Articles for the Cash Flow Business

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Mastering Partials for Maximum Profits When Buying Notes

It is time to set those all too familiar New Year’s resolutions. I challenge all cash flow professionals to participate in one of my favorite wealth building strategies in the upcoming year. In the stock market wealth is built on the age old investment strategy of “Buy Low – Sell High.” While this investment strategy sounds simple in theory the practical application can be challenging. Fortunately, we have an equivalent wealth building strategy in the cash flow business with a much simpler and reliable execution plan “Buy Full – Sell Short.”

This strategy is relatively simple. You purchase the full payment stream available on a cash flow product from the holder/seller and sell a shorter payment stream to an investor. This enables a cash flow professional to earn a commission on the initial sale of the partial payment stream to the investor AND keep the future payment stream or remaining payments as a personal wealth building vehicle. This can be accomplished with only an investment of time and without the investment of personal capital.

At Diversified Investment Services we utilize a variety of methods to purchase private mortgages including credit lines, private funds, IRA’s, and institutional funds. We are constantly on the look out for opportunities to purchase the full payment stream from a note holder and sell a shorter payment stream or partial to an institutional investor. To illustrate the power of “Buying Full and Selling Short” I would like to share just two of the real-life transactions completed last year.

The Church Note

We were approached with a well-seasoned note secured by five retail strip mall commercial units purchased by a religious organization for utilization as meeting facilities. The particulars looked like this:

Sale Date 11/10/95
Sale Price $135,000
Down Payment $10,000
Original Balance     $125,000
Terms 10% interest payable in 360 payments of $1,096.96 per month
Balance $121,248.52
Remaining Term 306 months

 

We negotiated to pay $92,804 for the full purchase of the remaining 306 monthly payments. We took a full assignment and purchased the entire note payment stream from the seller. We subsequently negotiated to sell a partial of 186 monthly payments for a purchase price of $95,046. We realized an immediate profit of $2,242 on the sell of the note AND retained the right to receive 120 monthly installments of $1,096.96 each commencing in 15 ½ years.

(Author’s Update:  Wondering what happens when a note pays off early? Well that is what happened on this deal and you can read all about it at: http://noteinvestor.com/note-brokers/buying-brokering-notes-residual-income/.)

The Mobile Home Note

A large percentage of our product involves seller financed notes purchased at the time of their creation though the use of a simultaneous closing. There are frequently investment limitations on a newly created note as simultaneous closings frequently involve a purchaser or property that do not qualify for traditional bank financing, making them a prime candidate for this strategy. In this instance the seller financed note was secured by a double wide mobile home permanently attached to a one acre lot as follows:

Sale Date 10/3/00
Sale Price $85,000
Down Payment $9,000 (5% cash plus a 5.6% second)
Original Balance     $76,000
Terms 12% interest payable in 360 payments of $781.74 per month
Balance $76,000
Remaining Term 360 months

 

We negotiated to pay $63,858 for the full purchase of the remaining 306 monthly payments. We took a full assignment and purchased the entire note payment stream from the seller. We subsequently negotiated to sell a partial of 240 monthly payments for a purchase price of $66,027. We realized an immediate profit of $2,169 on the sell of the note AND retained the right to receive 120 monthly installments of $781.74 each commencing in 20 years.

(Author’s Update: This note went into default and the investor had to foreclose.  We did not receive our remainder interest but we were happy with the referral fee made at closing when selling the mortgage note.)

While we utilized personal credit lines to fund the seller and subsequently sold the partial to an investor, a cash flow professional could easily set-up a double closing with an investor enabling them to utilize the investor’s funds to pay the seller. The purchase agreement between the seller and the broker would be for a full purchase while the purchase agreement between the broker and the investor would be for the partial purchase. An assignment and note endorsement are executed from the seller to the broker and then from the broker to the investor to complete the chain of title. At Diversified, we frequently prepare this documentation for brokers desiring to use our company as the investment vehicle.

It is easy to see the long-term benefits you can realize by applying the “Buy Full – Sell Short” investment strategy. While a future income stream is the intended goal, the benefits are amplified in the event of an early payoff. As you set your goals for 2001 consider applying this strategy at least 4 times during the upcoming year. It is just one of the many tools available to cash flow professionals that enable you to secure your financial independence.

War Stories From a Cash Flow Note Veteran

War Stories, battles won battles lost, and some you wish you had never started. Every industry has them and the cash flow industry is no exception. At the last two conventions I have facilitated a session entitled, “Become Your Own Investor! Real life stories of money made and lost buying notes.”

After divulging a few horror stories followed by some enticing jackpot stories, I am always thrilled to glean knowledge from the experiences shared by others in the audience. Recognizing the value of learning from real life experiences, a participant in the last session suggested we run a series of “war stories” from industry professionals including their strategies to overcome the obstacles. Continually searching for fresh writing ideas, we are going to kick off the “war stories series” with a horror story from my personal archives. We have recruited several other note pros to share their stories in upcoming issues and we encourage all of our readers to submit their personal experiences.

The transaction was submitted for review in December of 1999 and started out as seemingly ordinary. It was a 1940’s bungalow style home in a small Oregon town that was occupied by the payer. The payer had very poor credit and medical collections however; a strong verifiable pay history and a fair amount of equity offset credit. The transaction details follow:

Sale Date: 10/10/96
Sale Price 45,000
Cash Down 5,000
Original Balance     40,000
Rate 10.0%
Term 180 payments of $429.84
Payments Made 26
Current Balance 37,128.94 with next payment due 1/1/99

 

Our offer of $31,250 was accepted and we proceeded using standard due diligence procedures. We reviewed copies of documents, a title commitment, the pay history/account verification from the third party servicer, and a new appraisal reflecting good property condition and known value increases for the area resulting in a fair market value of $60,000. We prepared for closing and required standard proof of hazard insurance. The seller returned the document package along with the insurance information. We called to verify coverage, which was verbally confirmed by the agent, and we authorized the wire transfer to the seller.

Now it gets interesting. On the day the wire transfer was authorized at the bank (a Friday) we received a return call from the insurance company stating they were in error and due to non-payment the hazard insurance policy was no longer in effect. This was brought to my attention by our closer and we attempted to contact the buyer but were not immediately successful.

During my 10 years of corporate experience and at that time two years of personal investment experience, I had seen thousands of accounts purchased without insurance verification and felt the risk was nominal. I decided to proceed and did not pull the wire at the bank. We sent the standard letter to the buyer to clarify the insurance issue and planned to force place insurance if sufficient proof was not provided.

