Posted by Nate on February 19, 2001 at 13:34:58:
Michael,
I can certainly agree with your last sentence there. In fact, in doing this type of deals, I do not value my second at all; if I don’t make sufficient profit from cashing out the 1st and the buyer’s down payment, I will not do that deal. The 2nd, if it’s paid, is all gravy to me.
NT
Am I going to have a seasoning problem? - Posted by Ayn
Posted by Ayn on February 16, 2001 at 10:17:34:
I just purchased a property well below market. A higher sales price is well supported by the comps. I plan to do some small fix-up and resell cash-to-new-loan, I like the cash. I could wrap the existing loan (which is short term, high interest), or sell on a l/o, but I don’t want to.
I haven’t done this for about a year and all these recent seasoning posts have me a little concerned.
Re: Am I going to have a seasoning problem? - Posted by Nate
Posted by Nate on February 16, 2001 at 10:26:52:
Why not sell with owner financing and then sell the note at closing to pay off your existing mortgage? Seasoning is not a problem. Michael Morrongiello or any of the other note buyers on this board could definitely assist you with this.
I’ve spoken with note buyers in the past … - Posted by Ayn
Posted by Ayn on February 16, 2001 at 11:08:43:
they want what I consider to be a BIG discount, and I don’t blame them. Money is sooooo available that there is absolutley no need to go this route. Note buyers have a place, but I don’t need them messing with MY bottom line.
A tool to use when and where appropriate - Posted by Michael Morrongiello
Posted by Michael Morrongiello on February 16, 2001 at 15:19:01:
Ayn,
I presume you goal is to Sell your renovated properties fast, and still get cash? or do you prefer to wait for that elusive “qualified” buyer to turn up?
There is a “bottom line” cost associated with waiting months to close and fund on the sale of one your properties that you have your funds and profit tied up into, or to make a “quick nickel of profit” today and moving on to the next deal.
We believe the FASTEST way to sell just about any property is to offering SELLER FINANCING as both a marketing and financing tool.
Notes have their place in the tool chest of the savvy property rehabber. They are NOT design to supplant other financing options but to be an additonal tool to use when and where appropriate.
To your success,
Michael Morrongiello
I Disagree With You - Posted by phil fernandez
Posted by phil fernandez on February 16, 2001 at 14:32:40:
Ayn,
You might not be structuring your owner financed deals properly or you are not talking to the right note buyers. If structured properly and your buyer is an owner/occupant there will be a rather small discount for cash. Perhaps only a 5 - 7% discount. To me this is a small price to pay for the liquidity of receiving cash.
Re: I’ve spoken with note buyers in the past … - Posted by Terry (IN)
Posted by Terry (IN) on February 16, 2001 at 12:43:43:
Ayn,
Sounds like you live in a “Seller’s” market. If you do, that’s great. For those of us who aren’t fortunate enough to be in that situation, by offering owner financing, we can normally sell quicker and realize more profit than any other way we could sell. You don’t need to accept a BIG discount. In fact, it’s possible to structure a note that would result in you receiving 100% of your appraised value. It’s just another way of marketing that may be more cost efficient than you have been led to believe. One thing for sure, you definately don’t have to be concerned about the seasoning issue.
Terry(IN)
Re: I Disagree With You - Posted by Ron (MD)
Posted by Ron (MD) on February 16, 2001 at 15:00:05:
Phil,
You say that when a deal is structured properly, the notebuyers discount should be in the 5-7% range.
I’d be interested in an example. When I’ve looked into this approach, I have found that notebuyers will, in fact, take a small discount (or none at all). However, to “structure the deal properly” enough to get a small discount the buyer has to be qualified enough that they could simply get FHA financing and they have to take an interest rate much higher than they could qualify on a normal FHA loan.
Please give an example of “proper structuring”. A buyer today can get FHA financing with a credit score in the high 500’s, 7.25% interest rate, and 0 points. If I’m going to use your approach, what should I expect those same numbers to be?
I truly would like to avoid traditional lending sources, but I think I can find an FHA-qualified buyer easier than I can find a near-qualified buyer willing to pay a $800 / month mortgage payment when the guy next door (and the tenant down the street) are paying $600.
Ron Guy
Terry, can you give us an example… - Posted by Vic
Posted by Vic on February 17, 2001 at 01:37:49:
… of how you would structure a note to get 100%.
Who would you sell this note to? What kind of credit scores would the buyer need? What kind of terms?
You say you have a notebuyer that will use the appraised price instead of the purchase price?
Can you fill us in a little bit on who this would be that would buy this kind of a note?
Thanks,
Vic
Re: I Disagree With You - Posted by phil fernandez
Posted by phil fernandez on February 16, 2001 at 19:24:02:
Ron,
Like you many buyers don’t want to deal with traditional lenders and are willing to pay higher rates for this.
