Paying for the Seller Held Mortgages you want to Buy

Most people do not plan on keeping the seller financed mortgages they find, but instead sell them to an investor and make a commission. However, under the interesting scheme described below, they could keep the mortgage as a long term investment and borrow against it.

As you may already know, First National Acceptance Company of North America, Inc ("First National") has been in the business of making loans that are secured by real estate receivables (i.e. land contracts, contracts for deed, notes and mortgages, deeds of trust, …a/k/a "paper") for a number of years.  We are also in the business of buying these real estate receivables, financing the acquisition of rehab property, and also financing land development projects. 

Rather than trying to find funding for each and every deal, First National loans you the money from an established line of credit (“BrokerLine™” ) to build up a portfolio of notes to hold for your own investment or sell off to industry buyers.   

This is how First National say their system works.

HOW DOES BROKERLINE™ WORK:

Notes are submitted as they are created or negotiated and fundings can occur within a matter of days, provided a complete package is received. We simply review the value of the collateral, the borrower’s ability to pay, and then perfect our interest in the note or contract at the closing. Underwriting requirements are straightforward and fundings are faster with a line of credit because you own the note.

WHO USES BROKERLINE™:

There are typically three types of customers that who currently use BrokerLine™:

i.) land developers who are creating paper from lot sales,

ii.) rehabbers who are creating paper from the sale of homes or commercial property that they've redeveloped, and lastly,

iii.) note brokers who are buying paper at a discount and either holding it for their own investment, or just getting it off the street and then selling it a profit to another investor (brokering the paper).

Though all three lines of business are very different, they all share one common theme, at the end of the day, all of these people are holding a note or contract, secured by real estate, that entitles them to receive payments.  

EXAMPLES:

1. The Land Developer Example

Let’s say a land developer buys a 100 acre tract for a price of $10,000/acre.  Then let's assume the developer spends $250,000 between platting, clearing the land, putting in roads, drainage, etc.  Let's now assume that the developer can sell off 90, one-acre lots for an average price of $20,000 per lot.  If the developer offers seller financing, most likely, this will greatly improve the developer’s ability to move the property quickly. 

At this point, let's add some terms to the deal, again, let's say the seller sells the property for $20,000 per one acre lot (there are 90 lots in the subdivision).  Let's also assume the seller receives a 10% down payment and is willing to take back a note at 10% for 120 months.  The monthly payment obligation would be $237.87.  If the developer would assign that contract to First National we could advance $14,000 against the note, thereby paying off the underlying debt and returning the developers out of pocket expenses to them. 

The purchaser will begin making payments to First National and payoff the advance through their monthly payments.  After 77 months, which is the expected time frame whereby First National should be paid off, there would still be a balance owing the to the developer (seller) of $8,400 on each lot (assuming no early payoffs or foreclosures).  Multiplying the $8,400 owing by the 90 receivables (from the 90 lot sales), leaves a balance still owing to the developer (after the advance is paid off) of $756,000. 

It is also important to keep in mind that at the time the developer created the paper, or sold the lots, the developer would have received 10% down, or $180,000 cash ($2,000 times 90 lots), plus a $1,260,000 BrokerLine™ advance ($14,000 X 90 lots).  In sum, for a property that was purchased for $1,000,000, and with an additional investment of $250,000; the developer was able to originate loans of $1,620,000 ($18,000 X 90 lots) was able plus receive an additional $180,000 in cash from the 10% down payment.  After the $1,260,000 advance is paid off, which should take about 6 years or less, the developer would still be owed about $756,000.  

2. The Rehabber Example

The BrokerLine™ works in much the same way property rehabbers.  Let’s assume a rehabber buys a home for $50,000, puts $10,000 into it, and resells the property for its fair market value, let's say that is $85,000 after the improvements.  At this point the rehabber will obviously be looking to obtain a cash sale and get paid.  With BrokerLine™, a cash sale is not the only option.  With BrokerLine™, a rehabber can resell the property by offering seller-financing, get the underlying debt paid off and recoup all of their out of pocket improvement costs. 

Here’s how it works.  When the rehabber seller-finances the sale, a note or a contract is created.  At closing the rehabber would assign that note or contract to First National, and I would make an advance to the rehabber from their BrokerLine™.  These “advanced proceeds,” from BrokerLine™ would be used to pay off the underlying debt (if any) and put the rehabber’s out of pocket expenses, back in their pocket so they have the cash needed for the next project. 

Let’s look at this scenario in a bit more detail.  Again, let’s assume the rehabber bought the property for $50,000, and spends $10,000 on improvements, increasing the value of the property to $85,000 - a very likely and common scenario.  Lets also assume the rehabber obtained a loan (or seller financing) to buy the property initially, and had to put 15% down himself, so he actually has $7,500 (15% of 50,000), plus the $10,000 of improvement money, or $17,500 total, in out of pocket expenses.  Let’s also assume that the rehabber resells the property on a seller financed deal for $85,000 with 10% down, at a rate of 10%, and over a term of 20 years (240 months).  This results in a note or contract for $76,500 and a monthly payment obligation for the buyer of $694.82.  If I were to make an advance of 80% of the note amount, this would result in cash to the rehabber at closing of $69,700.  $61,200 from my advance plus the down payment of $8,500 (10% of 85,000), or $69,700 total - that’s $9,700 MORE than the rehabber’s cost of the property and its improvements ($60,000).  Assuming the purchasers don’t pay off early, through their payments, the BrokerLine™ advance would be paid off in 12 years, leaving a balance owing to rehabber of $60,654.58.    

