Posted by David Butler on February 27, 2002 at 14:58:05:
Hello Todd,
Lots of unanswered questions to work with here, but the first one would be… “what do you mean you want someone to take over the first?” I thought you sold the property? You have a Payor that is scheduled to take over the first in three years? Who is on the first now? You say you are? Did the Payor take the property “subject to”? Is he listed as primary liability on the senior loan? This sounds like a lease-option, real estate contract, or possibly some kind of wrap? Is the first aware of the property transfer? Can you provide more details as to exactly what you have there?
Okay… assuming it is a clean sale, and you are holding a bona fide 2nd note sitting behind a senior loan of $121,000. The questions that need to be answered should be fairly obvious:
What did the property sell for?
What is the bona fide property value?
How much did the Payor put down?
What is the Payor’s credit history?
What is the Payor’s employment/income history?
Does the Payor occupy one of the units?
What is the operating history for the property?
How long has the property been operating?
What is the rate and terms on the senior loan?
Does the net operating income of the property
cover the debt service?
Can the property carry itself if the Payor defaults?
Second notes are inherently a higher risk note in comparison to senior notes. The answers to the questions above will determine whether or not the note can be sold, and at what price. Keep in mind that note buyers like to see two things in every note transaction… “protective equity” and “Payor hard equity”. Both make a big difference in what is considered a viable note.
Hope this helps, and let us know what you come up with!
David P. Butler