WHY IS IT IMPORTANT THAT CASCADE FUNDING, INC. BUY NOTES?
This section is an exerpt from input Cascade Funding, Inc. provided to The Washington State Department of Financial Institututions in August 2013 regarding regulations related to the Dodd-Frank Act.
(Important Note: In the aftermath of the the financial collapse of 2007 - 2008, Washington State actually made it illegal for most people to sell their own real estate using seller-financing and of course to then sell their note. Although few industry professionals knew about this, it was indeed the law. Recognizing that this may have gone to far, as part of new rule making the state of Washington requested input from the public. What follows was a portion of our input. Amazingly, we had to first make a strong argument to allow seller-financing to even be legal! We then had to explain clearly why investment companies such as ours were vital to the overall economy. We were very honored that rule makers in Washington State asked for our input and pleased that they listened and incorporated many of our suggestions into final law passed in 2014.)
III. Selling Notes to Investors
Let’s first look at why it is so vital for people to be able to sell their notes on the secondary market.
A. Selling Notes to Investors Is Essential
It is essential that people are able to turn their real estate notes into lump sums of immediate, risk free cash by selling them. Converting the note to its equivalent cash value provides essential funds to people who may have no other alternative.
Let’s look at a typical situation that will help illustrate the discussions below: The property is a 1970 single wide mobile home on a quarter acre of land located in a small town in Washington State. A 75 year old woman has lived in this mobile home for the last 30 years with her now deceased husband. The property has a market value of $60,000 which represents 90 % of her net worth. She needs to sell the property now and move in with a family member. This property does not qualify for lender-financing. Potential buyers for her home are not rich people so they don’t have $60,000 cash. They can scrape together a 10 % down payment ($6,000) and offer to pay her the balance of $54,000 at 6 % interest and monthly payments of $323.76. She reasons that this would be a nice annuity and safe investment for the remainder of her life. Furthermore, her realtor explains to her that if she ever wanted or needed to convert her note to cash, she could sell it on the secondary market. Having this option was important to her since she knows her situation could change at any time (she might need to move to an assisted living facility or have other expensive medical issues) and she might need a lump sum of cash. Therefore, she happily agrees to the transaction and sells her property for full market value.
1. Maintain Property Values
If this woman did not have the option of selling her note her only alternative would be to sell to an all cash buyer. To do that, she would have to sell the property for a drastically reduced price. Probably as low as $30,000, one-half, or less(!), IF she can find an all cash buyer for this kind of property. This is a real world situation and these are real world numbers. So if she cannot sell the property on contract and then have the option later of selling that note, her property wouldn’t sell or would do so at a fraction of its true market value. This depresses the market value of her property but also all those nearby of similar type. Selling on contract along with the right to sell the note some time later maintains property values.
2. Preserve Equity
Furthermore, consider how people in this city who have sold on contract in the past would be affected. If property values decrease substantially, the notes they hold could become largely unsecured. If a note payer failed to pay on any of these notes, the note holders would have to take back a house worth far less and then have to try to find a new buyer. Assuming these also are not lender-financeable properties, they would have to find all cash buyers! These people would have had a substantial portion of their equity stripped from them. This likely would mean loss of most of their net worth – all because they didn’t have the option of seller-financing and the right to sell their note in the future.
3. Estate Liquidation
Seller-carryback real estate notes are often held by people as safe annuities. They also are used effectively in retirement portfolios. Therefore, these notes are frequently part of the assets in estates when people pass away. In order to liquidate the estate, the assets need to be converted to their cash equivalents. This is done by selling them into the secondary market.
4. Achieve Liquidity
a) Pay Creditors
Often selling a seller-carryback real estate note is the only way a person can generate enough cash to pay creditors. People going through bankruptcy are frequently ordered to liquidate notes to pay creditors.
b) Equity Settlement in Divorce
Very often couples holding a note together need to sell that note to divide their assets.
c) Other Investment Opportunities
This is perhaps the most frequent reason note sellers give us for selling their note, and it makes a lot of sense. The only way they can generate enough cash to invest is to sell their note. Also, very often people just spend the payments when they receive them each month, usually on daily living expenses or other minor things. Sadly, after years of receiving payments, they have nothing to show for it. People are much more likely to invest a lump sum of cash than to spend it.
d) Down Payment for Purchase Of Other Property
A person sells a house on contract but would like to purchase another property. If the down payment they receive from the sale of their house is not large enough, they often sell their note to provide enough down payment cash to buy a new house. Preventing note sales prevents both properties from selling.
e) College Tuition for Kids
Perhaps the woman in the example above would like to help send her grandchild to college. How could she do this? She could sell her note and provide some of the proceeds to that worthy cause.
f) Maintenance or Improvement of Existing Property
A note sale may be the only way people can generate the cash needed for repairs or improvements to their new home.
g) Medical Needs
Unforeseen health issues are a major cause of financial ruin for many people, especially the uninsured. Selling a note may mean the difference between life and death for some people.
h) Start a New Business
Start-up cash to fund a new business venture may be the only way to realize these dreams.
i) Use Money Before Dying
Older people may wish to spend their remaining net worth before they die. How can we deny such people the ability to convert their note to cash they can spend?
j) Easier to Pass on to Heirs
It is much easier for heirs to divide cash than to try to figure out what to do with a real estate note.
k) Pay Taxes
Back income and property taxes can add up quickly. Many people don’t pay them simply because they live paycheck to paycheck. Selling a note can provide the lump sum cash they need and, in the case of property taxes, remain in their property.
l) Take Vacations, Buy a Boat, and so on
The list of things people can do with a lump sum of cash is endless.
5. Provides liquidity to the Economy
There are a small number of microbusinesses, mom and pop or single person investment companies, who purchase seller held real estate notes as passive investments. These investors provide liquidity to the economy by providing lump sums of cash to note holders. People with these lump sums spend them on all of the items described above. Therefore, note sales serve to lubricate the economy and investors who purchase them make that possible. Seller-carryback real estate notes secured by single family, owner occupied residences are the least risky notes that investors purchase and, therefore, make up the bulk of investors’ note portfolios. Preventing note holders from selling these investment grade notes will end these small investment companies. Investors cannot stay in business by investing only in high risk land or commercial notes.
6. Excellent Supplements to Retirement Portfolios
Many individuals also have retirement portfolios that include seller-carryback real estate notes. For some, note portfolios are their only retirement accounts. Generally these notes are held to maturity, but if they cannot be sold by law, and property values decrease as described above, the value of these notes and the entire portfolios can be reduced by half or more. This would be devastating to those who have worked a lifetime playing by all the rules to accumulate adequate retirement assets. It is imperative that notes within these retirement accounts be sold when necessary. Smart portfolio management requires rebalancing of risk to proportions consistent with the retirees’ age and health changes. This is accomplished by selling notes that no longer provide the required risk characteristics and replace them with notes that do. These are the same procedures used to balance equity portfolios.
7. Qualify For Medicare
Often people need to sell their notes to qualify for Medicaid. This is very common.