Note Owner's Manual

Innovative Solutions
2272 El Paso Street
Lancaster, CA 93535
(805) 946-2289

Why a Note Owner's Manual?

This manual is designed to assist people who will be selling property 
or who are receiving monthly payments on properties they have 
already sold (mortgages, trust deeds, or land contracts)  

Mortgages, trust deeds, and land contracts can be excellent 
investments.  These are all referred to as "seller-take-backs," or 
privately-held loans.  But, like anything else, it pays to know a few 
basics ... pitfalls to avoid and opportunities to explore.

Please take a few moments to read this manual.  It is full of valuable 
information -- from what to do if the purchaser fails to make a 
payment on time to how you can sell some or all of the payments on 
your loan to obtain cash in a matter of days.

Although mortgages, trust deeds and land contracts are relatively 
simple documents, we suggest you read these documents, and this 
Note Owner's Manual, once a year.  There's no better way to know 
your rights as well as your options.


Helpful Hint:  	

For valuable advice on how to sell property using seller-take-back 
financing, see "Tips for Selling Property Using Seller-Take-Back 
Financing" in this manual.  



Introduction

A mortgage, trust deed, or land contract is a written contract 
between a person who has sold property and the person who bought 
that property.

At the time that you sold your property, odds are that you would 
have preferred a cash sale.  Taking back financing, however, 
provided a quick and inexpensive way to sell the property without 
the rigid guidelines, hassles, and delays of bank financing.  This loan 
also provides you with some monthly income at, hopefully, a good 
rate of interest.

Taking back financing is a sensible way to sell property and is 
extremely common all over the United States.  The terms used to 
describe this financing vary by state and range from trust deeds, 
contracts for deed and land contracts to deeds of trust, notes, and 
(privately held) mortgages, but they all represent the same thing -- a 
way of selling property by allowing the purchaser to "borrow" from 
the seller rather than paying cash up front or borrowing from a bank.  
All these vehicles are referred to as "seller-take-back" financing.

When a property is sold and a seller-take-back mortgage is used, 
the seller, who is now also the lender, is called the mortgagee.  The 
buyer, who is now the borrower, is called the mortgagor.  When a 
property is sold using a seller-take-back trust deed, the seller is the 
beneficiary, the buyer is now the trustor, and there is a third party 
who acts as the title holder called the trustee.  When a land contract 
is being used, the terms purchaser and seller are used.



Legal Description of the Property

In the contract, the legal description is the detailed description of the 
parcel of land the seller agrees to sell to the purchaser.  The city, 
village or township of the property is noted, together with the country 
and state. 

Along with the actual "soil" sold, the seller also conveys such things 
as any buildings, easements, tenements, hereditaments, 
improvements, and appurtenances.  In short, the seller conveys 
everything that is permanently affixed to the property sold.

Helpful Hint:	Next to the legal description on your contract, write 
in the property parcel number (also known as a "tax ID" number or a 
"Sidwell" number) used by the tax authorities.  This makes it easier 
to check to see if the property taxes have been properly paid by the 
purchaser each year.

Believe it or not, many contracts do not mention the actual street 
address of the property sold.  If this is true of your contract, jot down 
the actual street address next to the legal description of the property 
on the contract.



Prices and Terms of Payment

This area of your contract contains the following figures and dates:  
Total Purchase Price, Down Payment, Beginning Balance 
Remaining (the purchase price minus the down payment), Monthly 
Payment, Annual Interest Rate, amount and date of the Balloon 
Payment (if any), and the date that the first payment is due.

Purchase Price:  The purchase price (sometimes referred to as 
"consideration") is negotiated between the seller and the buyer.  
Properties sold with seller-take-back financing often sell for more 
than properties that are sold for cash because the terms are more 
favorable for the buyer.

Down Payment:  The down payment is usually 10% to 20% of the 
purchase price.  From your viewpoint as the seller, the bigger the 
down payment the better.  It represents money that does not have to 
be collected in the uncertain future and it also represents the 
purchaser's commitment to the property.

Therefore, a property sold with no down payment is quite risky, 
because initially the buyer is no more financially committed to the 
property than a renter would be.

