Cashflows Note Buyer

Lesson VI

We're in the home stretch, Mary

I hope you did your homework! If you didn't, unfortunately there's
no way to make you stay after school. But to get the most out of
this course, I do strongly suggest that you study both the lessons
and the homework. Here's what you should be reading now
(found at http://www.cashflows.org):

5 Things A Successful Note Buyer Must Have, by Jon Richards
(This is in the section entitled "Especially For Beginners"

Mortgage Transaction Checklist
Sample Letter To Note Seller Requesting Documents
Note Purchase Contract
How To Fill Out The Note Purchase Contract
Note Seller's Representations & Warranties
(These are in the section entitled "Contracts and Forms")

The above, along with the note intake worksheet that I gave you
in a previous lesson, are the basic documents you will need to buy
notes. It doesn't matter if you are planning to broker notes or
keep them for investment, you will still use these documents.

There are others you might use. For example, if you buy part of
a note (and you will), you will need a contract to do that. It's
different from the Note Purchase Contract, above. Other situations
will call for other documents. You can download what you need at
www.cashflows.org

To this point in the course -- which follows the steps in a note
purchase -- we have learned a lot about how the note business
works, finding notes, screening them for marketability and negotiation
with note holders. In the previous lesson we began to study what
documentation we will need. Some of it comes from the note seller
(such as copies of the note and mortgage or trust deed, property deed,
settlement statement, proofs of payment, etc.), some of it comes
from the courthouse (lien searches and documents that the seller
can't find) and some of it is generated fresh (credit reports on the
payor, appraisal, etc.)

------------------------------------------------------------
Lonnie, after reading your two books, I went out looking for
one mobile home and wound up buying a 250 unit park. Paid $450,000
for it and I truly believe it will be worth at least a million
after I get it filled. I've been a CPA for 15 years and have never
seen any deal like this. (Update-The park is filled and I'm getting
$215 rent per lot and I'm no longer a CPA. Thanks so much!)
B.R. Wichita Falls, TX

Lonnie's techniques have worked for thousands.
http://papersourceonline.com/e-books-more/deals-on-wheels/
http://papersourceonline.com/e-books-more/make-w-mobile-homes/
------------------------------------------------------------

Now let's finish the documentation process with Delbert Ashby:

The next items on our documentation check-list pertain to the
underlying senior debt (if any). We will want a copy of the note and
security instrument (such as the mortgage or deed of trust for that
debt. We will want to confirm that the amounts, terms, conditions
and outstanding balances for that debt are as we have been told.
(Some notes allow for extra debt to be added after some paydown has
happened over a period of time.)

Of special interest will be whether it has a due on sale clause,
terms under which the loan can be called and, from your point of
view if you are an investor, what happens if it is called.
What are your remedies and options to protect your position?

You will also want to check for any terms that might influence
your position even if all the debts are performing.

Think about the subordination clauses mentioned in our last
lesson. What other things could be lurking around to cause us a
problem? Don't be afraid of potential problems, just be aware of
them and know what they mean. They could become opportunities.
All we really have to do is to make sure we READ AND UNDERSTAND
EVERYTHING!! These documents will also tell us the lender's name,
loan number, where his debt is recorded, who to contact and much
more. There will be several times and several reasons why we may
want to contact that lender over a period of time.

SENIOR DEBT STATUS VERIFICATION

If you are buying a second mortgage or trust deed, the next item
is the senior debt status verification letter.
This is where we get in touch with the senior debt holder to
confirm that the payments on that debt are and have been current
and that the outstanding balance is as reported to us.

Yes, people have been known to make payments on the "small second"
mortgage and be in default on the first. Clearly, we would not
want to bu*y a second with the first in default. The reason we
want to confirm the current balance is that this could affect
our lo*an to value ratio/exposure and lead to future disagreements.
Maybe some extra debt has been negotiated with the current lender
or maybe some back payments or interest have been added to the
balance. In addition, this is certainly going to tell us something
about the payor's current financial condition. In any case, we need
to know.

PAYOR ESTOPPEL AFFIDAVIT

Next on our list is the PAYOR ESTOPPEL AFFIDAVIT. The purpose of
this is to get the payor to acknowledge that the mortgagor agrees
that he owes what we have been told that he owes and to STOP
future possible disagreement on those points. They are effectively
told that if they don't agree with the facts as stated, tell me
now or "don't come back to me later" and say that things were
different at the time we bought the note than was stated.

CREDIT APPROVAL

Next is CREDIT APPROVAL. This means that we should have received
the credit report and should have evaluated it. In addition,
if a credit application has been submitted (as in buying right
after settlement) we should verify everything on the report.
But remember that our ultimate recourse is the property.
The credit information does help us in the resale of notes
since others may put more emphasis on the payor than we do.
The credit history will certainly affect the price we for which
we can resell the note.

Del's book, "Make Money Trading Mortgages," is indispensable for
any note broker:
http://papersourceonline.com/e-books-more/start-here/

------------------------------------

Can You Order a Credit Report on a Note Payor Without His Consent?
by Lorelei Stevens, President, Wall Street Brokers, Inc.