3. The Note Buyer or Note Broker Example

 It works similarly for note buyers or “note brokers” who are buying seller-financed notes at a discount.  The broker would buy the note or contract (“paper”) at a discount with BrokerLine™, and simultaneously assign the "paper" to First National as collateral for the advance.  The purchasers immediately start making payments to First National, covering the interest due on the BrokerLine™ .  These payments create value and equity for the broker. 

Let’s assume the broker can buy a $65,000 note for $52,000 (80% of the balance due).  Let’s also assume the purchaser is paying a 10% interest rate, and bought the house for $70,000 with $5,000 (7%) down, and is making monthly payments of $570.42 (a 30 year note).  With BrokerLine™, the broker can buy this note without coming out of pocket with any money at all because First National finances the full purchase price.  When the purchaser pays off, be it from refinancing of the note or selling the property, the broker keeps the difference between what is owed on the note and the amount of the BrokerLine™ advance that is owing.  In this case, if the purchaser paid off, the broker’s profit would be at least $13,000.  

Some brokers use BrokerLine™ simply to get these notes “off the street,” and then turn and sell the notes for a profit.  In this case, if the broker could sell the note at 90% - the broker would make a profit of $6,500 (90% of 65,000 less $52,000 - your cost). With BrokerLine™ the broker owns their notes, which affording the time needed to shop for the best source of permanent funding.

Other brokers prefer to hold some notes for the long haul.  These brokers choose to earn the interest themselves and watch the equity in their portfolio grow over time.  Building off of the example above, where the broker buys the $65,000 note for $52,000, let’s assume that the broker doesn’t sell the note and let’s also assume that the purchaser doesn’t pay off early.  In this case, the note could be bought with a BrokerLine™ advance, again, without the broker ever needing to come out of pocket with any cash.  Through the payments of the purchaser alone, the advance would be paid off in 13 years, leaving a balance owing to the broker of $56,059.32.  That’s a great profit considering the broker didn’t come out of pocket for any of the purchase price.  This is just another example of the how BrokerLine™ can help you do more business, increase profits, and generate long tern net worth.

SERVICING:

First National fully services all "pledged" collateral notes and contracts.  By this I mean that First National begins invoicing the purchasers, receiving all of payments, and applying all of those payments against the amount owing on the BrokerLine™ and properly applying those payments to the purchaser’s individual accounts.  First National would also begin making collection calls and sending collection letters to the purchasers as needed. 

BrokerLine™ customers enjoy the right to pay off and take back any current, or any delinquent collateral accounts at any time.  Like our BrokerLine™ customers, First National also maintains the right to foreclose on the collateral accounts in the event of default.  All BrokerLine™ customers receive a password which enables 24 hour a day website access to their account.  The online reports are very detailed, and contain a complete history of each collateral account.  Please see an example of these reports at our website: http://www.fnacna.com. 

The BrokerLine™ account reporting indicates when payments were made, the balance due, fees assessed for late payments and NSF charges, and so on.  We service these collateral accounts like we service our own originated residential and commercial loans.    

TERMS:

The interest rate charged and percentage of the principal balance that FNACNA is able to advance may vary with the type and quality of each note on your BrokerLine™.  Advances typically range between 70% and 91% of the note balance.   We are flexible, and we do offer fixed as well as variable rate and advance schedules.   Most borrowers will pay a fixed rate between 8.50 % and 11.5 % and up to a 2 point origination fee.

All payments due on the notes in your Line will then be directed to First National with monthly invoices and held in escrow as they are received each month. At the end of each month, any fees and interest owed to First National (or any principal amounts required to keep the Line within formula) are deducted from the money in your escrow account and the balance of that account is swept into your commercial checking account (provided that borrowing formula is adequate). The money in your checking account is, of course, yours to buy more notes or to use as you please.

Brokers with notes that are currently owned can be put on a line right away. These notes can then be borrowed against, provided the collateral falls in our underwriting guidelines and FNACNA can perfect an interest in the notes.

If you are interested in acquiring First National's unique BrokerLine™ please contact Mr. John Hyatt (see below) for an application today. 

First National has been involved in the “seller financed real estate business” for over 40 years.  They are a wholly owned subsidiary of First National Bank of America, (Member FDIC), a federally chartered bank, located in E. Lansing, MI .

They say that they are flexible, that they understand the business, and would like to establish a working business relationship with you.  Please visit their website at http://www.fnacna.com.  If you have any questions, please do not hesitate to call. 

BROKERLINE FUNDING INSTRUCTIONS:

APPLICATION REQUIREMENTS:

i)   the last 2 years of tax returns (complete with ALL schedules) for the company - if applicable (and for anyone owning 25% or more of the company);

ii)  a current profit and loss statement and a balance sheet for the company - if applicable;

iii) a personal financial statement, application, and 4506 form for anyone owning 25% or more of the company - if applicable (please see attached);

 

resume or its equivalent for the guarantors; 

 
also, please describe what type of business has your company been involved with in the past, what you are doing now, where are you headed, and how will you use the line of credit. They will also need:

 

vi)     Organizational documents; ie,

        a) by-laws for corporations,

        b) partnership agreements for LP's, and

        c) operating agreements for LLC's ; and lastly

if you have an inventory list of current notes, please attach a spreadsheet detailing these notes (balance due, appraised value, sales price, months paid, interest rate...etc.)
 

John D. Hyatt

Relationship Manager

First National Acceptance Company of North America, Inc.

http://www.fnacna.com

241 Saginaw Hwy., East Lansing, MI 48823

PH:   517-333-7223

FX:   517-333-0390