Similarly, non-cash down payments (barter items such as used cars, 
snowmobiles, applied rent and the like), and down payments to be 
paid over time or borrowed from friends or parents are also riskier 
than those paid in cash out of the buyer's own pocket.  (See "Tips for 
Selling Property Using Seller-Take-Back Financing")


Balance Remaining:  Initially, this amount is the purchase price 
minus the down payment.  The balance remaining should go down 
with each monthly payment made by the borrower.  An amortization 
schedule shows how the balance will be reduced by monthly 
payments made on time.


Helpful Hint:

Amortization Schedules can be obtained from banks, real-estate 
offices, and title companies for a small fee.  However, we will be 
glad to send you a complimentary amortization schedule based on 
the balance remaining, interest rate and payment amounts of your 
mortgage, trust deed, or land contract.  Just call us.


The Monthly Payment:  The amount of the monthly payment is 
determined by the amount of the loan, the interest rate, and the term 
of the loan in years.  The higher the amount of the loan and the 
interest rate, the higher the payment.  The shorter the term, the 
higher the payment.

Helpful Hint:	Some people have the monthly payments on their 
loan serviced by a bank, credit union, or escrow company.  Be advised, 
however, that these companies do not assist you in the collection of your 
payments.  They merely provide a bookkeeping service.  If the borrower 
gets behind on his payments or defaults, it is your problem.  

See "Selling All or Part of Your Mortgage, Trust Deed or Land Contract 
for Cash" for ideas on how you can sell your contract for instant cash 
and never have to worry again about collecting payments.


Payment Due Date:  This is the date when the first payment is due.  
A "Grace Period" in some contracts permits the purchaser a few 
days each month during which he or she may fail to make payments 
and not be considered in default.  Also, some mortgages provide for 
a late fee if the payment is not received on time or within the grace 
period.

Helpful Hint:	Do NOT let the borrower get into the habit of making 
payments later than the due date or grace period.  Be polite but 
insist on promptness.


Balloon Payment:  If your loan contains a clause that reads 
something like, "The entire purchase price and interest shall be fully 
paid within five (5) years from the date hereof, anything herein to the 
contrary notwithstanding," then there is what is known as a "balloon" 
in the loan (a five year balloon in this example).

A "balloon payment" is the term used for a large, final payment on 
the loan.  Balloon clauses usually call for the final payment to be 
made in five, 10, 15 years, etc., from the original sale date.

If the borrower fails to make a balloon payment, this constitutes a 
default on the contract (see the section, "Default" for a discussion of 
your options in the event that your borrower fails to "pop the balloon" 
or obtain financing to make the last, large remaining principal 
payment).

Helpful Hint:	It is a good idea to notify the borrower by letter at 
least four to six months before the balloon is due.  This will give the 
borrower plenty of time to begin looking for a way to finance or 
otherwise pay that last, large payment.

For advice on what to do if your borrower is unable to make a 
balloon payment, call us.  We face these situations frequently, and 
are experienced in exploring all of the options available to a 
someone who is owed a balloon payment by someone who can't pay 
it.  We may even be able to provide you with all (or nearly all) of the 
money owed you by the borrower without foreclosing or forcing a 
sale of the borrower's home.


Interest Rate:	The interest rate is stated in annual terms.  When 
recording each payment made, interest is calculated for the payment 
period (usually monthly) by multiplying the interest rate by the 
balance due and then dividing this annual interest amount by the 
number of payments made each year.  This number (total interest 
for the period) is then deducted from the payment.  The rest of the 
payment is known as the principal portion of the payment and is 
deducted from the principal balance remaining on the loan.

Sound confusing?  It's really not if you follow an example:  Consider 
a transaction that has a sale price of $75,000, a down payment of 
$10,000, with a seller-take-back loan of $65,000 payable with 
monthly payments at 10%.  The interest portion of the first payment 
will be $541.67 ($65,000 x .10 / 12), and the principal portion of the 
payment will be $85.59 ($627.26 - $541.67). (* A financial calculator 
is used to get $627.26).  The remaining principal balance on the loan 
after the first payment will then be $64,914.41 ($65,000 - $85.59).