This question has haunted note brokers and investors for years.

The answer appears to be "yes."

Section 604 (a) (3) (E) of the federal Fair Credit Reporting Act
"FCRA") states that a permissible purpose is given to a person who:

"intends to use the information, as a potential invest*or or servicer,
or current insurer, in connection with a valuation of, or an
assessment of the credit or prepayment risks associated with,
an existing credit obligation, "

Therefore, this section gives a permissible purpose for potential
investors, servicers or insurers of credit obligations to obtain a
report on a payor for the purpose of evaluating or assessing the
credit or prepayment risks involved in existing credit obligations
of the payor.

For example, an entity which plans to buy a note and trust deed
would have a permissible purpose under this section to obtain a
consumer report on the payor for that particular transaction.

I have verified this information with my attorney and with the
Federal Trade Commission. However, your own attorney should be
consulted regarding this matter for legal advice.

Here is the Associated Credit Bureau's analysis:

"Section 604(a)(3)(E) creates a permissible purpose for potential
investors, servicers or insurers of credit obligations to obtain
consumer reports for the purpose of evaluating or assessing the
credit or prepayment risks involved in existing credit obligations
of consumers.

"For example, an entity that plans to invest in a mortgage loan
transaction would have a permissible purpose under this section
to obtain a consumer report on the borrower in that transaction."


Lorelei Stevens is president of Wall Street Brokers, Inc. in Seattle,
Washington. If you have a note to sell, please contact her at
206-448-1160 or fax 206-448-8476 or e-mail lorelei@eskimo.com
Website: www.wallstreetbrokers.com

I can't say enough good things about Lorelei's book "Lorelei's
Legal Lessons," and neither can some of the top people in the
note business. See for yourself at
http://papersourceonline.com/e-books-more/essential-guid/

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in the Gulf of Oman, to renew my subscription to THE PAPER SOURCE
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INTERNET SPECIAL: $40 off a year's subscription to THE PAPER SOURCE
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P & L STATEMENT

The P & L (Profit and Loss) statement applies primarily to
investor-owned or commercial properties. We would want to see a
P & L statement on the properties because a property of this type
is expected to produce the revenues to make its own payments.
If we had to take the property back, we would want to know that
it could pay its own way AND that we would know how to operate
the property to make it pay. Since this will not apply to most
notes we would personally hold, I will not elaborate further here.

Now we have covered the first 16 items on our documentation
checklist. This completes all of the documents we need to allow us
to make our purchase decision and to schedule settlement.

It's time to instruct the settlement agent (a title company or
attorney) how you want settlement handled. These instructions
will vary from case to case, depending upon whether you are
keeping or brokering the note.

Let's assume you are brokering. You simply tell them you are
buying a note from party "A" and simultaneously reselling it to
party "B." Give them these instructions:

1. You want separate but simultaneous closings. You do not want
either party to know who the other party is since they might
decide to go around you in future transactions.

2. Your purchaser's money will fund the transaction. Thus, the
purchaser's funds must be in escrow AND authorized for distribution
before settlement.

3. You require a double recordation with your ownership recorded
before the resale to your investor is recorded. This means that
you actually own the note before you resell it.

4. You want to be sure that your purchaser's requirements are
fully met before closing so that there will be no complications
to cause your purchaser not to settle as scheduled.

5. Per the contract, funds to the seller are not to be disbursed
until proof of recordation of the resale to the note investor has
been received.

6. Ask the settlement agent to coordinate the closing by being in
touch with all parties and to let me know if anything else is
needed and/or is delaying settlement.

7. You should let the settlement agent know of any other documents
you require at settlement (such as title insurance, affidavits, etc.)
so they will have adequate time to respond. If you want them to
handle post-closing activities beyond the norm, mention that at
this time. Beyond the above items (or anything special to your case),
the settlement agent should know how to handle the rest.

Delbert Ashby has been involved in notes longer than some note
investors and brokers have been alive. He authored the book,
"Make Mon ey Trading Mortgages," which is the best written
explanation of the note brokering business available:
A comprehensive, quality 145-page book that will teach you what
a note broker needs to know. It is available as an e-book for just
$19.95, and you get it immediately:
http://papersourceonline.com/e-books-more/start-here/

Thanks to Del Ashby for his wonderful contributions to this course,
to THE PAPER SOURCE JOURNAL and to the note industry.

Now, back to my comments (WJM):

While it's vital that you know all about the paperwork needed for
a note transaction, you may be thinking, "man, what a hassle!" And
you are right.

I'd like to end this lesson with some observations on what makes a
good mortgage or trust deed. I wrote it a few years ago and have
made updates to it as necessary. I think it is a pretty good summary
of the factors that make some notes more valuable than others.

Remember, I wrote the following with private investors in mind. Let
me make two exceptions:

(1) You can broker a lot of notes that you shouldn't own. When I
write something like, "a second lien note with a huge balance first
lien should be avoided," I don't mean you should avoid BROKERING
such a note. There are institutional investment firms that
specialize in all sorts of off-the-midway paper and it's fine to
broker notes to them that you would never even consider owning
yourself. In fact, that is EXACTLY what you should do with the
majority of the notes that cross your desk.

