the credit market was tight.
Although the real estate market is now recovering from the crisis, the Covid 19 problem will be a major challenge in 2020. While residential real estate prices rose in the first months of the virus’s spread, commercial real estate saw a decline. Naturally, banks became less generous in lending for almost all types of loans. Owner financing was still used to purchase real estate and businesses during all these economic cycles.
Why create a trust deed note?
Many sellers of property and businesses turn to owner financing when they need cash flow. This is done by creating a mortgage note or deed-of trust note. These sellers have the option to either keep the note or to sell the mortgage note to a trust buyer after the property has been sold. There are many reasons to use a mortgage note, deed of trust or note.
- Attracting more buyers
- Seller wants to defer capital gains taxes
- Saving the banks’ high fees and closing costs
- Flexibility in terms of payment and payment schedules
- Dealing with low buyer credit scores
- Selling between family members, or negotiating divorce agreements
Although the terms and conditions of deed of trust notes may vary, they always include an agreed-upon term, interest rate, payment amount, as well as the date that the seller must be paid. These conditions are legally and formalized in a note.
Selling a Deed of Trust Note
Sometimes the seller would prefer to receive all cash upfront. Even if this wasn’t the case, it is possible for circumstances to change or new investment opportunities to prompt the seller into needing cash fast.
The deed-of-trust note holder has the right to sell all or part of the note. The note’s value will depend on many factors. The note’s value will increase if there is more equity and better buyer credit.
A partial sale, which is a selling of part of a trust note, involves the selling of only a portion of the remaining payments. A partial purchase allows you to receive less upfront, but more over time.
How to Create a Strong Trust Deed
If you or your client are creating a trust note,
- A good down payment is required. For a standard house, this means at least 10%, and for commercial properties, land, or mobile homes, 20%. These numbers are not always possible so make sure you get as much as possible without placing the buyer in a financial predicament. Note buyers should consider two elements: the loan-to-value ratio (or LTV) and the investment-to value ratio (or ITV).
- Sell to someone with good credit if you can. An FICO (credit score), of at least 680, is preferred. However, 625 or slightly less is sometimes sufficient. Even if credit scores are below 600, you can still sell the note. However, be ready to accept a lower price and remember that all other aspects of the note must be sound.
- You should ensure that the interest rate charged is not higher than comparable bank lending rates.
When deciding whether or not to purchase a note, we also consider the following items to be positives:
- Property is owned by the owner
- Access to electricity, water, roads, and other services (for land).
- Multi-unit apartments and general office buildings are more common than specialty businesses such as restaurants when it comes to commercial notes. It will be more difficult to sell a note on a property that was once a gas station, or any other type of liability.
- The property and its surrounding areas are in excellent condition
You will also need to ensure that the sale price is not higher than the market value (if possible) and that title to property is clear
Whom to Call
There are many trust deed notes buyers in the U.S. but only a few have the expertise and customer service to make sure you get the best deal and have a pleasant experience. ELM Capital was founded in 2002. Since 2002, ELM Capital has worked with thousands of note buyers and assisted many to sell their trust deeds notes. ELM can provide you with the best pricing and client service in the industry. We also have the knowledge and ability to answer any questions or concerns.
We are happy to help you with any questions regarding structuring your note, or selling it.
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