Helpful Hint:	Call us if you would like a free Amortization 
Schedule for your note.  It will tell you, for each month, what the 
remaining balance is and what the principal and interest amounts are.  
Just provide us with the loan amount, term in years, annual interest 
rate, and payment amount, and we will be happy to mail it to you.



Taxes and Insurance

Who is responsible for making tax and insurance payments depends 
on the terms of the mortgage.  The three most common ways to 
handle the payment of taxes and insurance on the property are:

1.	The borrower pays the taxes and insurance;

2.	The lender (seller) pays taxes and insurance but then adds the 
amounts paid back to the balance of the contract;

3.	The borrower makes monthly contributions to an escrow account 
held by the seller, and the seller pays taxes and insurance out of 
this account.

If the borrower ever fails to pay taxes or insurance bills, you have 
the right to pay them at any time after they are in default and then 
add the cost of these expenses to the balance on the contract.  It is 
always a good idea, therefore, to inform the insurance company that 
you should be notified if there is a cancellation or some other lapse 
of coverage.


Helpful Hints Regarding Insurance:

You should verify that the insurance policy is issued for an amount 
that represents AT LEAST the full value of the amount still owed you 
(the borrower should want to insure the property for its full value).   

Be sure that you are listed as the mortgagee, trustee, or first 
contract holder on the insurance policy.  This way, you will be 
entitled to the proceeds from any insurance claim ahead of the 
borrower.  If you are listed this way on the policy, you should get 
renewal notices each year from the insurance company.  You should 
also get a notice of cancellation if the borrower fails to keep the 
policy current.

If you ever get a cancellation notice, or for any reason find the 
property uninsured or underinsured, immediately contact the 
borrower regarding this breach and purchase your own coverage 
until the problem is remedied.


Helpful Hints Regarding Taxes:

You can determine if the taxes are current by calling the county 
where the property is located.  We recommend doing this on an 
annual basis.  The borrower's failure to keep current on taxes is a 
breach of contract and an indication that he or she may not be able 
to afford the property, even if the monthly payments are current.  
There is nothing more discouraging that foreclosing on a property 
only to discover that the first expense you have is several thousand 
dollars of unpaid back taxes.



Borrower's Duty to Maintain the Premises

It is the borrower's responsibility to protect the value of the property 
until it is paid in full.  This clause is important because the value of 
the property is what motivates the borrower to keep making 
payments.  If the borrower ever defaults and suffers foreclosure, it is 
the value of the property that will enable you, the seller, to re-sell the 
property and get your money back without a loss.

Most loans require the borrower to notify the seller in writing before 
the borrower or any third party neglects the property or allows it to 
be used in a way that lessens its value or removes, changes or 
demolishes any buildings or improvements on the premises in a way 
which may diminish the property's value.

Helpful Hint:	It is a good idea to drive by the property you sold on 
a regular basis.  If you've moved out of state, have someone you know 
do this for you.  Fundamental changes to or deferred maintenance on the 
buildings on a property can seriously diminish the value of your loan, 
while improvements to the property (a new roof or new landscaping, for 
instance) can make prompt payments by the borrower more likely than ever.


Default

If the borrower fails to perform any significant part of the contract, 
the seller may have the right, after notifying the borrower in writing 
of the exact nature of the default, to take legal action.  If the default 
continues, the seller has the right to declare the remaining balance 
due and payable and, if the default is not then cleared up or the loan 
is not paid in full, the seller can begin steps to foreclose.

Defaults by the borrower may include failure to properly maintain the 
property, failure to adequately insure the property, or failure to pay 
taxes on the property as they become due.

The way in which borrowers most commonly default is, as you would 
expect, by failing to make timely payments.  If a payment is ever 
late, we recommend taking the following steps:

1.  Check the contract to see if a grace period exists; if so, you must 
honor it.

2.  If no grace period exists or it has expired, phone the borrower 
and ask about the payment; insist upon payment, and make a note 
of the date and time of the call and keep this information with your 
land contract.

3.  On the same day as the above phone call, write a letter that 
identifies the default and summarizes any action the borrower has 
failed to perform, and mail it to the borrower, certified mail, return 
receipt requested.

