Dawn Rickabaugh - Note Queen

Aloha Dawn,

Hope everything is going well for you. I was out yesterday educating Realtors at open houses on non traditional financing, ie Land Trusts. They all seem to recognize that things are different and were open to pursuing the EHLT approach. A couple questions came up and I thought I’d ask you your thoughts on them.

Q: Assuming a $1.2M MAV with an underlying $250,000 mortgage. RB comes in with lets say $100,000 and seller agrees to carry $1.1M at 6.5%. Would it be possible to take the difference between the remaining equity of $850,000 ($1.2M - $100,000 =$1.1M - $250,000 underlying) and divide it into two notes of $425,000 each at 6.5% and then sell one of the notes at some small discount (I don’t know how much it would have to be discounted) so the seller gets more cash up front? If you did it this way I assume that the new Note Holder would then have to be a beneficiary of the trust to secure his interest?? Can I mix Notes and Land Trusts in this manner or ???

A: Tough to mix seller carry back notes and land trusts . . . you need to choose one or the other. In the above situation, why put the thing in a trust if you can sell a 1st TD to pay off the underlying financing and create more cash at closing for the seller? Create a relatively small 1st (and sell it), and a large 2nd. Then the seller has:

• down payment
• mortgage paid off with a little extra to boot
• a stream of income from a 2nd deed of trust

It is very important that you put the deal together properly and underwrite the buyer so seller has optimal results when holding or selling the notes.

Q: Can we use a local escrow company to hold the funds, do a pre-liminary title search, and ultimately disburse the funds to the Trustee?

A: In my experience, it's harder than you'd imagine to find an escrow company that is comfortable closing these types of transactions. They get hung up on the fact that there is no 1099 being issued at closing, among other things. Additionally, I like using an escrow that has processed many of these types of transactions . . . sometimes they catch things a less experienced company might miss.

Best wishes . . . looking forward to helping you put some of these transactions together.

• Why not sign up so new posts come straight to your inbox?
• Create and sell your note
• Read a related article by Investor's Business Daily

In honor of Halloween, I was trying to come up with something scary to write about. And then it came to me . . . the acceleration clause. It's the language that allows a bank to 'call' a loan when and if they find out title has been transferred.

Yes . . . the proverbial, mysterious, vengeful, ever-looming, life-throttling, hatchet-in-the-skull, grave-digging due-on-sale clause is definitely a spook many people find threatening. It's a (Santa) Clause that could turn into a Nightmare Before Christmas for people trying to put deals together with creative seller financing techniques: subject-to, wrap, etc.

I've always proposed that there is a relatively small likelihood of a bank calling a loan these days. It just doesn't make sense for them to foreclose on a performing asset. Aren't they busy enough foreclosing on properties where they aren't receiving the payments???

And that's when I started having some doubts . . .

Since when does common sense have anything to do with how a bank does business these days? They routinely refuse short sales so they can sell for 50% less as an REO down the road. Yup . . . prescribing the lenders with qualities they do not possess (such as common sense) is probably not a great idea.

What if they desperately need to beef up their reserve requirements one month? Might they go digging for loans they can call in to restore some liquidity? I do know people who have had this happen to them.

So, while I still maintain that there is a relatively small chance that a bank will call a loan in today's climate, if it's absolutely crucial to the deal that the existing financing be left in place, then I suggest you use a different vehicle for structuring your transaction: the Equity Holding Trust Transfer System.

Brief comedic interlude:

Now, back to our original programming . . .

As scary as the due on sale clause can be, I have to say that there's something MUCH MORE THREATENING out there!!!

I get a lot more scared looking at the grocery bill needed to sustain four teenagers . . . they're like locusts. You think you have a field full of grain, or a refrigerator full of food, and whoosh!! They come through in swarms and decimate the food supply.

So, please be very very careful how many of these you will let live in your house, especially with the upward price pressure on commodities these days.

• Why not stay tuned for more of these inspiring posts?
• Read about some frequently asked questions regarding seller financing

"Aloha Dawn,

I had a question for you to see how you might have handled something. My sister in laws' boss is gong to be selling his condo here in Hawaii (he lives in LA). I told her about the land trust and she thought he might be interested in it and maybe I could list his house using that approach.

I wrote him an email and gave him an overview of how owner financing, if done properly, might allow him to sell his home more easily in the current market (he wants to list at $1.8 and owes about $800,000). He feels he needs the cash out of the house and has a Realtor friend that he has known for a number of years (knowing the Realtor, it will go on the market overpriced and then slowly be reduced to a realistic level).

How would you have countered his argument that he has a “friend” that is a Realtor. He would have been a perfect OWC type transaction, and knowing his property and its location, he is going to have a hard time selling it even at a reduced price. Thank you for any thoughts you might have."

