Three Reasons Why Seller Held Notes Weather The Real Estate Storm

Real estate is going through some chaotic times, particularly in the housing market, where a mix of oversupply, inflated prices and rash lending practices have severely damaged the entire sector – and from there, the US, and now the global economy. However, the news isn’t all gloom and doom. Privately managed mortgage notes have performed consistently well for companies like American Funding Resources, which continued to purchase first lien notes even while large institutions flee the housing business completely. According to American Funding Resources’ analysts, there are three reasons why seller-held mortgage notes are still worth creating, buying and selling.

They’re Mortgages, Not Parts of “Investment Products”

One of the most important factors keeping seller-held notes in good shape is that they aren’t part of the institutional lending system. Seller-held notes were never bundled into collateralized debt obligations alongside subprime mortgages. As a result, there is no risk that institutional failure will affect these private arrangements. People holding seller-funded notes must still deal with a general decline in property values, but not the direct results of arm’s length institutional administration of the loans, such as mass foreclosures, payment confusion and missing note documents. In an environment when many bank clients are not even sure who owns their mortgage and more evidence of confusion and errant practices reveal themselves in the traditional mortgage industry, seller-held notes represent an simpler, more stable compromise.

Well Documented Lending and Borrower Information

From a mortgage note buyer’s or holder’s point of view, one of the ironies of the real estate market after the bubble is that while private lending arrangements were occasionally spurned as unsafe, the fact is that responsible private mortgage note holders appear to have dealt with their assets with more prudence than bigger, supposedly safer banks. Unlike institutional loans, seller-held notes are directly administered by the party assuming risk. The lender, not an agent working on commission, reviews every detail, and the standard of practice is to employ qualified legal advice as part of the process. Because he’s assuming the risk, the lender usually thoroughly examines the borrower’s credit and employment history. Many people who got subprime mortgages would never have been able to arrange a private loan with a responsible note holder.

Salable Notes Belong to Valuable Properties

Due to the fact that the note holder needs legal advice and a borrower able to make regular payments for an extended period, seller-held notes gravitate toward properties that demonstrate long-term potential, including multi-family apartments, traditional homes and established condominiums. If mortgage note holders want to sell their notes they must conform to note buyers’ requirements as well. Companies like American Funding Resources select seller-held notes attached to collateral with confirmed, stable value. “We like traditional, detached homes in established neighborhoods,” said American Funding Resources president Wayne Burgess. “We know that half-vacant developments lack the maturity to perform as well, and we don’t deal in unstable types of properties at all.” Burgess notes that his company won’t handle mobile homes and other properties that rapidly depreciate.

About the author

American Funding is a Palm Bay, Florida based mortgage note buyer dealing in seller-held home, commercial, multifamily and lot mortgages and other property loan instruments. For over 30 years, American Funding has provided liquidity to note sellers. For more information call toll free at 1-800-939-1086.

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