8 HUGE Owner Financing Mistakes to AVOID! ($$$ Costly!!)

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This is the no Closer show where you get the latest developments in distressed note investing and learn the secrets of how you can control millions of dollars worth of property. For panties on the dollar. Get educated and entertained by someone who has closed thousands of deals and lives to support you in achieving the same. Now here's your host CEO of We Close Nodes, Scott Carson.

Hey real estate investors.

If you have ever wanted to dive into the sexy side of real estate and become a note investor and not just somebody that owner finances properties or buys and sells on terms, but somebody who's actually buying debt from lenders, mortgage bankers, hedge funds on distressed real estate on both residential and commercial properties. Now is the perfect time. And guess what? We have our upcoming three day workshop here in just a few days on July 25th, 26th and 27th. That's right, that's a Friday. Saturday, Sunday.

You can join me live on Zoom.

And our Note Buying for Dummies workshop. We'll go through the Fs of how to find fund and flip non performing notes at huge discounts without having to use your own money.

And we'll show you all the different.

Ways you can make money being a note investor. Day one's all about how we find these deals from banks, hedge funds and how you can automate the process of connecting with these people and get tapes and listen to you over and over again. Day two is all about raising capital and marketing. We'll show you how to tap into thousands of IRA investors who are looking for deals to fund and how to communicate and how to contact them and get them to fund your deals. And day three is all about the flip the exit strategies putting deals together. We'll mix in due diligence. We'll mix in the marketing side along with the structure side. So much stuff in three days live on Zoom with yours truly, the Note guy, Scott Carson. Make sure you get signed up by going to Note buying for dummies.com or click on the three day workshop tab on our workshop. Get signed up today as we're still running discounts and you too can soon become a no buyer.

