Frequently Asked Questions by investors on Notes/Land Contracts
1. How is this investment different than a rental property?
A rental property involves a property owner and a tenant who will rent and live in the home. In a rental property the rent is paid by the tenant but the property owner is responsible to buy the property, pay for taxes, insurance, repairs, remodeling and management fees.
A note/land contract investment involves an investor and a tenant-buyer. The tenant-buyer is buying the property AS-IS and pays for repairs, taxes, and insurance. The tenant-buyer benefits from home ownership. The investor plays the role of the bank and holds the deed to the property. For protection, the investor keeps the deed until the loan is paid off by the tenant- buyer. The investor maintains a banker’s position and the buyer enjoys homeownership without bank financing.
2. What do you mean by the investor plays the role of the bank?
If you have ever purchased a property and received a loan from a bank, then it is easier to understand. Think of yourself (the investor) as the bank in the same scenario.
First of all, the buyer pays the mortgage to the bank based on the loan amount; he/she owns the property (with the deed in their name) and pays for property taxes, insurance, repairs, etc. In case of banks they hold first position mortgage (1st lien position) and if the buyer stops payment then the bank will foreclose and take the property back which can take a long time (months or years).
In a note/land contract the investor will have the same benefits as if you were a bank, with the exception that you hold the deed and if a tenant-buyer stops payments you can evict (takes a few weeks) and there is no need for lengthy foreclosure. This adds a lot more protection for the investor.
3. What happens if the tenant-buyer doesn’t make their payment on time?
Summit will work with them to get them current. After exhausting all options if the tenant-buyer doesn’t pay, the investor can evict them and take the property back. The investor at that point has the option to sell, rent, or resell the property with new financing terms.
4. Where are the properties located?
The properties are in many states such as AL, AZ, FL, GA, IL, IN, KS, MI, NC, SC, NY, OH, PA, TX, and others. We currently do not have any properties in California.
5. How important is the location?
When you are holding the note and acting as a bank, the location is not as important as it is when owning a rental property. With the note the payment history or credit of the tenant-buyer is more important.
6. How is this investment different than a mutual fund or the stock market?
With discounted notes or land contracts you know your fixed rate of return and you know your liabilities. Your investment is secured by the property and you have a lot of cushion because the loan value to property market value is kept low and you buy the note at a discounted price.
With stocks and mutual funds you can experience large up and down swings depending on the risks that you take. Over the long term, investments in the stock market can have a lower average ROI than discounted notes.
7. What is the liquidity of notes and land contracts?
Unlike stocks or mutual funds the notes are not as liquid. As the notes and land contracts are seasoned (tenant-buyer builds a track record of timely payments) you can typically sell your note for a higher price to other investors.
8. What is my rate of return?
Your ROI is typically between 12% to 18% depending on the terms of the loan and seasoning.
9. What do I receive when I purchase a note or land contract?
You receive the deed and the land contract is assigned to you or your company. The tenant-buyer term remains the same. The future payments will be paid to you.
10. What are my risks and liabilities?
If a tenant-buyer defaults or abandons the property you may lose a few months of payment. The typical resell process with new financing takes about 3 to 6 months, during which you are responsible for taxes and insurance. You also have the options of selling the notes for cash or renting the property. Summit team will assist you in case a default happens.
11. How do I get my investment money back, under what terms and conditions?
You get paid in monthly payments for the period of the loan. The monthly payments that you receive pays the interest and the original investment money over the loan term (example; 20 years). Similar to the way a bank gets paid back on a mortgage loan, the principle and interest is collected over the term of the loan by you (the investor).
12. Does Summit Solutions offer services to assist me if needed?
Yes, Summit can monitor the payments (tax and insurance) are on track. In case the tenant-buyer falls behind with their payment, Summit will contact them to get them back on track. If needed we send pay or quit letters or start eviction process. Also we can help our investors re-sell with financing.