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The Rise of Owner-Financed Notes

By: Jeffery Hartman

· Notes,CRE,DEBT

With the possibility of rising interest rates on the horizon, an attractive investment which may see increased use (and a large resale market) will be Owner-Financed Notes, or OFN's.

Many small investors may have purchased or lent money on an OFN in one form or another. Some small lenders may purchase used mobile homes, fix them up, and use an OFN for the sale of the mobile home. OFN's are also commonly used for home purchases, particularly when the buyer's credit is too low for standard financing through a bank or credit union (or has other issues, such as a judgment or bankruptcy which may disqualify them from a regular mortgage).

As a market, OFN's are not commonly found for resale. A few websites offering purchase terms exist, but they are few and far between and have little active marketing. “We are building an active brokerage for Owner-Financed Notes, but since the notes are created on such an individual basis, people do not know that they can receive good cash value for their notes. Our goal is to let people know that they can receive good value for their notes and that a market exists.”

OFN's can bear a higher risk than mortgages and consumer loans. They are typically made between individuals, and the borrower tends to have a lower credit score or some other significant credit risk. However, if the note is secured by a mortgage with good equity, the risk is significantly decreased and the note bearer can have confidence they will be repaid either by the borrower or the equity in the property. 

“Due diligence is key, each note has a complication that increases its risk, and you have to know what is going on before you purchase. There is a reason that the borrower cannot or will not go to a standard lending institution to borrow the money, and you have to know what that is before buying the note.” 

The benefit to buying OFN's will come in an environment where interest rates are rising. What may occur is that OFN's may become more common as the role of individual lenders and banks may swap, where the interest rates banks offer will be too high and individual lenders may have the most competitive rates. If and when that scenario occurs, OFN markets will increase and the borrower quality will get better as savvy borrowers will know to look outside of standard lending markets to finance their homes. 

“We're excited, we are seeing some increased interest already in OFN's and are gearing up to be a major buyer and broker nationwide. The OFN market has not seen large exposure by an active investor market, and we are going to be ahead of the curve when it hits.”

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