Foreign Good morning, good afternoon and good evening everybody. Hey, welcome this episode of the Note Closure Show. As always, Scott Carson. Excited to be here with the day. If you're listening for the first time. Hey, thanks for listening. Make sure you subscribe and leave a five star review. If you're listening. Hey, thanks for all of our long term listeners out there. I am so honored every time one of you books a call with me and tells me that you're watching the YouTube video or you're listening to the podcast, whether it's on Spotify or Apple, itunes or any player, I am always humbled. So thank you. Keep those calls, keep those messages, keep those reviews coming. We're really, really proud of the fact that you guys do that and it literally keeps me going. But today's episode, I want to talk about mistakes that we see people making when it comes to owner financing a property, whether it's residential, commercial. There are some big mistakes people are making that is shooting them in the foot and it's not always their fault. I mean, it is their fault because they agree to it and they may not do a lot of research on it. But the most aggravating thing I get is I've had friends, colleagues, people that obviously listen to the show and they decide to own or finance a note, a purchase, and they don't pick up the phone and give me a phone call to make sure that that note is either structured properly or the terms are at such so that they get the biggest bang for the buck if they're looking to sell the note. Now that's, that's where I want to get into people out there that teach under financing, yes, it is a, a strategy to help you sell where you don't necessarily have to take all your profits on the front end. You're not going to have to worry about a 1031 exchange. You're not going to worry about short term or long term capital gains. A lot of cases you pay less taxes because you only get, you know, a partial down payment. The rest is spread over time and treat on your cash flow debt base. Those are great strategies. Okay, nothing wrong with that. The big issue I get is when people talk about, oh, if you owner financing, you're going to get all this cash flow and payments over 10, 20, 30 years or five years. And I agree, yes, you will get more. But the biggest problem with that is if you have to sell the note and if your note's not structured properly, you're going to take a discount in a lot of cases. And depending on what the credit score of the borrower is and what their FICO looks like and what's going on, the value of the property, those are issues too that are going to really hurt you in the long run if you try to sell it. Like I've got a guy that called me up, wants to talk to me about note purchase or buying his note and I'm like, okay, he's telling me it's on acreage, you know, the guy put a chunk of money down, which is great. But the interest rate is below market. It was even below market, was originated back last year. And I asked him, I said, why did you come to this interest rate? Because it's below market. I think it's a 6% interest rate. I'm like, it's below where rates are at right now. Well, that's what we had to use to get the payment to work. And I'm like, okay, I get that. But if it's to an entity in a lot of cases versus an individual, you shouldn't have done. I mean, even you shouldn't be giving somebody a below market rate. Now, I get the guy brought a big chunk of cash to the table. I get it. But if you are interested in selling and this note's only been around since like three months, three or four months. So there's not a lot of seizing to it. And I'm like. And I was talking to the guy, like, did you think you were. So, yeah, I plan on selling another immediately. I'm like, well, then why didn't you pick up the phone and call me? Ask me, I will tell you or point you in the right direction to structure the note. Now he's taking a big haircut and it's not happy with it. But I'm like, listen, then, then expect to hold on this note for a period of time and get your monthly cash flow then, because that's what you struck, how you structured the deal to fulfill it. And I got another guy, too. On a commercial property, the paperwork looks a little funky. Same thing. Payment, interest rates below market. The guy did bring a chunk of cash down, stuff like that. But same thing, it's a below market interest rate. And I, I get it, but it's, it's, it's frustrating because they're not, it's not structured properly. Doesn't look like it's written on normal documents. There are things on the, the mortgage that just don't make. So the best thing I can tell you is, first and foremost, these are the things that I would highly. If you're going to structure a note deal and owner finance your property with a residential commercial property, these are things to keep in mind. All right? These are the facts that are going to help you potentially get the most for your note when in other places, if you don't do this, you're going to lose some money. So the first thing is down payment. That's the biggest thing. And here's the thing. I Would not be owner financing a property when you're getting less than 10% of the purchase price down. So 10% down payment at a minimum. Okay. Second thing, don't over price the asset. So like if the value if you were to try to sell the property conventionally and comps come back and say 400. Well don't sit around and turn around owner find seven owner. I finance it at 450. Well if you own a finance at 450 you know it's only really truly worth 400. Yes, you're the bank in your value. I get that it's one of the selling point but don't over. You might get away with being to do that for a few grand, 5, 10, 15,000, something like that. Or if it's a bigger asset, maybe more. But the point is if it won't sell at 450 in today's market, it sure is probably not going to sell it for 50 in the next 12 months. So you're just going to lose that difference in a discount depending on what the seller brings to the table. So let's lose that number. So let's just say somebody owner finances a house that's worth 400. At 450 the borrower brings 10% down. Right? They bring 45 grand down. Well when you go to sell that note, the note seller is going to look at well the borrower owes 405, the house is really only worth 400. You're going to take a 20, 25% discount probably depending on what the interest rate is or more to get below 75 or get below 80% LTV. So they might offer on that 320. Well then you just lost that money. Didn't make any sense. You took a big discount. So that's the first thing is making sure. That's really two things. Making sure you're getting 10% down. And second, you don't over finance the property. The third thing that's most important is interest rate. Okay, make sure you give a market interest rate of what's going on. Talk to somebody what are interest rates in today's market? And then yes, if interest rates go up, guess what? And you under finance interest rate, you're going to take a big discount because most investors note buyers are looking for somewhere around a, you know, 8 to 10% cash and cash return. So that's what they're going to take a discount to get. Make sure they're getting that 8, 9, 10 return on their money. If you've got a 6% interest rate and they want to get 8, guess what? You're losing roughly 30 cents on the dollar. 