Cash Flow Notes Explained

A note, which can also be referred to as private mortgage, cash flow note, land contract and other names is simply a mortgage. When a buyer does not qualify for a loan a seller may be willing to finance the sale of their own property. The buyer obtains a mortgage from the seller so instead of making payments to the bank he makes the payments to the seller. The seller may carry back a note for a portion of the sale price if the buyer qualifies for a loan from the bank but does not have enough cash for a down payment, or the entire sale price if he or she does not qualify for a loan at all.

Example 1: Carrying back a note for a portion of the sale price. This typically occurs when the buyer is approved for a loan from the bank but cannot come up with the required down payment. If a home sells for $100,000 and the bank approves the loan and requires a 20% down payment the buyer needs to come up with $20,000 in cash to pay the bank. If the buyer has less than the $20,000 he or she can ask the seller to finance the down payment. So the buyer can have $5,000 which is paid to the bank for the down payment and also borrow $15,000 from the seller which is also paid to the bank to complete the down payment. The bank lends $80,000 to the buyer ($100,000 selling price minus $20,000 down payment). The bank holds the first mortgage and the seller holds the second mortgage for $15,000.

The buyer will now pay the bank monthly payments on the $80,000 loan and monthly payments to the seller on the $15,000 loan. This scenario creates a private mortgage note worth $15,000. The seller now has to collect payments on this note which is for a portion of the sale price.

Example 2: Carrying back a note for the entire sale price. This is simpler than the above example because there is no bank involved. The house is sold for $100,000. A private mortgage is carried back for the sales price minus any down payment if any. So if the seller required a down payment of $5,000 the private mortgage or note will be in the amount of $95,000.

As you can now see, notes are created in order to make the sale of a property when the seller doesn’t have enough cash to satisfy bank requirements or simply does not qualify for a loan at all.

Benefit #3 of Using a Real Estate Agent

Benefit #3: Your Real Estate Agent is an Expert on the Entire Transaction

A good real estate agent will have gone through hundreds of real estate transactions and should know purchase agreement contracts and addenda inside and out. If you’d ever looked at a real estate terms dictionary you were probably overwhelmed. The purchase agreements are so wordy and lengthy that it is a daunting task to read through it. It’s even tougher to understand it.

Misunderstanding a clause or a “subject-to” can end up costing you thousands of dollars – there goes your savings on commissions by not using an agent. Although most home buyers are not looking to pull a fast one on you this kind of things happen all the time. Seasoned real estate investors will include language in purchase agreements that protect them by decreasing their liability and your chances of collecting the earnest money should they pull out of the transaction. Investors typically will not be looking to take advantage of you, but are protecting themselves at your expense.

Here is a brief example of one of these situations in which you as a seller may miss something on the contract that a real estate agent would spot on a heart beat.
A normal transaction will have a closing date at which funds are transferred, commissions are paid, and ownership changes hand. Most contracts state that possession takes place the day of closing but may have clauses that specify and outcome should the owner of the house be unable to vacate in time. A buyer can specify on the contract that the seller will pay a per Diem of $100 per day from closing until the time he or she vacates the property and allows the buyer to move in. The buyer can further protect himself by including some verbiage stating that if he cannot close on time due to financing problems that the closing date be moved or even that the contract becomes null. As you can see this contract would be very beneficial for the buyer but very dangerous for the seller. Although this type of clause on a purchase agreement is not difficult to understand most people may miss it. A real estate agent knows what things to look for and will alert you of any situations which may be detrimental to you as a seller.
If you sell your house on your own, or if you buy your house without an agent make sure you read the entire contract. It’s long and boring (believe me) but 2 hours of torture can save you thousands of dollars.