(2) When I write things like, "these notes aren't as desirable as
others," or "stick to these notes" for investment, I am assuming
you are fairly new at this. More experienced private investors
in notes may want to branch out into other areas that would
be too risky for beginning investors.

Someone once criticized me for printing some "rules of note
investment." They said, "Whose 'rules'? Yours? Give me a break."

My answer to that is,

(1) What rule isn't written by somebody? (With the exception of
God'slaws, of course). There's nothing wrong with someone writing
"rules." What you have to examine is whether the person is
qualified, by their own knowledge and experience, to offer "rules."
In other words, have they earned the right?

(2) "Rules" are simply suggestions. OK, strong suggestions!

(3) They are based on my over 25 years of buying notes and editing
THE PAPER SOURCE since 1987, a journal in which the brightest,
most experienced note investors and brokers share their wisdom.

(4) Finally, yes, it's my opinion. It's the only one I'm qualified
to give.

Here we go:

**The value of a note depends ultimately on the economic conditions
that support the value of the property.**

An owner-occupied single family house in a good neighborhood located
in an area with a long-term stable economy is the best collateral
possible. Among other reasons, that is because single family houses
have a better appreciation track record than any other type of
property. A note on the above is further enhanced by a payor who
has an excellent credit record and unblemished payment history.

Less desirable collateral, in descending order: owner-occupied
(owner lives in 1 unit) duplexes/triplexes; non-owner-occupied
single family houses; non-owner-occupied duplexes/triplexes;
other non-owner-occupied multi-family units; improved land;
commercial (non-industrial) properties; resort properties;
subdivided but unimproved lots; raw land (some buyers would use a
slightly different hierarchy).

Due to the current regulatory environment in the U.S.,
industrial properties, gasoline stations, even properties with
underground oil tanks have many hidden liabilities. Notes secured
by such properties should be avoided.

Cooperatives, time-shares, mobile homes without land, business notes
without real estate, signature loans, viaticals (insurance policies
on terminally ill persons), senior settlements, are not adequate
security as notes in your personal portfolio. There are investors
for many of these notes, however, and you can certainly broker them.

I advise you to steer clear of viaticals and senior settlements, both
for your own investment and even to broker. There is a great deal of
fraud in these instruments, and states (such as California) are ruling
them to be securities.

Speaking of fraud, so-called "prime bank notes," "prime bank
guarantees," and similarly-titled "investments" do not exist.
They are complete frauds, total scams. "Letters of credit,"
while they exist, are not transferable and thus cannot
be bought and sold. If someone tries to convince you otherwise,
run the other way. They are crooks.

The higher the investment-to-value ratio (ITV), the riskier the note.
(ITV = amount paid for the note + senior lien balance (if any)
divided by the market value of the property).

A deep discount on a note does not make it pay better. (Thanks to Jim
Levie for reminding me of that fact).

If there is little or no appreciation in the property, the
loan-to-value ratio (LTV) is a barometer of the likelihood of
default. (LTV = balance of all loans against the property divided by
the market value of the property).

Notes on property purchased for $1,000 down or less often default.
The higher the down payment, the better.

An amortized note is more valuable than one with a balloon, since
the payor may not be able to make the balloon payment.

The single most powerful financial aspect determining the value of
a note is the amount of the monthly payment. For example, all else
being equal, a 10-year note with a large monthly payment and no
balloon is worth more than a 10 year note with a smaller monthly
payment and a balloon.

A note in the first lien position is more valuable than one in the
second lien position. Third lien or lower notes are worth very
little.

A second lien note with a huge balance first lien should be avoided.
In case of foreclosure, the owner of the second lien would have to
make the payments on the first.

A seasoned note (one with a payment history of several years or more)
is better than a green note (little or no payment history).

The payor's credit history is important to help determine the
character of the payor and likelihood of default, but it is not
infallible. Everyone, even those with the best credit, can lose
their incomes, have medical emergencies or suffer other unforeseen
catastrophes. The best use of a credit report is to identify a
potential bankruptcy candidate.

A second note behind an assumable first is always to be preferred
over one behind a non-assumable first.

**Again: The value of a note depends ultimately on the economic
conditions that support the value of the property.**

This is not a complete list, but it is most of the crucial
factors to weigh when considering a note for investment.

Your suggested homework is at www.cashflows.org The topic area
for the articles is in the parenthesis:

What Being A "Broker" Really Means
The #1 Broker For The #1 Volume Investor Shares His Secrets
(Especially For Beginners)

Brokers At The Crossroad: The Return of the Private Investor
(Hot Issues)

Next Thursday you'll receive Lesson VII of How To Get Started
Profiting From Notes, so please watch for it in your e-mailbox.

May the Lord richly bless you,

W. J. Mencarow
Editor of THE PAPER SOURCE JOURNAL
www.PaperSourceOnline.com

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