Things seemed in order until we were contacted by an adjoining property owner the next week making a $10,000 “as-is” offer to purchase the “lot” next to their $250,000 home.

Guess what? The house on which we had purchased the note burned down over the weekend and we were left with nothing more than a lot, a shell of a building, and debris as security.

We called the fire department (to verify the date of the fire and the condition of the property), ordered a property inspection, contacted the appraiser to obtain a land only value ($24,000 – $29,000), and traced the buyer whose home phone was no longer in operation.

Once we made contact with the buyer we confirmed our fears finding he did not have insurance as the insurance premium money had been used to purchase prescriptions for his recently deceased wife who did not have health insurance coverage during her fight with cancer. He was a self-employed car mechanic and his income was currently down. It was a sad situation and initially the buyer seemed cooperative and wanted to continue payments until he could sort out his financial affairs. He was interested in placing a mobile home on the lot and hoped we would help finance it. We were happy to explore the possibility and asked for a show of good faith in the form of current payments during the interim. Unfortunately the buyer’s financial situation declined, payments were never received and we ended up holding a Deed in Lieu of Foreclosure which we waited to exercise until we knew our final course of action. We attempted to sell the lot but realized most new building activity was being done on small tracts of land outside the city limits.

The neighbor was a local businessman who owned a nicer home in this small bedroom community of mixed homes. He was unhappy with the condition of his neighboring lot and increased his offer from $10,000 – $15,000. We explained it was appraised for $24,000 – $29,000 and were not ready to take such a loss but did offer owner financing if we came to an agreeable price. He did not desire financing and was concerned over the view. Understanding his motivation, we explained we were considering the placement of a used single wide mobile home on the lot (1969 or newer according to zoning requirements) which we would offer to a new buyer with owner financing if we were unable to sell the property as a lot. We waited (or I should say sweated) the situation out and the neighbor offered a cash purchase price of $23,000 provided the lot was cleaned. Initial estimates for clearing the lot had come between $5,000 to $7,000. We contacted the fire department regarding their “Burn to Learn” program. The fire department agreed to arrange a practice drill on the property resulting in a complete burn of the remaining structure and approximately 95% of the debris. The remaining debris could be hauled away at a nominal expense. We accepted the neighbor’s offer resulting in a loss after expenses of approximately $10,000. The transaction closed and I was never so relieved to have lost “only” $10,000.

So, what did I learn?

  • First, don’t be rushed or pressured into making investment decisions.
  • Second, we perform verbal debt verifications with the purchaser even if the account is serviced through a third party servicer. In the past we were comfortable with the servicer’s pay history but now I attempt to obtain all information available from the buyer prior to closing.
  • Third, we require current insurance at closing even if the seller has to pay and obtain insurance on the buyer’s behalf from the note proceeds. We have immediate forced place insurance policies in effect and we have back-up blanket coverage in case something is overlooked.

I have discussed this with numerous investors who have stated they’ve taken similar risks with insurance without detrimental effects but knowing it is a fixable problem we have implemented these procedures unless the land value far exceeds the investment.

As a follow-up to this story, just last week we were ready to fund on an Alabama note that had a current insurance declaration page in the file but upon calling we found the buyer’s had not kept their premium current and coverage had lapsed. We delayed the closing and required proof of current insurance prior to funding. We called to follow-up several days later only to be told the house had burned down the night before! It was another sad story but a good reminder and all the proof I needed to make certain we confirm insurance coverage at closing and during the life of the account. Live and learn or better yet listen and learn from my mistake!

Our articles have moved!  For up-to-date information on buying and selling mortgage notes please visit on online newsletter at NoteInvestor.com!

Taking a Look at RESPA and Private Mortgages

(This is a three part series on The Real Estate Settlement Procedures Act (RESPA) reprinted from the January – March 1999 issues of The Cash Flow Connection Newsletter.  RESPA has changed quite a bit since that time so please visit www.hud.gov for updated information.)

The Real Estate Settlement Procedures Act (RESPA) is a consumer protection statute which has drastically changed the sale, closing, and lending practices relating to residential real estate transactions since it’s enactment in 1974. If you have bought a home or obtained a loan in the past 25 years you have undoubtedly signed one of the numerous disclosures required under this federal regulation. But how does it affect the cash flow professional working with private mortgages? A general overview of this far reaching law will assist in this determination.

The primary purpose of RESPA was to effect certain changes in the settlement process of residential real estate transactions to assist consumers in becoming better shoppers for settlement services. It also intended to eliminate kickbacks and referral fees that unnecessarily increase the costs of certain settlement services. Additionally, RESPA requires that borrowers receive disclosures at various times. Some disclosures spell out the costs associated with the settlement, outline lender servicing and escrow account practices and describe business relationships between settlement service providers.

RESPA also prohibits certain practices that increase the cost of settlement services. Section 8 of RESPA prohibits a person from giving or accepting any thing of value for referrals of settlement service business involving a federally related mortgage loan. It also prohibits fee splitting and/or any person from giving or accepting any part of a charge for services that are not actually performed. An example of fee splitting would be a lender charging the borrower $250 for an appraisal with an actual cost of $200. Section 9 of RESPA prohibits home sellers from requiring home buyers to purchase title insurance from a particular company as a condition of sale. Section 10 of RESPA sets limits on the amounts that a lender may require a borrower to put into an escrow account for purposes of paying taxes, hazard insurance and other charges related to the property. Section 6 provides borrowers with important consumer protections relating to the servicing of their loans.

DISCLOSURES: AT THE TIME OF LOAN APPLICATION

When borrowers apply for a mortgage loan, mortgage brokers and/or lenders must give the borrowers the following at the time of application or by mail within three business days of receiving the application:

  • A Special Information Booklet, which contains consumer information regarding various real estate settlement services. (Required for purchase transactions only).
  • A Good Faith Estimate (GFE) of settlement costs, which lists the charges the buyer is likely to pay at settlement. This is only an estimate and the actual charges may differ. If a lender requires the borrower to use of a particular settlement provider, then the lender must disclose this requirement on the GFE.
  • A Mortgage Servicing Disclosure Statement, which discloses to the borrower whether the lender intends to service the loan or transfer it to another lender. It also provides information about complaint resolution.

