A Real Paper deal!...Any suggestions? - Posted by DougB

Real Estate Investing
1

Posted by Charles - DFW on April 11, 1999 at 24:27:06:

You are right.
If they absolutely refuse to refinance.

I guess the hardest part for me is to see why they would refuse to get institutional financing (bank or mortgage company). I guess that is the hard part about “helping them” get financing!

I don’t know what my bottom line on tying up $31k for 8-9 years. More than 20%. That was why I was recommending helping the owners to get refinancing (take a 2x4 and…anyway) and make 2-4k in 2 months (37.5 - 75% return).

If they refuse to get institutional refinancing , I had to help them, I would setup there financing with me for $550 /month for 12 years.
Then if I wanted cash, I would borrow as much as I could for payments of $550-600/month for 12 years.
If I wanted cashflow I would borrow $32,000 and have the difference between the payments.

Doug, please help me, why won’t they get bank or mortgage refinancing?

Charles

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A Real Paper deal!..Any suggestions? - Posted by DougB

Posted by DougB on April 08, 1999 at 11:12:17:

Got a call 2 days ago from homeowner that has a balloon for $31,643.15 due 5-1-99! He’s paying $400/month @ 9.75%. I called the note holder, who is an investor, and she will not discount the note or take partial cash. Really no reason to, but it doesn’t hurt to ask, because the property FMV is $70,000 and I’m sure she would love to take it back. The owner wants to keep the house because he is improving it and adding a garage. He has talked to the local banker and the banker suggested they take out a home improvement loan. The owner doesn’t want two payments. I suggested refinancing the home, but he for some reason wasn’t interested in that idea. Both he and his wife work, he is a self-employed carpenter she has a clerical desk job. He said they could afford $550-600 a month payment. My idea is to pay cash to the noteholder for the contract for deed and write up a new C4D for 96 months at 9% interest with payments starting at $550 the first year and increasing $25 per month each year. The last year’s payment will be $750 per month. I put the numbers in my new HP19BII using the cashflow menu and come up with a 17.54% yield, which gives me a 10-point spread. Of course I will eventually try to get the homeowner to payoff early, which will increase my yield.
Any other CREATIVE ideas or suggestions?

Thank you in advance for your suggestions.
DougB

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Re: A Real Paper deal!..Any suggestions? - Posted by Reif

Posted by Reif on April 08, 1999 at 23:42:50:

Just to preface, I’m a new guy, so if I’m out to lunch, someone please let me (and Doug) know.

Actually, after rereading this on the other board, I think I have it figured out.

Essentially, what is happening is Doug is refinancing the property for them at 9% (I agree with the others, Doug, since you don’t OWN the deed, you can’t write a contract FOR deed - you are going to write a mortgage or deed of trust.)

So, having said that, where are you getting the 31 large? If you can get it at 7% great, but I don’t know how that’s gonna happen.

If you are happy with 14% yield, I believe your original discount numbers work. But I also think your IRR only goes to about 14.48% if you can get them to go $25 higher a month.

Remember, if they give you an extra $25/month, your note now would amortize in 82 months, not 96 - perhaps that is where your miscalculation is.

I’m just a new guy, but intend on getting in the business myself. Maybe John or Bud can confirm the numbers.

The payors on this note are in trouble - and if the mortgage holder doesn’t want to foreclose - so is she.

Something doesn’t square here: The property owners need 31K in one month that they presumably do not have. The note holder, with one month to go, doesn’t want to foreclose, but doesn’t want to discount the note.

Have you asked each party what their intentions are when the balloon is due?

There HAS to be an answer there - and therein will lie your solution.

If you basically wind up refinancing the payors, as was your original idea, I would extend the term on the note (and therefore create a higher face value) to increase your yield. Hey, you’re saving their credit - you ought to get a fair return for that. 133 months (11 years, one month) gives you a 18% return ($46,289 face value).

Now you have a better chance of getting cashed out, and, your graduated payments (if you go that way) give you a much better IRR.

Good Luck,

Reif

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Re: A Real Paper deal!..Any suggestions? - Posted by David Alexander

Posted by David Alexander on April 08, 1999 at 19:01:49:

I don’t see where your getting your yield at? But if they don’t want to refinance now, why would they pay you off early? I mean refinancing at less than 50% LTV would be a slam dunk. If the Owner of the note wants the house back why would they sell to you? I don’t see any way to make a buck here, the homeowner wants to stay in the house, but doesn’t want to refinance. Maybe when it time for the ballon to be up and the guy doesn’t make it happen, the Investor, doesn’t want to go through foreclosure or something.

Show us the figures, or tell us what were missing.

David Alexander

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Re: A Real Paper deal!..Any suggestions? - Posted by Bud Branstetter

Posted by Bud Branstetter on April 08, 1999 at 15:01:51:

Maybe I am brain dead but several questions come to mind. Why are you doing a contract for deed versus a mortgage or deed of trust? Aren’t you using your own money instead of other peoples? Are you increasing the principle over what is owed or how do you get more than 9% return on unpaid principle if it is paid off early?

