Chat Room Transcript - Posted by Rich

Posted by John Behle on June 20, 1999 at 12:56:51:

I’m going to have to read that example so I know exactly what you are referencing. Questions were flying by so quick - my fingers are still tired from typing.

Chat Room Transcript - Posted by Rich

Posted by Rich on June 19, 1999 at 20:14:11:

John, I just read your chat room transcript and have a question. The deal that was used as an example: $100,000 Note bought at $70,000 and refinanced at $75,000. When you buy the $100,000 note and refinance at $75,000 isn’t the $75,000 note a second position debt? Why would a lender want to be in a second position when the first psoition is such a high LTV. Even though the debt is only 75% of the LTV the first note, if it goes into default is the one that would cause the problem. Am I wrong here?


Finance - hypothecate - - - not “refinance” - Posted by John Behle

Posted by John Behle on June 20, 1999 at 13:14:34:

That particular example was an illustration of buying and financing a note instead of buying and brokering. As we discussed the scenario, JohnBoy worked the numbers on his calculator and posted that example when he “got” what I was talking about. Here’s his example:

“Ok, I think I got it…Lets say the note was just created for $100k at 10% for 360 months…that’s $877.57 per month…you buy for $70k and borrow at 12% $75k…you put $5k in your pocket and your payment to the investor on $75k at 12% is $771.46 per month…you get $106.11 cash flow plus the $5k up front and that’s with doing nothing more with the note and letting it go the full term which is unlikely…and if it pays off early you c” (he was cut off somehow)

It’s not a matter of refinancing the note I am buying, it is a matter of using it as collateral for a loan just like you would a property. I buy the 100k note from Sam secured by the property on Pine street. I pay Sam $70k.

I borrow from an investor (Jim) secured by the note. That is a process called “hypothecation”. I use the note as collateral and borrow $75k from Jim. Jim has the 100k note as collateral, but this in no way affects the note or the payor on the note. He still pays as normal like he did to Sam before Sam sold the note to me. I or a third party collect the payments and pay Jim the investor and pocket the difference.