33 cent discounts just so they get based on cash flow. So that's an easy consideration there. Don't come below market if you give something like a ridiculously low interest rate. Like we had a guy years ago and I don't understand when he's like well I gave somebody a 4% interest rate. I'm like, could they get that you give them a 4% interest rate in their house and they got like a 500 fico score? Like yeah, like why? Well, I just thought it'd be nice. Like that doesn't make any sense. You know, if an investor wants to get 10% their money, that means you're only technically getting 50 cents on the dollar if it's a 5% interest rate. So keep that in mind. 6, 7%. Obviously the more he brings down, that's a helpful thing, right? But still keep that in mind. You're going to take a bit of discount now. Now the next thing you need to do is make sure that there's to help you make sure you still split it up. If somebody brings 10% down, still do a, you know, don't do more than a 75, 80% first at the max and then do a second, do a carry back second. You're technically carrying back the whole property. But what you're doing by splitting up and doing a 75 to 80% first lien and a 10 to 15% LTV on a second is that you're taking less of a discount. Because if you only have one note for say 90 cents on the dollar and sellers only to give you 70% of value, well then you just lost 20%. But if you A, have a 75 first and a 15 second, well guess what, you can sell that 75%, only take a 5% discount. You're still holding back that 15 second mortgage for cash flow so you don't lose as much. And that's one of the most important things. Structure these with a first and a second. Now of course if they, if they bring like 30, 40% down then you're not going to take a big, you know, not circle for a second. But somebody's not bringing 20, 25% down, then you really need to make sure there's a first and a second lien in there and you can make them the same interest rate. Okay, 7, 8%, you know, interest rate. But that's the thing is don't expect to sell it and get Full pard. And that's the biggest thing. You need to put these with a third party servicing company or an escrow company that's collecting payments from on a regular basis. Don't you be collecting payments. Put it with a third party servicer. It's worth paying the 25, 30 bucks a month with FCI or somebody else out there to collect on your behalf. Because that third party servicing turns out to be really, really valuable. Because now that all the documentation, all the note information that they've got is easily transferable to the new note buyer and it actually adds value to it. I mean you can actually write in the servicing cost so that somebody's paying principal interest, tax, insurance and servicing in an owner finance note. So it's actually being paid by your borrower instead of just you. So that's one thing you write in there. Okay. Another thing that's important is, you know, and I hate this, but make sure that the borrower that you're buying from has a decent fico. Look, if you're not going to first, first and foremost, if you're just selling one note primary, you can get away without having to run through an rmlo. All right? But if you are going to be doing more of these, you know, call the underwriter and I mean that, go to call the underwriter.com. have Max Bailey and his team take a look at your borrower. Have your borrower pull a credit karma score, at least something to show credit score so you can see where it's at. And if they have a low credit score, and by low I really mean below like 660, 680 or below that you're going to take a bigger discount because they're not paying their bills on time. Now they got a 685 or greater then you're probably, that's not going to be a detriment to your deal. But you also got to make sure that if it's on an owner financed house, that's going to be the primary. Make sure that their dti, the debt to income ratios isn't through the roof and stuff like that. So that's the thing to keep in mind. That's why you would want to have AN RMLO like calltheunderwriter.com to take a look at your bar to make sure that that note is Dot Frank compliant. Now if it's not Dodd Frank compliant, then that you need to take a discount. We had one of our students, California was evaluating a couple owner finance notes down in the Valley. These were on mobile homes that were actually secured. So the tongue was removed. They were actually had a certificate attachment. And these borrowers didn't have a credit score. I think they had a green car. And I don't know, they may have been. Might have been illegals living there, but the borrower did not have a credit score. Right. And so the seller of these properties, the owner financed them, didn't run them through RM alone. So they technically were not Dodd Frank compliant loans. Now, there was some equity there, the borrowers brought some down payment to it, and the interest rate wasn't too bad. But the fact that the paperwork wasn't Dodd Frank compliant, which means that they're a. We don't know what their DTI scores were, don't know what the financials were, those really lessened the value of the actual paper. All right, and when Cal ran it by an attorney and ran it by some of the things he said, that's, you know, they all came back, said, this is a big flag, especially ran it through a third party, like having Fanac USA take a look at it. They came back, said, yeah, we wouldn't buy the. We wouldn't buy this paper because it's not Dodd Frank compliant. And that's, that's one of the most important things to have is if you're going to do this on a regular basis. For our strategy, don't try to, you know, save you a few thousand bucks or a few hundred bucks, stuff like that. Make that process of having your borrowers get evaluated by call the underwriter or some other rmlo out there to go through the process. Not all RMLOs are created. Some are much more expensive. There's attorney out of Dallas who's made a living doing it, and I think he's just through the nose, expensive. We've got an attorney here in Austin, Texas, has been known to do a lot of that stuff and charging like 3,500. So I think that just gets to be a bit ridiculous. That's why we like Max Bailey, because it's not too difficult for 200 bucks, you can have them evaluate your borrower, fill out the paperwork. But that's the