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To Reif - Posted by DougB

Posted by DougB on April 09, 1999 at 13:11:00:

Hey thanks for taking the time to read all my posts and punching the numbers into the financial calculator. I will get the deed to the property when I give the noteholder, she is also the Warranty deed holder, her cash ( We are writing up an option to purchase, which will give me time to negotiate my contract with the current homeowner). So I will be just fine. I agree with you that my best option is to get the PV(face amount of the new C4D I negotiate with the homeowner) as high as possible. That way I get a decent rate of return if he takes the full term to payoff the contract or I get a nice payday if he pays off early. Here’s how I did my graduated payment calc. First, I did not amortize it as you did. I put in my initial investment of -31,643.15 then 550 for 12 #times, 575 for 12#times, 600 for 12#times, and so on until the last one of 725 for 12#times. Pressed the CALC button then the IRR button and came up with 1.46 x 12 = 17.54%

One other idea I had was to write in the contract a clause that gives the homeowner a $2,000 discount off the face amount if he pays off or refinances the first year. My yield would be 27.91%. If I went with your numbers I could give them a bigger discount. It’s a blast massaging the numbers!!!

DougB

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Udate on note deal - Posted by DougB

Posted by DougB on April 09, 1999 at 10:41:09:

Today I talked to the noteholder and we will be getting together to sign an option agreement for me to payoff the balloon and get a warranty deed for the property. I also talked to the homeowner and he still wants me to do the deal. I’m picking up a copy of the contract for deed and the abstract tomorrow. I also talked to my attorney and we will probably to a simultaneous closing after he does the title opinion.

Thanks Charles for the suggestion. The only problems I see are the high interest rate might be affected by the usury laws and the $1500 penalty is not an incentive to refinance for the homeowner (although paying 15.5% interest might be an incentive!). Another idea I had was to keep the interest rate at 9% write the C4D for a higher amount ( like Reif suggested) and offer the guy a $5000 discount if he pays me off within one year. Doing it this way I have the opportunity to get a big chunk of cash and a high yield if the homeowner pays of early and I get a somewhat reasonably yield if he takes 8 years to pay off.

DougB

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Re: A Real Paper deal!..Any suggestions? - Posted by Charles - DFW

Posted by Charles - DFW on April 09, 1999 at 04:46:26:

Since Doug is paying the original owner 31k, would not he own the deed, or at least own the original contract for deed. Anyway,

My suggestion:
Payoff the original owner.
Create a new C4D, mortgage, whatever…
Terms 1)Loan amt $31,679 + fees
120mths @ 15.5% = payment $530 - 550
2)You will work with owner to get better
financing 9.5% or less
3)Owner will pay $1,500 intrest prepayment
penalty to payoff your loan.
$38,000 (to include loan fees) 120mthn @9% gives payments of $481.37

If you did that in 3months your yield would be more than 30%

Charles

ps. I believe that the “face value” is the amount borrowed or current pay off, not the sum of all payments.

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Re: A Real Paper deal!..Any suggestions? - Posted by Reif

Posted by Reif on April 08, 1999 at 23:49:03:

I forgot to add:

You should at least try to get the seller to discount the amount of foreclosure costs - attorney’s fees, possible property damage from upset payors, etc.

Then, if you can get the terms I outlined above, you have a good deal, IMH (newbie)O.

Reif

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Dave see answers to Buds questions - Posted by DougB

Posted by DougB on April 08, 1999 at 21:20:23:

thank you for your reply. See post to Bud Bransetter below

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Re: Brain Dead? - Posted by Charles - DFW

Posted by Charles - DFW on April 08, 1999 at 23:35:00:

Unless I have missed something,
my vote for brain dead is:
1st - The owner (a)waiting till the last month to find financing for a balloon and (b) thinking he’ll have two payments if he gets a loan to pay off the origina note.

2nd - the Banker for recommending a home equity loan, and not refinancing. (The banker may only have equity loans to offer.)

Charles

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Answers to your questions Bud - Posted by DougB

Posted by DougB on April 08, 1999 at 21:18:07:

Contract for Deeds are very common in our State… According to a local RE investor that has a 10 million dollar portfolio of C4D?s there are many advantages over a mortgage especially if you have to take the property back. The contract can be canceled and the people out in 60 days versus over 6 months on a mortgage foreclosure. I would write a new C4D for $37,542.14 and cash out the note holder for $31,643.15. The input is as follows N=96 I=9 PMT=550 FV=0 press PV= -31643.15 then input PV= -31,643.15 press I=14.02. To increase my yield I was proposing to increase the payment $25 dollars each year. In the cashflow function on the HP19BII input -31,643.15 as my initial investment then input the increasing cash flows for 8 years. That?s how I came up with the 17% yield. I?m new to the financial calculator, but I did review John Behl?s tapes to make sure I was doing it correct. Did I do okay? It seems very odd to me that the homeowner wouldn?t refinance, but he doesn?t want to. I was the one who suggested he refinance! The note holder just wants her cash and doesn?t care who she gets it from. She doesn?t seem eager to foreclose and get the house back. My statement ?I?m sure she would love to take it back? is not what she told me on the phone, sorry to mislead you. I know the whole scenario seems odd but I?m just telling you the facts and nothing but the facts! Any suggestions or ideas?