4.  If the above steps do not produce the desired results, contact an 
attorney immediately.  Trying to cure a default by yourself can cause 
problems for you, the seller.

Helpful Hint:	If legal action is required, a seller has the right to 
initiate foreclosure proceedings.  Find an attorney with experience in 
the area of real estate foreclosure.

Also, because your attorney may be required to appear in court, it is 
best to hire one who lives near the property in question.  This will 
save you from paying travel time and other unnecessary expenses.

Important Note:	

Declaring a loan to be in default and starting the foreclosure process 
is a serious matter and should be handled by an attorney familiar 
with the laws of the state in which the property is located.  The 
biggest mistakes made by sellers in this area are:

1.  Trying to take matters into their own hands, and
2.  Delaying the exercise of their rights.

Begin to think in terms of foreclosure when the borrower is one 
month behind, not three our four months.

REMEMBER, you are not the "bad guy"... the borrower is the one 
not making payments.  They can sell the property, re-finance the 
property, or bring the payments current.  The ball is in their court, so 
to speak.  Advise the borrower of the available options and that you 
are prepared to take legal action.  After an initial phone call and a 
certified letter, only swift and decisive action taken with the 
assistance of legal counsel is likely to motivate them to act.  Be 
honest, firm and considerate.  Don't harass, but don't delay!

Helpful Hint:	Keep records of all written and spoken conversations 
with the borrower, including dates, times, and what was discussed.  
You'll never know how or when these records will come in handy until 
you need them but don't have them.  Then it's too late!

A failure to enforce any clause in your contract can, over time, 
establish the precedent that the clause is not binding and has no 
effect.  In other words, actions can speak louder than words.  
Consistent conduct over a period of time, in fact, can take 
precedence over the actual wording of your contract in a court of 
law!  In short, stick to the contract or be prepared to find it 
difficult to enforce in court.


Tips for Selling Property Using Seller-Take-Back Financing

Using seller-take-back financing can be an excellent way to sell your 
property quickly and at a good price.  As conventional financing 
becomes even more costly, more difficult to obtain, and more time 
consuming, seller financing will become even more popular (we 
estimate that approximately 15% to 20% of property sold is now sold 
with seller financing).

If you're thinking about selling some property and taking back 
financing, here are some things you should know that could be 
beneficial to you in the future -- especially if you should want to sell 
that mortgage, trust deed, or land contract for cash someday.  The 
way a mortgage is planned and written can have a lot to do with its 
sales value in the future.


The Purchase Price:  The purchase price is negotiated between 
you and the borrower, but there are some objective standards that 
can be used as the basis for negotiation.

One way to establish such standards is to have three different 
Realtors do a market analysis on the property, complete with two or 
three "comparables" each (Comparables are properties that are 
comparable to the subject property and can be used to determine its 
market value).  An average of these three analyses will usually give 
you a good idea of what the property should sell for.  This service is 
often free since the Realtors will be competing for the right to list 
your property (Be advised, though, that Realtors may over-estimate 
the value of your property in order to win the right to list it).

A second method is to hire an independent appraiser to do a 
complete appraisal of your property, which would include (as above) 
three comparables.  This method can cost from $150 to $600, but is 
more authoritative than the first method.


The Down Payment:  The down payment should be as large as 
possible.  A larger down payment means the purchaser has more 
equity and owes less, both of which make the contract more secure 
and thus more salable.  A good thing to remember is that the larger 
the down payment, the more your loan is worth.  Make sure that the 
down payment is paid out of the borrower's pocket -- not his or her 
parent's pockets.  Politely but firmly inquire where the money for the 
down payment is coming from and make your selling decision 
accordingly.


The Interest Rate:  The interest rate on your loan should be close to 
interest rates currently being charged on mortgages by banks and 
savings and loan associations.  There are legal maximums in most 
states.  See your attorney for details.


The monthly Payment:  The amount of the monthly payment is 
determined by the amount of the loan, the interest rate, and the term 
in years (5, 10, 15 years, etc.)  The higher the amount of the loan 
and the interest, the higher the payment.  The shorter the term of 
years, the higher the payment.