DISCLOSURES BEFORE SETTLEMENT (CLOSING) OCCURS

An Affiliated Business Arrangement (AfBA) Disclosure is required whenever a settlement service provider involved in a RESPA covered transaction refers the consumer to a provider with whom the referring party has an ownership or other beneficial interest.

The referring party must give the AfBA disclosure to the consumer at or prior to the time of referral. The disclosure must describe the business arrangement that exists between the two providers and give the borrower an estimate of the second provider’s charges. Except in cases where a lender refers a borrower to an attorney, credit reporting agency or real estate appraiser to represent the lender’s interest in the transaction, the referring party may not require the consumer to use the particular provider being referred.

The HUD-1 Settlement Statement is a standard form that clearly shows all charges imposed on borrowers and sellers in connection with the settlement. RESPA allows the borrower to request to see the HUD-1 Settlement Statement one day before the actual settlement. The settlement agent must then provide the borrowers with a completed HUD-1 Settlement Statement based on information known to the agent at that time.

DISCLOSURES AT SETTLEMENT

The HUD-1 Settlement statement shows the actual settlement costs of the loan transaction. Separate forms may be prepared for the borrower and the seller. Where it is not the practice that the borrower and seller attend settlement, the HUD-1 should be mailed or delivered as soon as practical after settlement.

The Initial Escrow Statement itemizes the estimated taxes, insurance premiums and other charges, if any, anticipated to be paid from the escrow account during the first twelve months of the loan. It lists the escrow payment amount and any required cushion. Although the statement is usually given at settlement, the lender has 45 days from settlement to deliver it.

DISCLOSURES AFTER SETTLEMENT

Loan servicers must deliver to borrowers an Annual Escrow Statement once a year. The annual escrow account statement summarizes all escrow account deposits and payments during the servicer’s twelve month computation year. It also notifies the borrower of any shortages or surpluses in the account and advises the borrower about the course of action being taken.

A Servicing Transfer Statement is required if the loan servicer sells or assigns the servicing rights to a borrower’s loan to another loan servicer. Generally, the loan servicer must notify the borrower 15 days before the effective date of the loan transfer. As long the borrower makes a timely payment to the old servicer within 60 days of the loan transfer, the borrower cannot be penalized. The notice must include the name and address of the new servicer, toll-free telephone numbers, and the date the new servicer will begin accepting payments.

APPLICATION OF RESPA

Generally, RESPA covers transactions involving a federally related mortgage loan (first or subordinate position) placed on a one-to-four family residential real estate property (including condos, co-ops, mobile homes sold with real property, and certain time shares). A federally related mortgage loan includes most conventional and/or government sponsored loans (FHA, VA, etc) involving home purchase loans, assumptions, refinances, property improvement loans, equity lines of credit, and reverse mortgages.

RESPA does not typically apply to an all cash sale, temporary construction financing, a sale where the individual home seller takes back the mortgage, a rental property transaction, or any other business purpose transaction. However, it is important to note that RESPA may apply to certain individual home sellers that take back a mortgage should they exceed a specified number of transactions and/or an aggregate dollar amount during any given year.

Since most private mortgage purchases involve an individual seller that has provided owner financing on a one-time basis, a cash flow professional may wonder why they should familiarize themselves with the RESPA statute. The reasons are plentiful:

  • Maintain RESPA compliance by knowing when the statute is applicable or a non-issue
  • Become aware of important RESPA elements that could potentially become a template for future regulation in related industries.
  • Enhance professionalism by gaining awareness of laws that affect other real estate professionals with whom you may conduct business.
  • Develop a system which models certain requirements relating to escrow account servicing and the transfer of servicing rights when purchasing accounts to hold for interim or long term investment.

This final point will serve as a basis for the next two articles in our three part series on the Real Estate Settlement Procedures Act. For more information on RESPA you can review the actual statute on the internet at www.hud.gov

RESPA and Escrow Accounts

 (Reprinted from the February 1999 issue of The Cash Flow Connection Newsletter)

The Real Estate Settlement Procedures Act (RESPA) of 1974 enacted significant reforms in the settlement process involving federally related mortgage loans (see the January 1999 issue of CFC for a detailed definition). This article will further explore the specific requirements pertaining to escrow accounts, also known as reserves or impounds. While owner-financed private mortgages are generally precluded from RESPA, many investors and servicers of these notes wisely model their escrow procedures after RESPA requirements to maintain fair and sound business practices.

Section 10 of the Real Estate Settlement Procedures Act (RESPA) limits the amount of money a lender may require the borrower to hold in an escrow account for payment of taxes, insurance, etc. RESPA also requires the lender to provide initial and annual escrow account statements. The Department published escrow account regulations in October 1994, with an effective date of May 1995. The regulations required lenders to adopt the aggregate accounting method for newly established accounts. Lenders have until October 1997, for previously established accounts.
Section 10 of RESPA limits the amount of money that a lender may require a borrower to put into an escrow account for purposes of paying taxes, hazard insurance and other charges related to the property. RESPA also requires the lender to provide initial and annual escrow account statements. The Department of housing and urban Development (HUD) published escrow account regulations in October 1994 with an effective date of May 1995. The regulations required lenders to adopt the aggregate accounting method for newly established accounts, with an extension until October 1997 for previously established accounts.

During the course of the loan, RESPA prohibits a lender from charging excessive amounts for the escrow account. Each month the lender may require a borrower to pay into the escrow account no more than 1/12 of the total of all disbursements payable during the year, plus an amount necessary to pay for any shortage in the account. In addition, the lender may require a cushion, not to exceed an amount equal to 1/6 of the total disbursements for the year.

The lender must perform an escrow account analysis once during the year and notify borrowers of any shortage. Any excess of $50 or more must be returned to the borrower.

FREQUENTLY ASKED QUESTIONS ABOUT ESCROW ACCOUNTS
Did the new accounting method require increases to escrow payments? NO
The new accounting method generally requires borrowers to maintain a lesser amount in the account than the single-item method predominately used by lenders. However, many lenders chose to increase the escrow account cushion to the maximum allowed by law.

Did the regulations establish a new escrow account cushion? NO
Since 1976 the RESPA statute has allowed lenders to maintain a cushion equal to one-sixth of the total amount of items paid out of the account, or approximately two months of escrow payments. If state law or mortgage documents allow for a lessor amount, the lessor amount prevails.