DougB

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Re: Udate on note deal - Posted by Charles - DFW

Posted by Charles - DFW on April 09, 1999 at 22:55:27:

I don’t know is 15.5% would be considered usury or not?
The owner does not see the $1,500 penalty, what he actually sees is about a $50/month (incentive) drop in his payment for the same amount of time. The idea is to get $1,500-2,000 for purchasing the D4C and setting up the owner with new financing, which is what you would do if you raise the face value up $3-5K.

What is the reasoning (justification) for raising the face value of the loan(C4D)? If you are going to set the present value of your loan at $35-37k. Then why not work with him to get bank or mortgage financing. Then you get $2-4k right away after expenses. Turning this in 60 days would give you between 37-74% yield.

I don’t see much value in raising the face value $5,000 then offering a $5,000 discount for refinancing.

Why is the owner going thru you. Why does’nt he go out and get financing on his own?

Thanks,
Charles

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Re: A Real Paper deal!..Any suggestions? - Posted by Reif

Posted by Reif on April 10, 1999 at 02:23:44:

ps. I believe that the “face value” is the amount borrowed or current pay off, not the sum of all payments.<<

Right.

Payments $550 for 133 months at 9% is a face value of 46K and change.

Total payments would be upwards of 73K.

What am I missing?

Reif

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Re: Answers to your questions Bud - Posted by David Alexander

Posted by David Alexander on April 09, 1999 at 09:51:02:

So where are you getting the number 37,542.14 from?
Have the people agreed to let you buy the house and sale it back to them? As far as graduated payments have you talked to the payors about that yet. I personally would hate to have money stuck at a 14% yield.

David Alexander

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Re: Saving their credit? - Posted by Charles - DFW

Posted by Charles - DFW on April 10, 1999 at 21:21:33:

What my “ps.” was responding to was:
“133 months (11 years, one month) gives you a 18% return ($46,289 face value).”

In re-reading your post, I see that what you are saying is you are talking about face value.

My question now is how do you justify increasing the amount owed from $31,643 to $46,289.

The property is worth $70,000. A $35,000 loan would give an LTV of %50. Even without the owner’s payment history there are lots of lenders who would loan them $32,000 with $3,000 cost, a total of $35,000 at 9-10%.

Adding $14,000 dollars to a loan for “saving their credit” is far from being fair. I can see making 1-2 thousand helping them get financing ( How much help do you need to get a 50% LTV loan with a payment history?).

Charles

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Pulled it out a hat!!! - Posted by DougB

Posted by DougB on April 09, 1999 at 10:52:56:

I just punched different numbers in the HP19BII to come up with different yields. I like precise numbers to shows the homeowner I have been working hard to analyze this deal. We are negotiating the deal with the homeowner as far as terms. What do you consider an acceptable yield for your deals?

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Also… - Posted by David Alexander

Posted by David Alexander on April 09, 1999 at 10:06:20:

To me the real money here is in the FMV of the property if as you say it’s worth 70k. Get an option to buy the Note for 60 days, and wait till it goes into default. Although depending on the situation I’m not saying just kick the people out, if they don’t want to refinance with you making a small profit(that way you get your principal back and can carry a small note) say as some sort of brokerage. Then pay them to leave, 500, 1000, 2000 bucks, you would still be in the house for less than 50%LTV. Resale the house, for 70-75k with Owner financing, get 5k or so down and then carry a note. You could also then put money against your note pulling your cash out and recalculate your yield as infinity.

David Alexander

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Re: Saving their credit? - Posted by Reif

Posted by Reif on April 10, 1999 at 23:00:30:

I know they can refinance, our principle in this story TOLD them to refinance - they WON’T refinance.

Who’s fault is that?

The way I justify getting the extra 14K face value is that 18% is what my money is worth.

If you add 2K to what they could do with a no doc refi it makes the total about 37K. Now your rate of return is 14.5% or so. Is that a deal? Not sure, I’m new, but it doesn’t sound like it - especially since we have learned these folks don’t want to refinance. There’s no way to improve the paper substantially.

What’s your bottom line rate of return for tying up 31K over 8-9 years?

Reif

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Re: Also… - Posted by DougB

Posted by DougB on April 09, 1999 at 10:46:20:

I know there is a huge profit potential if I have to foreclose on the property. However, I want to work something out that will give me a decent yield and let the people keep their house. If they don’t pay then it’s a different story. Thanks for your comments

DougB