Loans can also be structured as Interest-Only loans with a balloon 
feature, or for a longer term of years with a balloon.  This keeps the 
buyer's payment manageable, and ensures that the seller will be 
paid off in the desired time.  If you need any assistance in 
structuring this type of payment plan, please call us.


Taxes and Insurance:  Lending institutions generally require the 
buyer to pay one twelfth of the estimated yearly real-estate taxes per 
month and one twelfth of the estimated insurance costs, in addition 
to the monthly payment.  At the end of the year, the lending 
institution then has the money on hand to pay the taxes and 
insurance.  You can do the same.  Since the loan will run over a 
period of time, there is always the chance that property taxes will be 
raised, so be sure to include a clause that provides for increasing 
the payment when this happens.


Underlying Debt:  If you currently own a piece of property, you do 
not necessarily have to pay off your present land contract or 
mortgage.  Instead, you can sometimes continue to make monthly 
payments in the required amount just as before (the original 
obligation is referred to as an "underlying debt" since it "underlies" -- 
is superior to and existed before -- the debt owed to you on the more 
recent sale of the same property).  However, check the mortgage 
you are making payments on, to see if it has a "Due on Sale" clause, 
requiring you to pay off the debt if you sell the property.


Amortization:  How long a loan is scheduled to run is referred to as 
its "amortization period." The length of this period depends on the 
amount of the loan, the interest rate, and the size of the monthly 
payment.  

For you, the seller, the shorter the contract, the better.  To shorten 
the length of the contract, you can increase the down payment 
and/or increase the size of the monthly payments.  Contracts with 10 
to 20 year amortizations are common and are preferred to contracts 
with 30 year amortizations.

You may also consider including a "Balloon Payment" due in five to 
ten years.  Even if the balloon is not "popped" (paid in full by the 
borrower), it gives you an opportunity to increase the monthly 
payment and the interest rate (or both), as well as set a new balloon 
payment one or two years down the road.  By the time the balloon 
payment becomes due, such increases are generally easily 
accommodated by the borrower, and may be a preferred option to 
foreclosure.

As a service to both you and the borrower, do not set balloon dates 
that are too near.  One an two-year balloon clauses are often 
unrealistic and create unnecessary difficulties for both you and the 
borrower.


The Borrower's Credit-Worthiness:  Just like any lender, you have 
every right to information that shows whether the borrower has an 
adequate source of income to pay his or her obligation.  Get 
references, find out where they work, their annual income, and 
obtain a credit report showing how promptly current debts are being 
paid.  If selling to a person with less than a commendable credit 
record, insist on a large down payment or find another buyer.



Selling All or Part of Your Mortgage, Trust Deed, or Land Contract for Cash


We specialize in purchasing mortgages, trust deeds, and land contracts.  
There are many ways of getting cash from your contract.  You can sell the 
whole mortgage now, or if you just need some short-term cash, you can 
sell some payments now and collect monthly payments again in the future.  
Many of these plans will give you as much as 95% of what is due on the loan.  
We charge no fees, no points, and no commissions.  


Why would I want to sell my loan for immediate cash now?

When you convert part or all of your loan to cash, you 
gain several advantages in addition to immediate cash:


1.	You don't have to worry about the monthly payments you 
receive slipping away on life's little expenses.

2.	You receive a substantial sum of cash right now -- enough 
to accomplish some major goals.

3.	You don't have to worry about collecting monthly payments 
or servicing your contract; we handle all of that.

4.	You don't have to worry about whether the taxes and 
insurance premiums are being paid each year to protect your 
investment; we handle all of that.

5.	You don't have to worry about whether your borrower will 
continue to make his or her payments.


How can I find out how much my mortgage is worth?

All you need to do is call.  One brief consultation with 
one of us, and we will answer all your questions, discuss 
your options, and help you decide for yourself whether 
turning your loan into immediate cash makes the most 
sense for you.  The choice is yours.


For More Information, Contact:

Innovative Solutions
2272 El Paso Street
Lancaster, CA 93535
(805) 946-2289



The materials herein are provided with the understanding that the 
author, company and/or publisher are NOT engaged in rendering 
accounting, legal, investment and/or tax advice or services.  
Questions regarding your specific accounting, legal, investment, 
and/or tax needs should be addressed by your own professional 
advisers.


