Sell the "Rock", Take Back "Paper", Sell the Paper (new options for a new era)

According to Kenneth R. Harvey, in his 1/09/09 article for “Realty Times”, (reprinted on the Ohio Association of Realtors website), “the credit crunch and tough times in the mortgage market are creating new profit opportunities in a highly-specialized real estate investment niche: Buying seller "carryback" mortgage notes”.

A “carryback”, or "seller takeback” can provide an important alternative to standard mortgage financing issued by a bank (which is not so “standard” anymore). The seller simply loans the buyer money to make the purchase, and “takes back a mortgage” from the buyer. After the deal is accomplished, the seller has two basic options: 1) the seller can hold onto the note as an investment for itself; or 2) the seller can offer it for sale to private investors who will buy it at a discount below the full face amount.

While there are not a lot of conventional lenders buying mortgages these days, Mr. Harney reports that there are now dozens of private note brokers you can locate online, and that one popular site is NoteGiant.com, where hundreds of notes are posted for sale or auction bids.

John Collins, one of the owners of NoteGiant was quoted in Mr. Harney’s article as saying that ”current market conditions are producing a bumper crop of private notes that can provide investors excellent returns -- provided they take sensible precautions”. Many of private note brokers’ clients are small pension fund investors, Realtors, and even hedge funds.

Mr. Harney relayed the following basic advice offered by Mr. Collins when considering buying notes:

1) “If you are new to note buying, limit yourself to properties close to where you live or work. That way, you can check out the underlying real estate, and drive by to see what the collateral looks like.”

2) “Stick with first lien notes that have substantial equity cushions so you can't lose your shirt if you've got to pull the plug and go to foreclosure. Avoid second lien notes.”

3) “If you don't feel confident doing the necessary "due diligence" research to check out title, appraisal, credit scores and other note features, turn to pros who'll do it for you.“

For sellers, know that seller financing has been a legitimate and long-standing real estate tool to help sell property, especially in credit crunch times. Credit reports and other proper financial investigations of the buyer, together with a large cash down payment and attorney to draft or review the documents are essential to help minimize the risk. Re: note buying, I personally prefer to “own a piece of the rock” vs. a piece of paper when it comes to real estate investments. However, with note buying, there is some comfort in being able to “foreclose on the paper, and eventually get the rock”. Still, it is essential to perform due diligence not only on the note, but on the property as well, and retain counsel and financial advisors so you know what you are buying and the possible risks as well as returns involved. We know all too well what buying bad notes or “good notes on bad property” can do.