Why are there so few good notes out there to be found? Perhaps those of us who have been teaching the secrets of “paper” for the past several years have created more knowledgeable note buyers in the market today than ever before.
While we have helped many people improve their lives and increase the size of their bank accounts, the market has become more and more competitive. Good notes are becoming very difficult to find. Or are they?
Remember the basics. A note is a contract by which a person agrees to make payments of a certain amount until the debt is retired. Some of these contracts (notes) are secured against real property; some are secured against other types of property.
A huge marketplace with no liquidity
I prefer to look for opportunities where others don’t seem to be looking. For those of you who have heard my discussion on “True Market Liquidity,” you will remember the basic element is structure.
When there is no structure for financing in a cash deficient marketplace, there is no liquidity and, therefore, no business takes place. The market remains that way until someone steps in to create the structure and, thereby, the liquidity.
Today the Manufactured Housing industry is booming throughout the country. The current demographics show that mobile home buyers are younger and more affluent. And yet, there is no liquidity in that marketplace. Why do I say this? Since the beginning of the last recession, most of the major mobile home lenders have dropped out of the market.
Currently there are only two major lenders. Almost all of the available financing plans are structured for the new mobile home buyer. The numbers, however, show the major market is the resale market, not the new market. Green Tree, one of the largest national lenders for mobile homes, expressed excitement about this market in its 1992 annual report:
In 1992, Green Tree began to expand its “direct” loan business to individuals buying previously owned mobile homes. In 1993, we hope to further expand this business. With an estimated 800,000 mobile homes changing hands each year, this segment holds significant growth opportunities for Green Tree.
Since that report, Green Tree launched its “Classic” program, a program designed to provide loans to facilitate the “resale” market. But they have barely scratched the surface.
Problem or opportunity?
Few lenders will loan on any mobile home older than 1976, the year HUD announced a national building code for manufactured housing. Yet these mobile homes are updated and reconditioned just like any other home. In California alone this group of mobile homes (1976 and older) represents 73% of the market.
These owners are screaming for someone to finance the sale of their mobile homes. Very few lenders are answering their call. Is this a problem or an opportunity?
In most states, a mobile home (not including the lot it sits on) is considered “personal property” and is governed by the laws pertaining to “conditional sales contracts.” (Check with your attorney for laws applicable in your state.) In the event of default, compared to normal real estate notes, it is easier (less than 90 days) and less costly (several hundred dollars), if done correctly.
But it’s not real estate, you say? So What! Mobile homes go UP in value just like real estate homes. The delinquency rate for mobile home notes is the same or better than for normal real estate notes.
Security Pacific Housing (now owned by Bank of America), one of the two largest manufactured home lenders, routinely reports its delinquency rate each year at less than 3.%. If the underwriting or selection criteria is carefully followed at the time the note is created, its performance will be as good as any real estate note. Ask Security Pacific Housing.
A very strong yield and almost no competition
But what about yield? The average mobile home note in the “resale” market I’m talking about ranges from $15,000 to $25,000 in face value. The average term is between five to seven years. And the interest rate is an average of 12% to 14%. Remember these are first position notes, not seconds.
When you buy these notes at a discount, only the sky is the limit. My own personal goal is to buy mobile home notes at a minimum 35% yield. I have purchased “partials” for yields exceeding 90%. And these notes are coming in the door faster than I can handle them! Or….if you need a quick $5,000, you can do it by “flipping” these notes.
Now, if you’re sitting on some equity in your house or another piece of property, and can pull some of it out at an interest rate of 8% or 9%, you can make money with your equity and it won’t cost you a dime. You can buy good notes with great yield in a market with almost zero competition.
I’m always looking for notes to buy, especially from banks, and I’m happy to pay a percentage of the deal to anyone who brings me real estate notes. Email me at [email protected]