Celebrating 25 Years
BUSINESS AS USUAL” – I DON’T THINK SO!
My real estate broker friends tell me it takes pure unadulterated courage to do a real estate transaction right now either for yourself or to represent others. The risks are high and the ability to mitigate is low. The probability of negotiating with either a seller who thinks their property is worth what it was 3 years ago or a note seller who wants face value for the note is next to impossible. A Coldwell Banker broker told me that one seller allowed an NOD to be filed on their house – and later let the bank foreclose rather than face the fact that the house had dropped in value.
Traditional methodology to evaluate the real estate securing the note has been trashed during the meltdown. Note sellers don’t have a clue as to the “time value of money” and expect to get cash at close – sometimes at even more than the face value on the note.. Leverage, intrinsic in the purchasing or selling of real estate is useless without the ability to assume an existing loan or get new money from the Bank. Even though Legislators are throwing Billions at the Banks, they continue to screw down the credit. For banks with toxic loans to liquidate – many of them are just “plain dumb” as evidenced in a recent incident: One of our investor clients received a tape of a delinquent loan portfolio from a bank of well renown for sale. Guess what? The offering contained three REO’s! The bank rep was clueless, even after discussion, as to the difference between an REO (Real Estate Owned) and a Loan. Go Figure!
THERE’S HOPE BEYOND THE “FRAY”
On Monday David Butler, President and CEO of Hotspur Investment will join with Tom Standen, President and CEO of Equity Holding Corporation, for an all day education forum presenting a comprehensive exploration of how to use a simple Title-Holding Trust to accomplish: better solutions for future flexibility – in lieu of Starker and/or increasingly popular Reverse Starker Exchange, Installment sales, wraps and sale-leasebacks. Also covered will be options for Path to Cash Solutions, including achieving a broader field for Putting Pieces of Transactions Together and/or using fractional interests. The course will also cover improved alternatives for note swaps, “mortgage over basis” issues, Sec. 121 Exclusions and delaying depreciation recapture. Either one or both of these education days will prove to be a truer than true “meat and potato” session.
On Tuesday, April 21st, Jim Huey and Tom Standen will be presenting a full eight hours of “Hot Real Estate Strategies for Today’s Market”. Both Jim and Tom have several decades of experience in non-traditional methods and strategies that will work in today’s turbulent market.
OPPORTUNITY ABOUNDS – DEVELOP YOUR POTENTIAL
So, what was it like starting Note Servicing Business 25 years ago? Actually, our idea for a note servicing company began two years prior to officially hanging out the Note Servicing shingle in 1984. Let me tell you what happened to trigger this event.
The year was 1982 – You know, Ronald Reagan was US President, Epcot opened at Disney World; Stevie Wonder and Paul McCartney released “Ebony and Ivory”; CNN was launched and the space shuttle Columbia launched its first mission. Dang! That was a long time ago…I was only 49 years old! Here’s something even more interesting as it relates to our business. In 1982 the Compact Disc was introduced, MS-DOS was first licensed and get this – the word “internet” was first used in 1982 to describe the connected pieces of Arpanet – the predecessor of the Global Network.
As fate would have it, when we turned the first page of our brand new 1982 New Year, there was a reminder to return a call to Superior Court Judge Right after the Holidays. When called, the Judge requested Tom meet with him for a possible appointment as a Referee with respect to a recent case. Tom had recently retired as the CHP Area Commander and the Judge felt Tom was just the man for the job. Tom, always willing to learn something new, accepted the appointment which involved a case wherein a Real Estate Broker, representing a Seller, had sold a local Tavern and arranged for private financing. The Broker then put together a multi-investor (fractionated) Note with 165, yes you read this right, One Hundred Sixty Five Investors in the note. Obviously to most reading this, the note was created in violation of the Federal SEC rules and regulations which allowed (at the time) only 50 investors and the CA laws which limited the investors to 35. To make a short story long (joke) Tom was required to divide the monthly payment of $700.00 and write 165 checks on a monthly basis.
I made the trip with Tom to the Hewlett Packard Outlet in San Jose Silicon Valley where he purchased at that time the best available computer. It was an Hp 125 CP/M computer, hard drive, but had two floppy disc drives. Each drive could handle a 360KB floppy disc. He inserted the program into one drive; at that time the word processor program was called Satellite Service International (SSI) which preceded Word Perfect. Then if a spread sheet program was to be used the Visi-Calc program was inserted replacing the word processing disc.
Remember, this process entailed the servicing of just one loan with 165 beneficiaries as participants. These names had to be entered in alphabetical order as the program was unable to sort and put them in order. Next to the name the amount of investment for the beneficiary was listed and in the next column the percentage of ownership in the loan was calculated and expressed as a dollar amount. Then this list was printed and used to provide the information necessary in the word processing program to prepare each check for the individual beneficiary. The checks were printed on fan fold checks using a dot matrix printer that had a push pull tractor feed installed on it. Whew, it took him an entire day to complete this job each month including preparing envelopes, stuffing, hand stamping and sealing the envelopes.