Your buyer might not fit into the FHA mold in qualifying for a mortgage. Maybe his downpayment is difficult to verify. Maybe he has another house that he has to sell in order to qualify for his new loan. Maybe he has been transfered into the area and needs housing right now, not in 6 to 8 weeks it might take to push a FHA loan app through. And there are alot of people that are intimidated by the traditional loan process. They may feel that the banks are asking them to go through too many hoops and want a quick, fast easy closing. How about the guy that is self employed. There are tons of reasons why someone would be willing to pay on a higher mortgage payment than to deal with the banks and FHA regulations.
As far as structuring note buyers want to see 5 - 10% of the buyers money in the deal, decent credit, ( not perfect ), an ability to pay back the loan, job history and owner occupancy. In today’s marketplace perhaps an interest rate in the 9 - 10% range would be required for a small discount.
Just some quick thoughts on the subject.
Re: Terry, can you give us an example… - Posted by Terry (IN)
Posted by Terry (IN) on February 17, 2001 at 11:43:46:
Vic,
In order to make this work, you first have to know the appraised value of your home. You will be required to have the home appraised by an appraisal firm approved by the note buyer prior to marketing. Let’s assume that your home appraises for $100,000, that your buyer can qualify for 90% LTV and that your buyer has a total of $12,000 to cover down payment and closing costs. Typically, closing costs using a note buyer will be $1500 or less. That would leave your buyer with $10,500 for a down payment.
Let’s say the note buyer will buy your note for $82,800. You then add the discount (in this case $7200) to the appraised value of the home, giving you an adjusted price on the home of $107,200.
So, in this case, you would net $93,300 cash at closing ($82,800 from the note buyer and $10,500 down payment). You would also create a $6,700 second lien for a total of $100,000.
Your buyer will have a first lien of $90,000, a second to you for $6,700, with a down payment of $10,500 for a total of $107,200. Your buyers rate on the first lien would be in the 10% range with a 30 year amortization. The second lien will be whatever terms you and your buyer agree to.
Hope this helps and is not too confusing. If you need further clarification, email me.
Terry(IN)
Inflated sales price -not the way to go - Posted by Michael Morrongiello
Posted by Michael Morrongiello on February 18, 2001 at 14:00:13:
We have bought thousands of seller financed mortgages (trust deeds, contracts, etc.) over the years in just about every state in the Union including Hawaii and Alaska. We review, underwrite, and fund deals principally.
If one is selling a home that appraises for $100,000.00 (regardless of WHO appraises it) for in reality an inflated $107,200.00 sales price to a prospective buyer and then induces a note investor to come in and purchase the seller financed $90K 1st lien based upon the buyer having 10% “REAL EQUITY” into the property by virtue of their cash down payment, when in reality that buyer has NEGATIVE equity in the property, if this is NOT fully disclosed to the parties buying the paper then I would consider this scenario tantamount to committing lender fraud.
Additionally, very few investors in seller financed paper will look favorably upon buying a 1st lien note where the buyer has a property over encumbered with debt. They owe more against the home than the property is actually worth.
Down the road, when that debtor wakes up and trys to either sell or refinance their property and it dawns upon them that there is NO equity that exists in the property, there is little incentive for them to keep paying on the debt and often this is a prescription for default.
Depending on your marketplace when you sell property and offer to finance it, you SHOULD get TOP “Retail” dollar for your property as its sales price. However TOP DOLLAR does not mean an INFLATED “retail plus” sales price.
There are so many ways to make deals happen. I would cautiously consider putting together a deal that is not above board and “safe” for the payor on the mortgage(s), the property seller, and the note investor. To operate any other way “Your candle may burn bright for awhile, but it won’t burn very long…”
To your success,
Michael Morrongiello
So, In Essence What You Are Doing… - Posted by Vic
Posted by Vic on February 17, 2001 at 21:18:55:
…is adding the discount on to the purchase price. So, the buyer pays over the appraised value so that the seller ends up getting what they originally wanted.
Got you!
But as a seller you would then have another problem. What happens if this seller defaults on the second. As the second note holder, would you really want to foreclose on a property like this, where if you did foreclose, you’d have to make those high interest payments on the first?
Seems to me that if the buyer defaults on the second, there’s really not a whole lot you can do about it.
Am I missing something?
Vic
Do you disclose the “adjusted price” … - Posted by Ayn
Posted by Ayn on February 17, 2001 at 14:23:25:
surely the ultimate note buyer will want to know.
Also, having been a mortgage broker for a short time, I can tell you that an appraisal from “…an appraisal firm approved by the note buyer…” can potentially be substantially less than what an FHA approved appraiser would come in with.