thing you have to realize as a gentleman, you want to make this paper and I get it. If you're brand new to this, you've done it. It may not sound good, but pick up the phone and call someone, do some search on owner financing ways to get it done. Now, if you're in a distress situation, you're selling the property and it makes sense for you. Just do subject to get a cash, get a cash infusion and then just turn over the mortgage, you know, to the borrower, provided that you've got some clause and we can talk later about that as well. Maybe close to an attorney and stuff like that as well too, or put it in a trust and other things like that. But that's different. I mean, if you're distressed, there's some other things that you can do to do that. And I highly recommend that you book a time with me by going talkwithscottcarson.com and book a time on my count or talkwithscottcarson.Com I'm here to help. But that's the thing, ladies and gentlemen, is if you look at these things and you are thinking about it, ask a professional. Don't ask the person that's getting owner financing from you. Of course they're going to want to structure the deal that works best for them. Okay. But let's review this quick list. On this stuff is making sure that you get at least a 10% down payment that you're not over financing the property that you're combining loan to value or what you're selling it for is not way more than what the property's worth. If you're planning on selling the note in less than a year, don't sell it. I mean don't own or finance it. Sell it traditionally. Okay? Making sure you put a first and second so that your first isn't really more than 75 or 80% LTV. If you're getting less than 20% down payment, carry a second structure with a first and second and then tell the seller like listen, I'm structuring this. It's going to be the same payment whether it's a 90% one mortgage to you or it's a 7515. So same payments, paying same month. But it's allowing me to be more creative if I ever have to sell that note. Okay. It's allowing me to make it more marketable. Don't give a below interest rate to your borrowers. Making sure pull FICO credit score, something like that. If it's an LLC they're going to put it into, get the credit scores of the actual borrowers that are going into that. That's a new one we came across having your borrowers make sure it's going through a Dodd Frank compliance, you know, make sure it's a loan, that they're actually valuable enough. Having a third party servicer collect payments for you. You can put a balloon on there as well. If it's a residential loan, you can do with an individual aspect of that's going to help a little bit more commercial is kind of normal. And then last but not least is like I said, make sure you know what you're going to do. And this is one of the most things. If you plan on selling the note and think you're going to do it and six to 12 months, when he tells you that's a great idea, then run your deal by a buyer, you know, give me a phone call, hey, what should I do? What can I make this most valuable aspect of things? How can I structure this? So if I do sell it, I'm going to come out and take less of a discount, take less of a hit. Because that's the thing they're not talking about. They're all, all these glass like oh, how much money you're going to make in cash flow. And yes, you can want to try and sell this note. It's not the same thing. You have to understand that the markets change and what used to be. Yeah, when we first started doing note deals back years ago in the office of SMI funding, we would structure owner finances and you could sell the note at the closing table and you could get, probably get 80, 85 cents on the dollar for those first liens and stuff like that. But that's change. You've got to have seasoning, you've got to have some on time payments. You really need to make sure that it's a Dodd Frank compliant loan that's most valuable to you. And so that's the thing is, is expect if you, if you need the cat, if you need cash now, don't own or finance it. Okay? But if you do plan on selling it, then still want to do that, then structure it so that's it works the best for you. First, a second plus down payment, making sure you get credit scores, making sure your mate's Dodd Frank compliant, making sure it's with a third party service or going for. And these are things that I see people leave out all the time. It ends up costing the long run and they end up like, oh, I didn't know I was gonna take a 10 or 20 or $80,000 discount off of this. And that's what you got to keep in mind. Owner financing can be a great strategy. If you don't need the cash or don't need to cash in on that note in 12 months, you know, if you need it less than 12 months, then don't do it. Wait out, maybe find a different buyer for it. And of course, that's something you got to keep in mind too. If you don't have a buyer, obviously as things are dragging out a little bit, you got to be prepared to do that. You know, if I sell this in less than 12 months and we, we all get, things happen, emergencies, people get sick, lose jobs. They needed cash and get capital, I get that. But that's where it may make more sense for you to structure a partial payment instead of selling off the whole thing. Get a chump of cash for based on 6, 7, 8, 9 years of payments and then you, you're back in this driver's seat again. And that might be a way for you to avoid having tickets to a big discount. Of course you're going to lose some money on the payments, but you're not going to lose out in the whole amount on the back end. And if the bar doesn't pay, then, you know, whoever bought the note, you foreclose, they get paid off and you still get the overage above and beyond what was they paid the note for. So anyway, guys, like I said, feel free to reach out to me. TalkwithScottCarson.com Give me the full details of the asset. If you got a copy of the mortgage note, email that to me. We'll take a look at that, run a couple bids through our system, through some of our buyers, and come back with the best bid for you that we can for you. So hopefully it was valuable for you. If you're thinking about owner financing, pay attention to these things and talk to a professional first. And like I said, we're here to help. Do we charge to do that? We don't charge to give you a bid, but if you do end up deciding to take a bid, we will take probably a point or two points off the payment amount for our time and for resources because it's doing a business. So go out there, take some action, buddy. And like I said before you decide to owner finance, make sure you talk to professional note buyer to make sure that you can structure that deal to be the best possible deal if you, if you need to sell in less than 12 months. So go out, take some extra break and we'll see at the top. Bye, Sam.