Does RESPA require lenders to maintain an escrow account and/or cushion? NO
It is the lender’s decision whether the borrower must maintain an escrow account for the purpose of paying taxes and other items. Furthermore, neither the RESPA statute nor regulations require the lender to maintain a cushion.T

Can HUD require lenders to pay interest on escrow accounts? NO
In past years, legislation was introduced in Congress that would have required lenders to pay interest on escrow account balances, but it never passed. Some states do require interest to be paid on escrow account funds, but many do not.

Are lenders required to pay taxes on an annual basis if a discount is offered to the consumer? NO
Some lender have interpreted the regulations to require that taxes should be paid on an annual basis rather than a semi-annual basis, when a discount is available to the consumer. The Department clarified by comment in the Federal Register on May 9, 1995, that lenders were permitted (but not required) to make disbursements on an annual basis if a discount was available.

What is the disbursement date for paying escrow account items?
The rule states that the disbursement date for an escrow account item is a date on or before the earlier of either a deadline to take advantage of discounts, if available, or the deadline to avoid a penalty. The consumer and servicer in some cases may agree to an even earlier date than would normally be necessary to deliver the payment on time, if there are good reasons, such as letting the consumer get a federal income tax deduction.

How should the maximum amount allowed in an escrow account be calculated?
The following steps and example should help estimate the amount of money that may be required to put into either a new or existing account under aggregate accounting:

List all the payment amounts for items that will be paid out of the escrow account, and when they must be paid for the next 12 months (e.g., taxes- $1200 — $500 paid July 25 and $700 paid December 10; hazard insurance — $360 paid September 20).

If there is a payment like flood insurance, which is paid every 3 years, use a projected trial balance over that three-year period.

Divide this total amount by 12 monthly payments ($1560 divided by 12 = $130).

Create a trial running balance for the next 12 months listing all payments to the escrow account and all payments out of the account according to when these items are paid.

Increase all the monthly balances to bring the lowest point in the account (December -$780) up to 0.

          pmt    dis      3)  bal        4)  bal
Jun                             0            780
Jul       130    500         -370            410
Aug       130      0         -240            540
Sep       130    360         -470            310
Oct       130      0         -340            440
Nov       130      0         -210            570
Dec       130    700         -780 *            0 *
Jan       130      0         -650            130
Feb       130      0         -520            260
Mar       130      0         -390            390
Apr       130      0         -260            520
May       130      0         -130            650
Jun       130      0            0            780

Add any cushion your lender requires to the monthly balances. The cushion may be a maximum of 1/6 of the total escrow charges (1/6 of $1560 = $260).

                    pmt    dis     bal

Jun                               1040
Jul                 130    500     670
Aug                 130      0     800
Sep                 130    360     570
Oct                 130      0     700
Nov                 130      0     830
Dec                 130    700     260 *
Jan                 130      0     390
Feb                 130      0     520
Mar                 130      0     650
Apr                 130    300     780
May                 130      0     910
Jun                 130      0    1040

 

In this example, $1040 is the maximum amount the lender should require in the account. The account should fall to the cushion at least once during the year. In this example, it is in December ($260).

New Accounts — In this example, if the settlement date was May 15 and the first payment was due in July, $1040 would be the maximum amount that could be required to place in an escrow account. If your lender requires less than the maximum cushion, the amount would be less.

Existing Aggregate Accounts — In this example, during escrow analysis, the lender would compare the required amount of $1040 to the actual balance in the account in June. For example:

If the balance is $1076, there is a surplus of $36. The lender may choose to apply any surplus less than $50 to future payments, reducing the monthly escrow payment to $127, or may choose to return the surplus to the payor.

If the balance is $1090, there is a surplus of $50. The lender must return any surplus of $50 or more to payor within 30 days of the analysis.

If the balance was $940, there is a shortage of $100. This amount is less than one month’s escrow payment and the lender may ask the payor to pay this amount within 30 day or may spread it out over a year.

If the balance was $800, there is a shortage of $240. The lender must spread the collection over at least 12 months. If the lender spreads the shortage over 12 months, the monthly escrow payment would increase to $150.

If there is a deficiency in the account (where the lender has to use his own funds to pay a bill), the payor may have to reimburse the lender sooner than over 12 months. If the deficiency is less than one monthly escrow payment, the lender may require the payor to repay the lender in 30 days. If the deficiency is more than or equal to one monthly escrow payment, the lender may require the payor to repay the amount over 2-12 months.

For more information on RESPA you can review the actual statute on the Internet at www.hud.gov

RESPA AND THE TRANSFER OF SERVICING RIGHTS

(Reprinted from the March 1999 issue of The Cash Flow Connection Newsletter)

The Real Estate Settlement Procedures Act (RESPA) of 1974 enacted significant reforms in the settlement process involving federally related mortgage loans (see the January 1999 issue for a detailed definition). This article will further explore the specific requirements pertaining to the transfer of servicing rights. While owner financed private mortgages are generally precluded from RESPA, many investors and servicers of these notes wisely model their servicing procedures after RESPA requirements to maintain fair and sound business practices.

Section 2605 sets forth requirements pertaining to the servicing of federally related mortgage loans. Generally, a servicer is defined as the entity responsible for servicing the mortgage (i.e. collecting payments and applying to principal, interest, and escrows pursuant to the terms of the mortgage). The servicer can be the holder or owner of the mortgage or a third independent servicing company. Servicing rights can be sold or transferred which is usually the case when the mortgage itself is sold. While RESPA does not require the borrower’s permission to sell or transfer servicing, it does require notification to the borrower by the old and new servicer with specific requirements regarding the content of the notification.

Notice by Transferor

The existing servicer must notify the borrower in writing of any assignment, sale, or transfer of the servicing. This notice, commonly referred to as a good-bye letter, must be provided within 15 days prior to the effective date. The effective date is the date on which the mortgage payment of a borrower is first due to the new servicer.

The new servicer must also send written notification of the transfer to the borrower. Commonly referred to as a hello letter, this notice must be made to the borrower not more than 15 days after the effective date.

The time requirement for both the “good-bye” and “hello” notification is extended to 30 days after the effective date when the transfer is preceded by:

A) termination of the servicing contract for cause

B) commencement of proceedings for bankruptcy of the servicer; or

C) commencement of proceeding by the FDIC or RTC for receivership of the servicer.

 

Contents of Servicing Transfer Notices

The separate notice sent by the existing and new servicer must both contain the following:

(A) The effective date of transfer of the servicing.

(B) The name, address, and toll-free or collect call telephone number of the transferee (new) servicer.

