The Answers to All Your Questions
Wondering how this whole note buying process works? Here are straight forward answers to the most common questions on private lending and buying & selling mortgage notes.
Why Owner Financing?
Owner financing is on the rise with more sellers agreeing to accept payments from buyers. There are many reasons people agree to take back a note, deed of trust, mortgage or contract including:
- Quick sale of the property
- Monthly income from the note
- No hassles of bank financing (fees, delays, and strict underwriting)
- More qualified buyers
- Property is hard to finance
Why would I sell my mortgage note?
Circumstances change and many sellers would prefer cash today rather than small payments that trickle in each month. Here are just a few reasons people have sold their note payments for cash:
- Investment Opportunity
- Expensive Medical Care
- College Tuition
- Unexpected Financial Changes
- Peace of Mind – no more worrying if the buyer is going to make late payments or having to foreclose
- Accounting headaches, IRS regulations, paperwork hassles and the list goes on…
What is a note appraisal?
A note appraisal reflects the current market value of your payments similar to what a real estate appraisal provides for real property. It shows what your future payments are worth in cash dollars today and is sometimes referred to as a “note analysis” or “quote”.
We recommend you have your note evaluated once a year as pricing may change based on market conditions
How do I maintain the value of my note?
Many of the items that affect the value of your note were determined at the time the property was sold. However, there are three things that you can do now to make your note more valuable:
- keep good records and copies of the payments received,
- obtain a copy of the property insurance policy from the buyer each year; and
- verify the property taxes are paid when they come due (usually twice a year).
This will help maintain the value of your important asset and avoid any unpleasant surprises.
Can I sell all or part of my note?
We can purchase all or part of your remaining payments. Selling part of the payments allows you to receive a lump sum of cash up front, then payments when the note reverts back to you. We can even pay cash for a portion of each monthly payment.
Many people elect to sell just enough payments to meet their cash needs today and keep some of the future payments as an investment or nest egg. Always ask for an option that meets your needs.
How is the value of a note determined?
The value of a note is affected by the down payment, interest rate, payment amount, and term as well as the buyer’s credit rating and payment history. The type, condition, and value of the property also impact the value of your note.
The time value of money, which makes payments due now more valuable than payments due in 20 to 30 years, also plays a role in the evaluation process. Generally, due to inflation, money in your pocket today is worth more now than later. All of these elements will be taken into consideration in determining the current value of your note.
How will selling my note affect the payer?
The payer experiences no change in the way the payments are structured. The only change will be the address where the payments are mailed.
How do I get started?
The first step is to obtain a quote using our online form or by calling us at (310) 280-9173. We also request copies of the documents relating to your transaction:
- Note and Mortgage (Deed of Trust or Contract)
- Closing statement
- Buyer information
- Pay history and current balance
- Previous title insurance policy
- Current hazard insurance policy
We will then provide you an offer subject to the standard title, appraisal, and buyer’s credit review. Once under contract, you will receive your cash as soon as all of the documentation can be obtained. This typically takes as little as 10-15 working days.
How will I be paid if I decide to sell my note?
The purchase price is paid in guaranteed funds (cashier’s check or wire transfer) upon receipt of the final transfer package and original documents.
We are happy to wire funds to the title company so you may exchange your original documents for the proceeds, assuring the safe and secure transfer of your valuable asset.
Fund Specific Frequently Asked Questions
What’s the minimum amount that can be invested in Coastal Capital?
The minimum is $50,000 but we would prefer you invest $100,000. You can add to your balance at any time and an initial investment period of 1 year is required. You can invest on any day; the fund is based off a share value calculation.
When is interest from the fund paid out?
Interest from the fund can be paid out on a monthly basis and paid via ACH but 90% of investors choose to reinvest their interest to compound their returns. Others choose to take an annual or bi-annual withdraw to pay for personal expenses such as tax bills or a child’s tuition.
As an investor do, I get a 1099 or K-1?
Investors in the Coastal Capital fund receive a K-1 with the majority of the income being classified as interest income.
What is a servicer and who is it for Coastal Capital?
FCI processes the collection on monthly payments, collections, workouts and disburses funds. The loan servicing platform is available 24/7 with full transparency and details of each transaction. Coastal Capital uses FCI Lender Services, Inc. (FCI) a leading national Private Money Service located in Anaheim Hills, CA.
Why does Costal Capital have a high concentration of seconds?
This concentration allows for a higher yield and a more diversified field portfolio after weighing for risk on the loan to value ratio.
General Hard Money Lending Frequently Asked Questions
Low Interest Rate Risk
In a rising interest rate environment medium and long duration bonds can lose substantial value. Coastal Capital loans have short maturities averaging twelve months, preserving principal in a rising interest rate environment.
Due to the short-term nature of loans, the portfolio is constantly turning over as loans pay off. This allows investors to redeem their investment on relatively short notice.
Returns from investing in real estate loans/trust deeds are unlikely to move in tandem with returns in the stock market. Adding real estate loans/trust deeds to a portfolio will typically reduce overall portfolio volatility.
What is a Loan to Value ratio?
The loan-to-value (LTV) ratio is an assessment of lending risk that financial institutions and other lenders examine before approving a mortgage. Typically, assessments with high LTV ratios are higher risk and, therefore, if the mortgage is approved, the loan costs the borrower more.
What is a hard money lender?
A hard money lender is an investor or entity that makes loans secured by real estate, typically charging higher rates than banks, funding more quickly than banks and usually requiring less documentation than banks. Borrowers may use a hard money lender multiple times for various projects.
What differentiates hard money lenders from bank lenders?