Dear Creative Realtor From the Islands,

Putting it in the land trust (offering seller financing) doesn't mean the seller won't get all or most of his equity out at close. It's not hard for me to imagine that a buyer could have a 50% or more down payment and be happy to take over the existing payments (provided that the underlying financing is good). Good jumbos are hard to come by these days.

Sellers that list high and chase the market down always end up losing more money, but it can be hard to help them understand that. Advertising OWC, even if he decides not to carry, will always get him more interest, more offers, and a higher price.

And he needs to use a Realtor, like you, that has a thorough knowledge of seller financing strategies. Most agents just don't have a working knowledge of the subject and can really do a disservice to their clients by not bringing in a seller financing specialist.

Don't worry, as the weeks stack up, there will be more and more mainstream recognition of the need for creative strategies, then you should be positioned well. Let him languish on the market for a few months, and then revisit the conversation. Things change!

Answer: "Well, because I can."

Question: "Why do you write totally random quirky posts sometimes? Don't you want us to think that you're a respectable professional?"

It is intuitively understood by most people that anyone who goes by 'Note Queen' is likely to be eccentric at times. I don't actually think anyone is surprised at this point. Besides, as one of my teenagers likes to say, "Mom . . . nobody cares."

So, I got a call over the weekend from husband & wife sellers who had an escrow that was falling apart. They asked if I would please step in to put it back together. It's hard to think of being asked to do anything that sounds like more fun.

The sellers arranged a meeting with their listing agent, the selling agent, the buyers (and a token boyfriend, I think) and myself, and we all sorted it out to create a great solution for all concerned.

The buyer is getting to buy, the seller is getting to sell, and both agents are going to get their commissions after all. (Because the escrow is not quite closed, I'll leave the details of the deal for a future post.)

So I'm feeling pretty cool and sophisticated and relevant at this point.

I follow the listing agent back to his office to help him put the seller financing addendum together and do some minor strategizing about how to move things forward expediently. While I'm standing at his computer, working on Winforms, he comes up behind me and says, "Hey, I think there's a moth on your back," and he goes to gently grab what turns out to be the tag on my shirt.

And then I realized aloud, "Oh my God! I put my shirt on inside out!" We both had a good laugh. Folks, there are few better ways to impress your peers.

Just another bit of wisdom from the Note Queen. (Please consider donating to the: Help Dress the Note Queen Foundation).

Once in a while, I really get a head scratcher.

The other day I met with a seller and the buyer he had found for his property. The kitchen still needed to be finished, but they had agreed on a price, and the buyer was willing to take it "as is."

The problem: the property wouldn't appraise for the new loan unless the kitchen was finished. So the deal was off . . . or so they thought. That's when I asked the seller why he wasn't providing the financing for the buyer so he could get his escrow closed. I can usually find two or three ways to put the deal together without going to a bank.

I knew that the seller had existing financing that looked something like this:

• Loan amt: $360,000
• Interest rate: 5.85% fixed
• Term: 360
• Monthly payment: $2,110.98

Now that's REALLY attractive underlying financing! Perfect for a 'wrap.' If the seller would carry paper for the buyer and leave his financing in place, here's how it would look:

• Purchase price: $540,000
• Down payment: $100,000 (very nice 19% down)
• Loan amt: $440,000
• Interest rate: 6% (buyer's credit score is 800)
• Term: 360/due in 10 years
• Monthly payment: $2,625.58

The seller would get $100,000 now, and a positive cash flow of $514.60 per month until the buyer finished the project and got his own financing. Or, if market conditions weren't favorable for a new loan when the kitchen was finished, he would have the option of keeping the seller carry back loan for up to 10 years.

And why did we make the rate to the buyer only 6% when prevailing bank rates were 6.79%? Usually, sellers who offer financing can justify getting better than the prevailing rate.

When the seller and buyer originally agreed on the price of $540,000, the buyer could have secured a loan at 5.89%. By the time I met with them, rates had jumped almost a point, and that was a deal breaker.

The seller is stuck on price

The buyer is stuck on terms

So the seller gets his price in exchange for giving the buyer below-market terms. Hooray! Problem solved, deal done . . .

Nope.

The buyer, even after several rounds of explanations, decided that seller financing was "just too complicated." Huh? The only difference is where you send your payment.

He decided he'd rather buy another property where he can

• apply for a bank loan (whose programs and/or conditions could change mid-escrow)
• pay loan points and fees
• pay almost 1% more on his interest rate
• take three times as long to close
• possibly have a prepayment penalty

This is where many will start shouting about the infamous 'due-on-sale' clause in defense of our poor buyer. The chances of the bank calling the loan are minimal, and even if the loan was accelerated, the buyer is strong enough to replace a $360,000 loan at will.

And if the threat of the bank calling the loan is just too much for either party, that's when the Trust Transfer System makes a lot of sense.