(C) A toll-free or collect call telephone number for (i) an individual employed by the transferor (existing) servicer, or (ii) the department of the transferor servicer, that can be contacted by the borrower to answer inquiries relating to the transfer of servicing.

(D) The name and toll-free or collect call telephone number for (i) an individual employed by the transferee servicer, or (ii) the department of the transferee servicer, that can be contacted by the borrower to answer inquiries relating to the transfer of servicing.

(E) The date on which the transferor servicer who is servicing the mortgage loan before the assignment, sale, or transfer will cease to accept payments relating to the loan and the date on which the transferee servicer will begin to accept such payments.

(F) Any information concerning the effect the transfer may have, if any, on the terms of or the continued availability of mortgage life or disability insurance or any other type of optional insurance and what action, if any, the borrower must take to maintain coverage.

(G) A statement that the assignment, sale, or transfer of the servicing of the mortgage loan does not affect any term or condition of the security instruments other than terms directly related to the servicing of such loan.

Treatment of Payments During Transfer Period

During a 60-day period, beginning on the effective date of transfer of the servicing, a late fee may not be imposed on the borrower with respect to any payment and no such payment may be treated as late for any other purposes, if the payment is received by the transferor servicer (rather than the new servicer who should properly receive payment) before the due date of that payment.

Duty of Servicer to Respond to Inquiries

If any servicer receives a qualified written request from the borrower for information relating to the servicing of such loan, the servicer is required to provide a written response acknowledging receipt of the correspondence within 20 business days. Within 60 business days, the servicer must resolve the complaint by correcting the account or giving a statement of the reasons for its position. During this 60 day period, a servicer may not provide information regarding any overdue payment that is in dispute, to any consumer reporting agency.

This completes our three part series on the Real Estate Settlement Procedures Act based on information in 1999. Nothing in this article is intended to be legal, financial or tax advice. Please seek the counsel of qualified legal, financial, or tax advisors. For more information and updates you can review the actual statue on the Internet at www.hud.gov

The Fair Credit Act and the Cash Flow Industry

One question that is continually posed in the cash flow industry is whether an investor has the legal right to access a person’s credit file prior to purchasing a note or debt instrument. While we have covered this topic in past issues of The Cash Flow Connection, it seems timely to review the do’s and don’ts surrounding the use of credit reports. (This article written by Tracy Z. Rewey is reprinted with permission from the The Cash Flow Connection Newsletter.)

The rights of consumers are protected under The Federal Fair Credit Reporting Act (“Act”). Originally passed by Congress in 1970 and substantially overhauled in 1997, the Act regulates acceptable practices with respect to credit information, which is gathered and sold by Consumer Reporting Agencies. The Act is enforced by the Federal Trade Commission and carries stiff penalties for noncompliance ranging from monetary fines to imprisonment.

The Act protects a consumer’s rights in a variety of ways. First, it limits the permissible purposes for which a consumer credit report may be obtained and used. Second, it provides the consumer the right to receive full disclosure of items contained in the file, dispute information believed to be erroneous, and to include a statement explaining any controversy. Third, it limits the length of time during which adverse information may be reported on an individual (typically seven years on most adverse ratings and ten years on bankruptcy proceedings). Fourth, it requires that the consumer be informed when a credit report has contributed to the denial of credit.

The purchase of most debt instruments includes a review of the payer’s credit history by the investor prior to funding to assist in determining the likelihood of timely repayment. If the transaction involves the party making payments it is fairly simple to obtain their written permission to pull a credit report. However, in our business, it is more likely that the debt instrument already exists and the primary contact is with the person desiring to sell their payments rather than the payer. Is it acceptable to pull credit on the payer without first obtaining their written permission?

One of the definitions of permissible purposes (604a3E) states that a Credit Reporting Agency may furnish a consumer report to a person that “intends to use the information, as a potential investor or servicer, or current insure in connection with a valuation of, or an assessment of the credit or prepayment risks associated with, an existing credit obligation.” In our business there is an existing debt from the payer to the seller and the information is being evaluated by a potential investor to determine whether to pursue the investment.

While the right of an investor to access an existing payer’s credit file falls under the definition of permissible purposes, there are still areas for careful observation. It is prudent to only pull credit once a preliminary agreement has been reached with the seller. This could be in the form of your signed option/purchase agreement or as simple as a one sentence authorization from the seller. This serves to evidence your position as a “potential investor”. If you were dealing with a simultaneous transaction where the obligation or debt had not yet been created (such as a pending real estate sale, business sale, or a factoring relationship), it is advisable to first have the seller obtain the proposed payer’s written permission since both parties are motivated to complete the transaction. Caution should also be exercised in the number of investors a seller or broker submits the transaction to for review. A multitude of inquires is reflected on a credit report which has the potential to substantially lower a consumer’s credit score.

It is essential to remember that permissible users of credit reports are still required to employ confidentiality to protect a consumer’s right of privacy. Given this requirement, a cash flow professional is generally precluded from discussing information contained in the credit report unless that person is a joint user meaning they too have legally obtained a credit report. Sensible users will carefully avoid violating not only confidentiality but also being considered a Credit Reporting Agency by disseminating the information.

Hopefully this serves to clarify some of the implications of the Act on our industry. As always, it is advisable to consult with a qualified attorney, or for more information and a complete copy of the Act contact the FTC at 202-326-2222 or browse the web at www.ftc.gov.

DIS Adds Master Note Broker to List of Services

(This article was written by Jeff Thomas and reprinted by permission of the American Cash Flow Association from the January 1999 issue of the American Cash Flow Journal.)

Fred Rewey. Tracy Z. Do these names sound familiar? If you’re a regular in the industry, they should. You may recognize Tracy from her role as editor of the Cash Flow Connection. She was at Metropolitan Mortgage and Securities from 1988 to 1997, most recently as vice president and national production executive. Tracy developed the BrokerNet software program for brokers.

Fred, an Oxford attendee whose cash flow beginnings started with his ownership of Take Note Investments, working with Jon Richards and later Judy Miller, has recently added the role of visiting instructor for the American Cash Flow Institute to his list of credits. He also was a vice president at Metropolitan from 1995 to 1998, among other things developing and maintaining the second release of BrokerNet after Tracy left in 1997.

It was at Metro that the two met. Now they’re husband and wife, and more relevant to this story, the owners of Diversified Investment Services, Inc. (DIS) in Spokane Washington.