Hard money lenders differ from bank lenders in that they often fund more quickly, with fewer requirements and have funds from individual investors versus deposits on hand. Hard money lenders are sometimes called “asset-based lenders” because they focus mostly on the collateral for the loan; banks require both strong collateral and usually excellent credit and cash flow from the borrower.
Hard money lenders are willing to foreclose on and “take back” the underlying property if necessary, to satisfy the loan. Bank lenders typically look at the borrower to be able to pay back the underlying loan from the borrower’s income, whereas hard money lenders are comfortable looking to a sale or refinance of the property as the method of repayment.
What’s the difference between a first and second trust deed?
The difference between a First and Second Trust Deed is the priority of the lean based upon the date that the Trust Deed is recorded. The earliest recording date has priority (i.e. First Position). A second trust deed has the increased risk of being 'wiped out' if the First were to foreclose prior to the second doing so. The First is required to notify the Second of the foreclosure process by a Notice of Default. If the borrower were to stop making payments to the First, the lender would have the right to foreclose even if the lender of the Second has been receiving their regular payments.
Typically, if the borrower was not making payments on the First, the lenders of the Second would strategically reinstate the First to keep it current and avoid being wiped out completely by the First foreclosing.
The rates for a First Trust deed average 7-10% versus 11-13%+ for Seconds.
Pooling of funds versus owning an individual Trust Deed?
Aggregating trust deeds into a fund is like buying a mutual fund that provides the benefit of diversification. Buying a single trust deed is like owning a single stock which will inherently be more volatile than a diversified mix of stocks.
Why do hard money lenders exist?
Hard money lenders exist because many real estate investors need a quick response and quick funding to secure a deal when looking for a real estate loan. Banks and other institutional lenders that offer the lowest interest rates don’t provide the same combination of speed and transparency. With speed comes opportunity for both the borrower and the lender.
When does it make sense for developers to use a hard money loan?
Even investors/developers with strong financial statements and access to bank credit frequently choose to use private money loans (also called “hard money loans”). Situations where private money loans make the most sense include those where the borrower:
- Requires a quick closing and banks cannot meet the deadline;
- Wants to use debt rather than equity for a project to maximize return;
- Wants to avoid spending too much time raising equity or debt from many different smaller investors, but prefers to instead focus on finding new opportunities;
- Lacks the patience or time to deal with the bureaucracy of securing a loan from a bank;
- Has an excellent investment opportunity, but does not have sufficient financial strength to get a bank loan, and/or;
- Has a bank line of credit but needs a larger loan than is allowed under the existing bank line.
The common theme is that there is an opportunity for the borrower to generate substantial profit (or savings) quickly, and the cost of interest and origination fees is small relative to the anticipated profit, even given the premium rates charged by private lenders.
What are advantages of hard money lenders?
Hard money loans can have several advantages over traditional bank financing including:
- A simpler application process and quicker approval/disapproval decision;
- Less scrutiny of the borrower’s personal financial situation, including income, employment status and historical tax returns, as compared to bank loans;
- Borrowers can allocate less time to seeking financing and instead concentrate on other business;
- Borrowers can avoid the risk of being rejected by a bank;
- Most hard money lenders do not expect perfect credit and substantial amounts of disposable income from borrowers, but instead focus on the merits of the specific asset under consideration;
- Self-employment is not seen as unacceptable to private lenders, whereas many banks view self-employment negatively and strongly prefer lending to professionals with very steady income.
What are some disadvantages of hard money lenders?
Disadvantages of seeking a hard money loan may include:
- Hard money loans are more expensive than bank loans, with higher interest rates and origination fees;
- The quality of hard money lenders varies substantially from one lender to another; some are unscrupulous and may be seeking to have the borrower default in order to foreclose on underlying real estate as a business strategy;
- Some lenders may collect non-refundable deposits without having the capital required to make the loan; they may either hope to find the capital once the loan is “tied up” or in rare cases, they may simply aim to collect the deposit with no intention of funding the loan.
What kinds of property do hard money lenders lend on?
Hard money lenders will lend on both commercial and residential properties, although many will not lend on owner-occupied residences due to higher thresholds of scrutiny required by law. Commercial properties can include industrial, shopping centers, and office buildings. Some, but not all, hard money lenders will also invest in raw land slated for development and even hotels.
Vacation homes (single family residences), even if not a primary residence, are considered “owner occupied” and may or may not be financeable depending on the lender’s criteria regarding owner-occupied home loans.
What does the term “hard” mean in “hard money lender”?
The “hard” in hard money lending refers to the higher price which is charged to borrowers both in terms of interest rates (typically high single digits or low double digits) and higher loan origination fees (often around 2 percent of the loan amount, versus 1 percent or less for a typical bank loan).
Who funds hard money loans?
Hard money loans are typically funded by individuals or by funds that aggregate capital from multiple wealthy investors. Individuals who invest directly into a single loan are known as trust deed investors. Many trust deed investors are real estate investors/owners who invest in “bridge loans” to keep available capital working to generate a higher rate of return, rather than leaving the capital in banks earning minimal interest rates. Investors who prefer to invest passively in a fund are typically not as experienced in real estate investment and choose to pay the fund manager a fee to oversee the process of sourcing, selecting, and originating a series of bridge loans.
Why are so many hard money lenders based in California?
California is home to many leading hard money/private lenders. California has a tradition of private money borrowing and investing; it is a large state with huge numbers of properties and developers; and is a “non-judicial foreclosure state.” In California if borrower defaults, the lender can get control of the underlying property quickly (as long as the home is not owner-occupied) and liquidate it for payment. In contrast, some states with a judicial foreclosure process are less appealing for private lenders, because the foreclosure process can be long, arduous, and expensive.