The Housing Ecologist

Benefit #2 of Using a Real Estate Agent

Benefit #2: A Real Estate Agent Will Provide Constructive Criticism

This advantage of using a real estate agent is not always a given. You need to ask your real estate agent to give you an honest opinion of what needs to be done to your house to get in selling condition. This goes beyond the obvious – fixing the gate, painting walls, replacing doors with holes, etc. I’m talking about things we would not notice, things such as excessive clutter. Maybe there are way too many pictures on the wall which may make a room appear smaller, or the kitchen counter is full of really nice appliances that give the sense of ‘no counter space’. In our own eyes some things can be OK or even appealing, but you have to remember you need to make the home appealing to prospective buyers, not to yourself.

When you list your home as a for sale by owner you don’t have this outside set of eyes to provide this valuable input. If you go with FSBO make sure you ask a neighbor, friend, relative or colleague to do this for you. Make sure you ask for an honest opinion and make sure you are not offended by the feedback. Many real estate agents don’t mention things that need to be improved, moved or removed simply because the last think they want to do is to offend their customers.

A seasoned real estate agent will also make you aware of things that will come up as “defective” on a home inspection. When a buyer makes an offer and proceeds to do a home inspection things will come up, every home inspector will find something, even in a brand new house. If you can take care of the little things – fixing screens, fixing a leaky faucet, repairing a receptacle, etc. – you will minimize the amount of things “wrong” with your house. A buyer may be turned off if he or she hears a home inspector go on and on and on about all the things that are sub-standard with the house. Real estate agents should be with their customers during the home inspections so they know all the things that turn up. Your agent should have sold several houses and should have this experience.

Remember to ask an outside party for an opinion on the showing condition of your house, it is well worth it.

The Housing Ecologist

Benefit #1 of Using a Real Estate Agent

Benefit #1: A Good Real Estate Agent Will Professionally Market Your Home

As with almost any service that is professionally available you go to a real estate agent to help you do a much better job than you can do yourself. Some people spend 2 hours changing their own oil at a cost of $10 for oil and a new filter instead of spending $20 at a Quick Lube. Depending on how much their time is worth this may be a cost savings. For people that don’t have the inclination or the time to do this themselves it is way more cost effective to go down to the local mechanic shop to have it done. It is not that much different when it comes to selling your home.

When you list your home through a real estate agent he or she will quickly enter it into the MLS (Multiple Listing Service) and place it into their own company website. A lot of what the agent will do is behind the scenes yet it is very important. Things like phone calls to potential buyers, arranging and marketing open houses, follow up with open house visitor, fielding phone calls and web inquiries, web postings, and other methods to market and promote your property.
Agents will create a marketing plan to get your home sold. Specific methods will vary depending on which real estate agent and which real estate company you pick, but overall a good real estate agent will do all the work for you.

If you decide to go it alone you will have to do most of this work. Some companies that offer help kits to sell your house on your own can do a lot, but you will still have most of the work to do yourself. It is my firm belief that a good real estate agent will save you, not cost you, money.
If you think otherwise I would love to read your comment and your reasons. Thanks for reading. Have a great day.

The Housing Ecologist

Book Recommendations

If you are interested in Real Estate you probably know that there are thousands of books available on the subject. Choosing one that is really worth spending the time to read is not an easy task. I will be making posts with some recommendations. I will give my opinion of the book and how it has helped me.

It will be great if readers can also post their comments on the book mentioned in the post.

Today's recommendation: The Cashflow Quadrant by Robert T. Kiyosaki

As stated in Amazon's website "The Cashflow Quadrant is the follow-up guide to finding the financial fast track that best works for you. It reveals the strategies necessary for moving beyond just job security to greater financial security by generating wealth from four selective financial quadrants."

"Born and raised in Hawaii, Robert T. Kiyosaki co-founded an international education company that operated in seven countries, teaching business to tens of thousands of graduates. Now retired, Robert does what he enjoys most...investing. Concerned about the growing gap between the haves and have nots, Robert created the board game CASHFLOW, which teaches the game of money, here before only known by the rich.
Sharon L. Lechter is a wife and mother of three, CPA, consultant to the toy and publishing industries and business owner. As co-author of RICH DAD, POOR DAD and THE CASHFLOW QUADRANT, she now focuses her efforts in helping to create educational tools for anyone interested in bettering their own financial education."