Tracy Z left Metropolitan about a year and a half ago and it wasn’t long before she found herself in a Master-Brokering role. “Before we only did Master Brokering by word of mouth,” she says. “We were a smaller shop then, and we did quite a bit of consulting work in addition to buying for our personal account.”

Brokers would come to her with deals they didn’t want to process or deals they felt could be a risk. She states, “Now, so we can take on more business and be prepared to give that service, we’ve added staff members, and Fred’s come onboard. We have a senior closer that used to be with Metropolitan too. She’s been in the business for eight years, and she’s a really good processor. We feel like we’re prepared to take on more business.”

Looking at deals from both sides of the industry

Although Fred Rewey and Tracy Z have considerable experience brokering notes, anyone looking for a Master Broker shouldn’t forget that both held officer positions with the largest institutional buyer of private mortgages. “We’ve seen a lot of what’s out there,” states Rewey. “What’s unique is that we came from the funding side of it.”

Tracy continues. “We’ve watched the industry grow. I’ve been in it for over 10 years, and there are many brokers I’ve worked with through the years that now are top producers. It’s great to see,” she says. “When the companies we worked with got bigger and bigger, we got away from helping those who are new in the business. And so we want to get back to those roots and give them the benefit of our knowledge and expertise and let them learn along the way.”

Master Brokers are typically in place to be a co-broker rather than a mentor. And as the deal unfolds, the Master Broker lets the broker know what he or she did and why. The process is usually very hands-off. And all knowledge comes from seeing how the Master Broker handles the deal. In general, brokers don’t call a Master Broker until a deal is in place.

DIS takes a slightly different approach to the Master Broker relationship. Fred explains, “We’re probably more open than some [Master Brokers]. I’ll help somebody with a brochure or talk to them about their marketing and things like that.”

One way DIS helps the broker get hands-on experience is through the use of conference calls. “If they want to listen to us negotiate with a seller so that next time maybe they can do it, we can get on a three-way conference call because we have that technology,” states Z. “They can introduce us as the underwriter who wants to ask a few questions. We’re very open to setting it up so they can learn from the process and advance in their knowledge.”

Rewey adds, “We’re not looking for one deal where they send it in and we take our spread. We’re looking to develop relationships.”

For new brokers, there are many advantages to the Master Broker system. Because of their experience, Master Brokers bring a wealth of information and experience to the table including the following:

  • The ability to qualify or disqualify a deal quickly
  • Experience using different structuring techniques
  • The ability to process a deal quickly
  • Experience in negotiating fees
  • The ability to get the deal closed without mistakes
  • The ability to get it done, period – especially in tricky situations

Since a new broker may not yet have the experience to handle a deal as well as a seasoned Master Broker, he or she can take advantage of handing off the deal. There are a couple of reasons why: First, the broker gets the chance to watch an industry professional in action – someone who’s really good at what they do. It’s real experience that cannot be recreated in a training environment. Second, the broker receives part of the commission but without having to perform the work of processing and closing the deal.

The benefit of advanced funding

DIS primarily purchases notes for its own account. The notes are held for long-term investment or future resale in large portfolios. However, to take advantage of volume and pricing incentives, DIS also brokers transactions. When they do (also as in the case of a co-brokering situation), they use their own funds to provide a quick closing. DIS calls it the Advanced Funding program.

“We cut a lot of time off because we are the decision-makers,” says Tracy Z. “We’re using funds in our own credit lines, so we can pull the trigger when we think the deal is ready. All our deals – unless it’s an excessively-large commercial deal or something outside of our normal appetite – we fund ourselves.”

Rewey summarizes, “They get the benefit of having a mentor, but they don’t lose the benefit of being direct with someone who can make decisions and fund rapidly.”

Options for brokers

Diversified Investment Services will work with brokers in one of two ways, depending on the broker’s preference. One is a referral program. The other is a submission program.

Predetermined fee. If the brokers prefer, DIS will work with them before the deal to set a mutually acceptable fee – typically $1,000 to $1,500. Then DIS will negotiate the deal for the broker.

Negotiate your own deal. DIS will offer what they are willing to pay for the deal, and the broker can then negotiate something less to pay the seller.

“We’re pretty flexible,” Rewey states. “We can have a set amount if they want us to work the deal. Or it could be a split or better. There are certainly plenty of deals where they make more than we do. Whatever they need.”

Consulting – without the price tag

“We provide advanced consulting services for some of the more well-known investors out there. And we charge a fairly hefty fee for that,” states Z. She offers this expertise to brokers as well. “The people that come to us as Master Brokers get the benefit of that consulting service without any cost to them; they get it just because they sent us a deal.”

Fred Rewey and Tracy Z have over 15 years of combined industry experience. From start-up note broker to corporate officers for the nation’s largest note buyer, their experience covers all aspects of marketing, closing, underwriting, and servicing cash flow instruments. However, more impressive than their success is their willingness to share the knowledge that helped them achieve the position they hold in the industry.

Tracy Z states, “If they’re committed to bringing us business down the line when it works, then we’re dedicated to helping them find that business.”

Diversified Investment Services, Inc. is a note investment company created by Fred Rewey and Tracy Z in 1997. In addition to marketing and purchasing notes for its own account, DIS also works with brokers providing consulting, closing, and training services.

‘Tis Tax Time Season for Note Buyers

(Reprinted from the December 1998 issue of The Cash Flow Connection Newsletter)

Chestnuts, open fires, Jack Frost, a mail box full of catalogs, Sunday papers twice the normal size…it must almost be….tax season. The holiday season is just a short six days away from the end of another tax year. While April 15 looms as the dreaded tax deadline, there are actually quite a few filing deadlines in January that affect many cash flow professionals. It may understandably be the last thing on your mind, but don’t be caught unaware. We’ve compiled a basic primer for some of the more common 1099 and 1098 tax form filings utilized in our business. Just remember, we don’t make the rules!

As a general rule, every person engaged in a trade or business must report to the IRS any payment of $600 or more made to any person during the calendar year for items such as rent, compensation for service, commissions, interest and annuities. To make these filings, the IRS has provided a series of 1099 forms.

Form 1099-MISC

A 1099-MISC is usually filed for each payee on reportable compensation type payments of $600 or more made to non-employees and/or independent contractors. These are frequently issued to report referral fees paid by note buyers to consultants/note brokers.

