Posted by DougO(NM) on March 13, 2000 at 13:30:00:
Hi Bud
This is a tricky area, but I have discussed it with several individuals and have reached a few conclusions.
When an IRA buys a beneficial interest in a Trust, that is the asset it owns. The Trustee owns the property, thus the IRA or it’s asset is not being pledged as security. Thus the ability to utilize debt financing. (The hard part is lining up the investor to make the loan)
As far as ubi, this deal barely breaks even, so it falls below that radar screen threshold.
As for selling the note and having to personally gurantee it, as you say, that might or might not ever happen. Who’s to tell ? ; )
I wouldn’t normally do a deal with a balloon in it, but when the lender changes their mind at the closing table, guess I defer to the “Golden Rule”. I did manage to get her to put in an extension clause" Hopefully I’ll get some other deals done and get it paid off anyway.
Thanks for your input
Doug
Posted by DougO(NM) on March 11, 2000 at 18:55:43:
I think I already know what I’m gonna need to do on this one, but thought I would put this out there for you cash flow wizards to see if there might be anything else I should think about. My self directed IRA bought (through a Land Trust)some property, and yesterday when I went to pick-up my private lender to go to the closing, she decided that she wanted to add a 60 month balloon to the note. (Seems she’s been sick the last few days and is feeling like since she’s in her 70’s she shouldn’t do a 15 year note) I did get her to agree to let me put in something like “the balance shall be due and payable in 60 months, unless otherwise extended in writng by the noteholder” Anyway, it’s too late to find other financing or not buy the property, and this really puts a “kink” in my plan. (I bought the deal since I “thought” she was doing a straight 15 year note) The original note is $58,000, 180 months, 8.25%, $562.88n ow with a 60 month balloon. It’s a $70,000 property, we paid $63,000 and put down $5,000 At the end of 60 months the balance will be about $43,000, giving us around $20K hard equity. Since it is a trust (no recourse and other payor friendly clauses in the note) and ultimatley an IRA, and in order to make the deal cash flow anything over 8.5% is pretty much OUT, a refi at a bank, etc. is pretty much out. There is NO WAY this lady would sell the note at a discount (if she’s still with us and I pray she will be) so I am thinking my only option if she won’t extend is to locate another private lender that will think 8.25% and a 60% LTV is “good-enough”. We are setting it up at an Escrow company so we will have a payment history established that we can show a potential buyer.
Anyone think of anything else I might consider ?
Sorry if I’m too detailed here, and thanks in advance for any ideas anyone may have.
DougO
P.S. I just thought to myself that since the note allows for subsitution of collateral with the note holders approval, maybe we could walk the note & mortgage to other property we might own, release the original mortgage, the property in the Land Trust /IRA would then be Free & Clear. We could then borrow against the other property with another entity or personally if need be. See any problems with this scenario ?
Doug:
I don’t see this as a 60% LTV mortgage. You owe $58,00.00 on what you state is a $70K FMV property. Thats 83% LTV in my book. Most private lenders are Equity oriented and want to be into a property at a more conservative LTV exposure level.
It is doubtful you will find another “private investor” to fund this deal at PAR pricing which would represent the 8.25% return unless you cultivate them and wean them away from their “5% passbook savings mentality”.
However IF you have decent credit and you are also willing to personally gurantee the note with a seperate guarnatee document? (you can still own the property in the trusts name) this note after a few months of seasoning could be sold for a minimal 5% discount off its balance.
If your note holder will not take a discount then you can make up the difference to her in cash. (think of it as points) to make her whole. You now have the financing in place and her with her cash in hand and out of the picture.
Posted by DougO(NM) on March 12, 2000 at 14:16:52:
Hi Michael
No, it’s not 60% LTV today, (but then again we aren’t looking to sell it today.) 60 months from now, it will be at that LTV unless prices tank in Santa Fe and in this price range, I don’t think that will happen… I personally have excellent credit, in the commercial world and with all the private folks that we have met over the years at Napiers, Millers, and other RE type gatherings. I don’t anticipate starting to get this thing wrapped up until we have at LEAST 36-48 months seasoning, with the payment history coming right form the escrow company, so that should help. I do know that with loans to IRA property, there can be no recourse, though I will have to delve into the details of the way it’s structured to see what might be done. You best believe I will be cultivating other passbook type folks between now and then, but I like your suggestion. When this balloon pops, the balance will be about 43,000, a 5% discount (off of face value I assume)will only be about $2,150, which could easily be paid out of the IRA at that time. In the mean time, I might discuss some of these options with my lender. It could give us the long term financing we need on these deals and free up her capital for other acquisistions.
Thanks for your suggestions Michael
Doug
The IRA assets cannot be pledged for a loan. I will interpret the private lender as owning it momentarily then providing owner financing. Neither can you legally guarantee it personally. That would be self dealing. You can invest with yourself. With a separate document as suggested no one would ever know. You also need to discuss with your advisors the unrelated business income problem when you utilize owner financing in the IRA.
I do not like to do balloon notes without the ability to extend them. A one year extention for a principal payment of a certain amount or an increase in interest rate. Tony Hoffman used to preach no balloon under 7 years. In that time either interest rates would drop or apprciation would allow a refi.