Ultimately, there is a built-in discount with a note buyer, where there isn’t with a conventional lender. Regardless how many smoke and mirrors you use, the discount will show up in the sellers bottom line.
Re: Inflated sales price -not the way to go - Posted by Terry Best
Posted by Terry Best on February 18, 2001 at 18:01:48:
What I explained is a way for a person to do an owner financed deal, sell the first lien to a note buyer and wind up with 100%+ of the appraised value. This is one program that is available to me through my note buyer. So, my investor knows and my buyer knows. I’m not doing anything fradulant. Now, I’m not saying I can do this with every deal, but it can and has been done.
Michael, I’m suprised that Sunvest doesn’t offer a comparible program.
Terry(IN)
Re: So, In Essence What You Are Doing… - Posted by John D.
Posted by John D. on February 18, 2001 at 15:26:04:
True, but in most cases a small second behind a large first to a credit impaired buyer is worth little more than the paper it’s printed on anyway!!
Re: Do you disclose the adusted price - Posted by Terry (IN)
Posted by Terry (IN) on February 17, 2001 at 15:11:20:
Ayn,
Yes, we do disclose the adjusted price. A couple of things to ponder: We are attracting folks who have been or suspect they will be turned down by conventional lenders. These buyers are willing to pay greater than appraised value for the home because they see this as possibly the only home they can get into.
Also, if someone is qualified for conventional financing, are they going to pay full appraised value for the home? It’s not likely unless you are located in a hot sellers’ market. Unless they’ve absolutely fallen in love with your home and just have to have it, if you’re not willing to budge on your price, they’ll simply go on to the next.
This is by all means not the end-all in financing, just another tool that you might consider adding to your arsenal.
Terry(IN)
Re: Inflated sales price -not the way to go - Posted by Michael Morrongiello
Posted by Michael Morrongiello on February 18, 2001 at 19:58:03:
Terry:
We prefer to purchase seller financed notes where the borrowers down payment counts and establishes equity in the property for them. We find that a debtor who has put their money at risk, and has some established equity in their property is more likely to fight, claw, and scratch before losing their equity and their investment.
In most of the default situations we have been involved with, statiscally there is a far greater incidence of them where the debtor has little incentive to stay and keep making payments. When you “strip” away any equity that debtor has in his/her property you leave them limited options if or when a problem develops.
Sunvest has in the past and will continue to consider a seller financed note where a “negative equity” scenario exists, however it is doubtful that we would fund a deal under those circumstances at a high exposure level.
I guess thats what makes the world go around, “different strokes for different folks…”
Warmly,
Michael Morrongiello
Re: Inflated sales price -not the way to go - Posted by Nate
Posted by Nate on February 18, 2001 at 20:13:54:
Michael,
While I can certainly understand your position, I feel compelled to speak up because I think you may have misunderstood Terry’s point.
Under this program, his housebuyers do have a real (5% minimum) cash equity in the deal. I have actually spoken to him on the phone about this, and my understanding is that although the notebuyer will allow you to price the house slightly above appraised value, everything is disclosed and above board from the beginning, and the buyer does make an actual cash down payment.
Whether or not the homebuyer’s total purchase price (cash plus first trust plus second trust) exceeds the FMV of the home is a separate issue. It may not be a great deal for the homebuyer. But the first trust LTV is established based on the actual purchase price (which may or may not be higher than “appraised” value) and Terry’s notebuyer is clearly comfortable buying notes at that level. The homebuyer, likewise, does have real “hard” equity in the property that they would lose in a foreclosure.
If anyone stands to get in real trouble, it is the holder of the second – which will usually end up being the seller of the property, since those seconds aren’t very marketable…
Regards,
Nate Tassler
Understood - Posted by Michael Morrongiello
Posted by Michael Morrongiello on February 19, 2001 at 11:12:41:
Nate:
I completely understand Terry’s structure of these deals. My position is that financing created where a property is over encumbered with debt is generally not “safe” financing from a standpoint of risk. While it certainly may affect any juinor lienholder in the event of default my main point is that a default is statiscally MORE likely to happen when a borrower realizes they have limited options and little incentive to keep making paymnets on loans that exceed the value of their property. Eventually they “wake up and smell the coffee” and decide it is far cheaper to go rent a more affordable place somewhere else than to continue struggling to make payments on a property where they have no perceived value or equity.
Where possible I choose to participate in getting someone into a home where their likelyhood of continue payment is more beneficial to me (the note buyer), the 2nd lienholder if any through those continued payments, and the actual debtor. There is no reason to appeal to the “greed factor” of having to get the property seller 100% of his asking price, especially since that 2nd lien taken back is so tenuous to begin with.
Warmly,
Michael Morrongiello