Form 1099-DIV and 1099-INT

If your business is incorporated, your corporation will have to file a Form 1099-DIV for each person to whom it pays dividends of $10 or more each year. You will also file Form 1099-INT for each person to whom you pay $10 or more in interest on bonds, debentures or notes issued by the corporation in registered form. These 1099 forms are also required for any other payment of dividends or interest on which you are required to withhold tax.

Form 1099-S and 1099-B

In general, Form 1099-S must be given to recipients of the proceeds from the sale of real estate, while Form 1099-B is given to recipients of the proceeds from the sale of securities. Typically, these forms are handled by the escrow, closing or funding agent; however, it never hurts to verify that it has been appropriately filed.

Form 1098

Federal law requires that you give From 1098 to any individual from whom you receive $600 or more in mortgage interest during the year in the course of your trade or business. Form 1098 generally has the same filing requirements as the various 1099 forms. If payments are made by the payor to a third party escrow, collection, or servicing company, chances are this is being handled.

Filing Deadlines

The appropriate form is prepared for each reportable party and sent to the IRS with a duplicate form sent to the individual payee. You must also prepare and file a Form 1096 summarizing all the information on the forms in the 1099 series. Each of these forms is due to the IRS by February 28 of each year for the prior calendar year. A copy must also be sent to the recipient of the payment by January 31.

Penalties

There are stiff IRS penalties for not filing the appropriate 1099 forms. First, there is a $50 penalty for failure to obtain an appropriate tax identification number and/or filing late. There is also a penalty for not filing or not giving a 1099 to a payee, which runs $50 per failure. Since there is a separate penalty for not giving a copy of the 1099 to the payee, as well as for not filing a copy with the IRS, it can cost your $100 for each person for whom you fail to prepare 1099’s.

Exemptions

Fortunately, a number of important exemptions from the 1099 filing requirements will eliminate most of the people or companies to whom you are likely to make payments of $600 or more. You do not have to report:

  • Payments to corporations
  • Payments of compensation to employees that are already reported on a W-2
  • Payments of bills for merchandise, telephone, freight, storage, and similar charges.
  • Payments of rent made to real estate agents
  • Expense advances or reimbursement to employees
  • Payments to a governmental unit

Electronic Filings

If your business files 250 or more returns for a calendar year, the IRS requires an electronic or magnetic media filing. These returns include Form 1098, the Form 1099 series, the W-2 series, and various others. The electronic filing is in lieu of actual paper forms and includes very specific formats for the computer tape or disk which must be met.

This overview should assist the cash flow professional in identifying potential filing requirements. This is not intended as tax advise so please review your specific situation with a qualified tax advisor. Free tax publications and forms can be obtained by from the IRS at 800-829-3676 at www.irs.gov

Note Broker Fees – Too Much or Not Enough?

(Reprinted from the October 1998 issue of The Cash Flow Connection Newsletter)

Negotiating the purchase of a cash flow note is about providing a service to sellers desiring cash rather than payments over time. While providing an essential service, the cash flow industry is also a for profit business. Cash flow brokers earn their profit through fees or spreads resulting from the difference between the price the seller agrees to accept and the amount an investor will pay. But how are these fees determined? Is there such a thing as making too much or too little? While these questions might be considered a “hot potato” they are certainly worth exploring to determine how we will individually conduct our business.

Determining the Fee Amount

Two of the most common questions posed by new brokers are “What is an average fee?” and “How much should I make?” The answer from experienced pros invariably contains the words “It depends.” And it does depend. The type of transaction, the amount of competition, the ease or difficulty of placing the paper with an investor, along with hard costs, overhead costs, and time involved in closing the transaction, are all influencing factors.

After viewing thousands of transactions I would venture to say that the current average fee on a typical $50,000 residential note runs between $2500 to $3200 (or 5-6%) before costs. If you factor costs in the approximate amount of $1100, comprising of $600 for title and appraisal plus $500 for overhead costs, this leaves a net spread or fee of $1400 to $2100 (3-4%). This is a very modest cost estimate and doesn’t take into account higher expenses for commercial appraisals, high premium title report states, a large staff, or expensive marketing campaigns.

These types of fees represent the bread and butter for many cash flow brokers. There are certainly instances where a much higher fee can be earned. A fee in excess of 10% is typically the result of a hard to place note resulting from defects in the title, property, or credit history of the payor. Higher fees are more frequently seen on commercial transactions due to the size, skill, and additional overhead required to close this sort of investment.

How much is too much?

Some might be quick to respond “There is no such thing” or “Take what you can get.”

Others may feel it is a mute issue since today’s competitive market has made it more and more difficult to score a “home run” on fees. While less frequent than in the past, opportunities to earn higher fees still present themselves. The prudent and ethical business person will ponder the question “How much is too much?”

Why care? First, there is the issue of ethics that any professional must adhere to. Second, if we don’t regulate our actions they could be regulated for us. Third, if you fail to determine an appropriate fee structure, it might be determined by your investor. Let’s explore these issues further.

The subject of ethics is often felt to be a personal one. The “Can I sleep at night?” test might work for some. However, to make the test more tangible, it becomes a matter of what a court will deem appropriate or unconscionable. Generally, only a person who feels they were treated unfairly or taken advantage of will seek justice in the court of law. Unconscionable action is defined as unreasonable or unscrupulous actions that are not guided by a conscience.

Unconscionable action can be subject to prosecution and sentencing for the charged party but the more global effect can result in an industry with a tarnished image that sets the stage for ensuing regulation. In reviewing such a case the court will look first to existing statute. Finding a highly unregulated industry, the court may look to what is customary in our industry or an industry deemed similar. They may consider the average fee of a mortgage broker (1-2%) or the standard commission charged by a realtor (6-8%) as a basis of comparison. The knowledge or sophistication of the seller would be another consideration. Someone could take it a step further and make it their personal mission to protect the public from unscrupulous actions by proposing specific regulation. Nothing will bring on regulation quicker than a grandmother in tennis shoes shouting foul play. Regulate your actions or have them regulated by others.

Some investors, realizing the potential for risk, have begun internal reviews on the amount of fees being earned by brokers. At least one investor has an internal policy that if a gross fee exceeds 20% of the amount being paid by the investor it must be reviewed by management for acceptability. A fee in excess of 20% could be justifiable once costs are calculated into the mix. For instance, there are often the same hard costs incurred on a small note as a large note which equates to a much higher percentage on a smaller note. However, if an investor feels there is potential liability in purchasing a note with a high broker fee they might suggest either a) the broker obtain the seller’s written acknowledgement of the fee; or 2) the broker purchase the note himself and age it for a period of 30-90 days prior to selling to an investor. These actions can provide protection to both the broker and the investor.

