One niche market that has not been fully exploited is land notes. There are profits to be earned. Historically, however, it has been difficult to find buyers for land notes. The secret in buying and brokering land notes is to locate safe ones that are profitable for you and attractive to an investor.
First, buy notes only on developed land, not dirt. Developed land means the roads, telephone, water and electricity are in, but there is no building.
Second, buy land notes with recourse back to the note seller. This means the seller of the note is personally liable if the payor defaults on his or her payments.
Third, you want to have a realistic appraisal on the land value; “realistic” because developers can distort the value by selling a parcel to a colleague at an inflated price. New buyers and some appraisers will use this phony sale price to give an inflated appraisal.
Fourth, run a credit check on the payor. You should try to broker land notes with good payors who have “A” or “B” credit.
Fifth, verify that the payor made a MINIMUM cash down payment of 20% on the property — many investors won’t consider a note with less than 30% or even 50% down.
Sixth, call the payor to verify that he is happy with his purchase and that he is not unrealistic about making profits on his new property. Many land developers will “oversell” a developed lot, leaving the buyer with dreams of riches in a few years. When the buyer’s dream bursts you do not want to be stuck with a disgruntled payor.
Finally, keep your investment-to-value (ITV) at or below 50% if you want to broker the note to an investor. You do this by agreeing to buy only part of the payment stream. For example, if you and your investor are comfortable with a $30,000 value for a lot in a residential area, you would multiply .50 times $30,000 to get the maximum investment for your note buyer. In this case, an investor would put maximum $15,000 in this note. If there was a $22,500 note tobe sold, you would offer to buy only part of the payment stream.
Your goal is to find a good supply of lots and a hungry developer. Advertising that you buy land notes is one effective way to locate them. Other brokers have been successful working with real estate brokers, others contact developers by phone, offering to finance some of their sales. Your marketing creativity can be rewarded with several of these deals a month.
With this statement…..Third, you want to have a realistic appraisal on the land value; “realistic” because developers can distort the value by selling a parcel to a colleague at an inflated price. New buyers and some appraisers will use this phony sale price to give an inflated appraisal. …… is that an out of pocket cost and we just locate an appraiser through our local REIA? Is there something a Realtor can give us like a qualified opinion?
Everything was clear up until the next to the last paraghaph. What does the paragraph which begins with “Finally,” mean? It is not spelled out well enough for me.
Good advice and checklist for any type of notes.
Ed,
I think Bill is referring to the “Discount” on the paper. This means that the price you pay for the note ought to be 50% or less of the appraised value of the paper so that you can offer an attractive investment to your buyer.. Also keep in mind that the terms of the paper, credit worthiness of the payor, the recourse terms (and the net worth of the seller that sold the note ) and other factors could require that you demand a much greater discount than 50%.