A Commercial Note Deal...In Theory - Posted by Hugh James


#1

Posted by Hugh James on December 24, 1998 at 07:19:36:

Thanks for the advice Bud, but if you know of cheaper money sources, I’m ready to roll. We’ve tried dealing with local banks, including our own and they don’t understand this at all. First, they’ll only loan 70 to 75 per cent of the purchase price. They won’t consider the appraised value. One even told me they needed an EPA study at a cost of $2,000 even though the building never had any commercial space in it and is surrounded by single family homes. Most want two points to make the loan and one wants two points plus a $2,000 application fee. Frankly, they’re just nuts.


#2

A Commercial Note Deal…In Theory - Posted by Hugh James

Posted by Hugh James on December 21, 1998 at 17:08:33:

We’re 1000% new at this creative use of paper and notes business. And, if I should post this on the main board, just tell me and will do so. Here’s a theoretical deal that mirrors one we’re working on. Your collective thoughts are most appreciated.

John Doe has a contract in his name to purchase a 10 unit apartment building. In the space for the buyer’s name the contract reads “John Doe or his assigns.” John is buying the property from a local bank that took the building back in foreclosure. The property is not fully rented (it was bank policy not to re-rent as units became vacant), but needs only cleaning, decorating and some minor repairs to have all units up and rented. Otherwise it’s an excellent property in a good neighborhood. Gross monthly rental income when fully rented is projected to be $6,600.

The appraised market value, as is, is $100,000. The purchase price is $80,000. John wants to conserve his own cash to buy other properties and has decided to take in a small grouip of investors to put up their money to make the deal and the repairs. All have excellent credit. John will be a part of the investment group that takes title. The group will put down $10,000 cash. John will create two seller mortgage notes on the property and do a simultaneous closing. The first position note is $80,000 face value at 10.5% amortized over 360 months and ballonning in 60 months. This first lien note John wants to sell to a note buyer at the closing using the note buyers funds to actually close the sale. John will then hold his $10,000 second (7.5%, interest only, balloons in 60 months). The group is willing to accept a 1 year pre-payment penalty if it means a better cash deal from the note buyer.

Questions–What would make this a more attractive note to a buyer? Longer or shorter term? Higher rate? Will this whole scenario even work? What would note buyers of this type of paper typically pay for a first mortgage of this type? Anyone know how to locate buyers? How long does it typically take to close?

We know this is asking a lot, but time is of the essence. Any and all information you can offer is appreciated.


#3

Re: A Commercial Note Deal…In Theory - Posted by Bud Branstetter

Posted by Bud Branstetter on December 23, 1998 at 23:15:50:

On commercial(more than 4) note buyers usually don’t want to go more than 70%. Next they want personal guarantees on the note. They also may want more than 1 year for the prepayment penalty. Then they will also want an ongoing concern. You can do a note deal but with good credit why not go after cheaper money.