This books makes a clear distinction between assets and liabilities. I was under the impression that my personal residence was an asset. However, it is a liability! It is a liability because I pay to live in it, it does not make money for me. A real asset will generate cash flow for you. If you own a rental property then that is an asset. The book also explains how people can be employees, self-employed, business owners, and investors. Most people fall under the first two categories, the goal is to be on the third and fourth.

This book is a favorite of mine. I have become a Robert Kiyosaki fan and I'm partial to his teachings. They have worked well for me. I hope to hear your comments on this book.

Thanks.

The Housing Ecologist

Benefit #4 of For Sale By Owner

Benefit #4: No Contract

The fourth and final benefit (on our discussion) of selling your house FSBO instead of using a real estate agents is that there is no listing contract. When you hire a real estate agent to sell your home you typically sign a 3 or 6-month listing contract. During this time you cannot cancel the listing or sell by owner. You have to wait until the contract expires.

The real problem is not that you would get an offer that asks you to sell without a real estate agent. The problem of having a contract is if you have an agent who is doing a terrible job of promoting your property. You cannot simply fire the agent and hire someone else, you have to stay for the duration of the contract.

Many people sign the contract without reading it. It would be fair to ask the listing agent to include a performance clause in the contract. In other words, if the real estate agent is not getting the traffic he or she promised you can cancel the contract. Make sure that if you list your home with an agent that there is a way for you to get out of the contract for legitimate reasons. Now, if you want to change simply because your brother-in-law just got his license and you want to throw him a bone that is not going to work.

When using services such as ForSaleByOwner.com you can decide to pay a one time fee and keep the services as long as you want or pay a monthly. However, you can opt to hire a real estate agent at any time if you feel like you are not able to properly promote your house.

The following posting will begin explaining the benefits of listing your house through a real estate agent.

The Housing Ecologist

Benefit #3 of For Sale By Owner

Benefit #3: Marketing Assistance Available for FSBO

One of the greatest advantages of using a real estate agent to list and sell your house is that they are expert marketers, at least the good ones. In the past, owners that listed their house on their own probably advertised with only a sign in their yard. Or, if they were fancy, would place an ad on the local newspaper. Nowadays, companies such as http://www.dpbolvw.net/click-3739233-10429757 and http://www.fsbolocal.com/ offer outstanding marketing assistance. These companies charge an fee upfront which is typically $300 or less. This fee is not based on the sale price, it is a standard fee whether your house is listed for $15,000 or $500,000.

If you decide to sell your home on ForSaleByOwner.com you will find out that you can choose from these plans:

1. Monthly $80.95 (every 30 days)
2. $179 Basic (One-time fee)
3. $229 Basic Plus (One-time fee)
4. $319 Premium (One-time fee)
5. $539 Silver (One-time fee)
6. $629 Gold (One-time fee)

To learn the details on each you can visit http://www.forsalebyowner.com/

This particular service also gives you a darn good guarantee. If you do not sell your home and later hire a real estate agent who is able to sell your home, you get a full refund for the fee paid up front.
In today’s world just about everyone looking for a house, even those using a real estate agent, will search listing on the web. Many will pick out homes and send the list to their agent to set up the showings. So the most important item is to have your property listed on-line through as many services as possible. If your home is not online it is very likely that the only showings you get are from people that have driven by your house.

These online services will help your marketing by providing the following aids. What you get depends on the plan you choose to pay for.

1. Home selling workbook
2. Upload of pictures to website
3. Printable property fliers
4. Property pricing reports
5. Yard sign kit
6. Access to consultation line
7. Photo slide show and video online
8. Showcase on Realtor.com

Although these online services are great you are still responsible to insure that the marketing is as good as it can be. If used properly these services can be exceptional and save you thousands. Good luck selling your house.

The Housing Ecologist