How much is not enough?

This might be an even harder question to answer than the first. Each person in business must decide on the price of goods or services they provide in order to meet overhead and make a living. This price can be dictated by the cash flow needs as well as competition. When dealing with this issue there are two important items to contemplate.

First, it is misleading to quote an unrealistically high price to the seller (translating into an unrealistically low fee for the broker) just to “bag the deal.” Unfortunately this is becoming a frequent strategy used in competitive markets to take a deal away from another broker quoting a realistic price. Sadly, the broker quoting the unrealistically high price knows they will cut the seller at the last minute yet have a high probability of keeping the deal due to a seller’s resistance to start over. Interestingly, the brokers using this tactic are often the same ones charging what could be considered unconscionable fees.

Second, don’t charge so little that you run yourself (and potentially other brokers) out of business. You are a professional charging for a specialized service. Take a moment to pencil out your hard costs and overhead costs. Once you have deducted these costs estimate the number of hours you will expend on the deal and divide it into your net fee. Basically, this is the price per hour you are working for. If it’s single digits you might as well work at the local fast food joint, at least they provide benefits plus discounts on greasy food, and you don’t have to pay for the food before you sell it. Value your time for yourself as well as the industry as a whole.

For now, fee determination is a personal decision for each independent operator. However, it serves us all to combine a healthy interest in profits with a genuine regard for the welfare of our industry and any role our actions may play.

Selling Mortgage Notes – Mastering the Simultaneous Closing

(Reprinted from the June 1998 issue of The Cash Flow Connection Newsletter.  Please visit our online newsletter for more updated information including  Selling Mortgage Notes – Where Have All the Simos Gone? Published November 2010)

With investors reporting over 40% of their new private mortgage purchases having less than 12 months seasoning, it’s no wonder the simultaneous close and working with realtors are some of the hottest marketing techniques. Perfecting the simultaneous close provides an alternative to conventional financing that can enable sellers to sell, buyers to buy, properties to move, realtors to earn, and investors to profit.

Working with the purchase of a private mortgage immediately following the real estate closing provides opportunities as well as challenges. Investors know that one essential component of the simultaneous close is maintaining it’s identity and distinction as a private purchase money mortgage. It is an alternative to lender financing not another form of a loan. Over the years elements have been identified that aid in maintaining this important distinction. A review of these may prove helpful for use in your own business activities.

1. Become familiar with basic residential mortgage lending requirements.

While traditional mortgage lending requirements do not typically apply to a seller financed purchase money mortgage or real estate contract, you should become familiar with them anyway. Why? First of all, this makes good marketing sense. How can you position seller financing as a great alternative to the traditional loan if you don’t understand how it works?

Secondly, it is essential to know what constitutes a loan and is subject to a variety of governing laws. Anyone in real estate investments should be aware of the number and brevity of regulations passed to protect the borrowing consumer. There are the Consumer Credit Protection Act of 1968, Truth in Lending (TIL), Regulation Z, Real Estate Settlement Procedures Act (RSPA), Home Mortgage Disclosure Act (HMDA), Usury, Mortgage Broker and Lender Licensing, and the list certainly goes on. It isn’t late night reading but become familiar enough with them that you can either 1) comply or 2) completely avoid any activity that falls under their application.

2. Substance Over Form

The substance of a seller financed real estate transaction and your level of involvement have a considerable impact on maintaining the purchase money distinction. It is important to remember that the seller is allowing the buyer to purchase the property by accepting a certain amount down and the remaining amount over time with payments of principal and interest. The consideration for the lien is the purchase of the property. The seller is the one extending credit by accepting installments on the sale, rather than a lender providing cash to the borrower for payment to the seller.

It is certainly appropriate for the seller to request a financial statement and a credit report from the buyer since they will be relying on their credit worthiness for payment. The form or authorization the seller utilizes should in no way reflect the lending of money. Once again the extension of credit is from the seller by accepting an installment sale.

Once the seller and buyer have agreed upon a price and terms of repayment an investor can provide a quote reflecting the amount they would be willing to invest or pay for the lien subsequent to closing. As an investor it is advisable that you don’t get involved in the actual negotiation of terms. Avoid determining such items as down payment, interest rate, and payment amount. Be certain that the real estate agent, seller, buyer, and closing agent, clearly recognize the difference between seller financing and a loan.

3. Your words say it all.

Loan is a four letter word. Abolish it from your private mortgage investment vocabulary and do not confuse the issue by using incorrect terminology. There are sellers not lenders, buyers not borrowers, investors not banks, seller financing or purchase money liens not loans, and never ever are there points, origination fees, or buy downs!

4. The Documents

It’s all in the details. The documentation that the closing agent prepares plays an important part in evidencing the items outlined in substance over form. As the potential investor, review them carefully to be sure they utilize the correct terminology. Be certain that the financing instrument clearly states it is a purchase money lien and names the seller as the mortgagee or beneficiary.

Pay particular attention to the closing statement. It is fairly common for the closing agent to use a HUD-1 Settlement Statement. This however is not a preferred closing statement for owner financing since it was primarily developed for traditional lender financing and is filled with inaccurate terminology. If your agent insists on using this form review it closely. Be sure they leave Section (F), Name of Lender, blank or put in the property seller’s name and address. Line 202, Principal Amount of New Loan, of Section J, should also be left completely blank. The agent should utilize an empty line in this section and entitle it seller carry back contract (deed of trust, or mortgage), purchase money lien, or something similar in order to correctly reflect the amount paid by buyer. Of course avoid all lending terminology including any items in Section 800, Items Payable in Connection With Loan. Again, the buyer shouldn’t be paying discount, origination fees, or any other items typically associated with a loan. If the buyer is paying for an appraisal or other item, have these listed in Section 1300, Additional Settlement Charges. These may seem like small items but again, it’s all in the details.

5. Doing it Right

In summary, if simultaneous closings are part of your investment portfolio, learn to clearly recognize and differentiate this product from a traditional residential real estate loan. If planning to originate loans, be confident you are aware of and comply with all regulations as well as licensing requirements. If working with both product lines, consider utilizing separate entities to conduct each business activity. It is certainly appropriate to obtain legal counsel on these issues and of course, as in all business transactions, treat people fairly, ethically, and with professionalism at all times.