Steady as She Grows –
It was two years later, in 1984 when we took our first baby steps to actually launch a new company – North American Loan Servicing Corporation – later and now known as the Note Servicing Center Inc. Interest rates had climbed to over 15%, unemployment was double digit and seller financing was about the only way Realtors and sellers could move their property (Sound Familiar)? Tom visited local Realtors and Title Companies and felt confident that if we could capture 25% of the seller notes to service, it would cover the overhead and pay for a new computer. We bought an IBM AT Dos 286 computer with 20MG Hard Drive – Paid $5,000!!! This was the year – The timing was absolutely right – Time Magazine confirmed our hunch and in 1984 named the personal computer its “Man of the Year”. Yet, once again, Tom became my “Man of the Year”! We were off to build a new business. It’s been exciting but,
We’re Getting Better All the Time
Today, the Note Servicing Center operates on the cutting edge of Technology with a highly sophisticated computer operating system, proprietary in design which meets all requirements of Trust Accounting and reporting for the CA Department of Real Estate – the jurisdiction and licensing under which we operate. The system is updated as new regulations occur.
Our advanced software system accommodates notes and contracts with infinitely complex terms in payment schedule, finance type and interest rates including: Heloc’s, fractionated notes, all-inclusive notes and land contracts. We offer the latest in technology including impounding, monitoring and payment of real estate taxes, and hazard insurance and an “on line” account service where you can review your account 24/7 on a password protected server.
Our server and computers are maintained and kept current of all updates by our IT staff. Staff is vigilant and apprised of incoming threats with constant monitoring of all system components. The server and individual computers are protected by numerous security measures, ensuring all information is protected from both internal and external intrusions. In addition, to these intrusion protection measures, all data is backed up numerous times daily and a complete backup of all information is conducted weekly and is stored on the server. All data is stored in house to insure the safety and security of client information.
And there’s more…. We know lenders and note holders want their money “fast”. So now, we make sure to process payments the very same day as received and offer Automatic Debiting from the Borrowers Account and Electronic Depositing so that your money is transferred into your account within 48 hours. As one of our original clients said the other day: You’ve come a long way, Baby!
But, they ain’t seen nothing yet. As mentioned in last months Newsletter, in just a few short weeks, we will be rolling out a brand new fine tuned program custom made for those who are using the Lease/Option and Subject 2 as their method of choice. We know of no other company willing and able to provide this kind of service.
During this 25th Anniversary year we have even more surprises to roll out for your benefit. In the meantime, we wish you a successful and profitable day and close with a reminder to visit our website at www.sellerloans.com to browse for articles chuck full of powerful information; download our latest FREE e-booklet “Trust Deeds What you Should Know” and shop at our bookstore.
When people go to sell their home, the majority will still owe money on a loan from when they bought the property. Since few sellers own a property free and clear, what to do with this underlying lien is an important consideration with owner financing.
A title report from a reputable title company will identify any debts against the property still owed by the seller or any prior owners. In a traditional transaction, the seller’s liens against the property are paid off at closing from either the cash funds deposited by the buyer or the funds advanced by the lender for the buyer’s new loan.
With a seller-financed transaction it is unlikely the buyer will deposit sufficient down payment funds at closing to pay off the underlying liens from the seller’s proceeds. If the seller’s liens are to remain after closing, also known as a wraparound, there are several important considerations.
First, most loan documents contain some type of “due on sale clause.” A due on sale clause states that if the property ownership is transferred the lender can call the outstanding balance plus any accrued interest due and demand immediate payment in full.
There are many creative strategies that have been employed to avoid triggering a lender’s due on sale clause. The use of unrecorded real estate contracts, purchase by a trust entity, and use of third-party administrator are just a few.
While there are no guarantees, from a practical approach, lenders seldom exercise their due on sale clause provided the payments are received timely and other note terms, such as current taxes and insurance, are in compliance. Nonetheless, the lender has the right and this has the potential to cause subsequent problems. A competent attorney or title agency can provide wrap around disclosure language for the documents, making all parties aware of the situation.
Second, it is imperative to make arrangements for timely payment of the seller’s underlying lien from the purchaser’s monthly payment. It is a trusting fool that sends their payment each month directly to the seller and hopes the seller promptly sends on their portion to the lender. What if the seller forgets, or worse, gets in a financial bind and uses the money that month for other expenses?
When using seller financing with a wraparound situation, it is advisable to use the services of a third-party escrow or servicing agent. The third party will receive the monthly payment on the note from the new purchaser, apply to principal and interest, and then disburse the appropriate payment to the underlying lien holder, with any difference or overage remitted to the seller.
For more great information go to www.NoteSellerBlog.com by Fred and Tracy Z. Rewey