Collateral Rental - Posted by David Alexander

Posted by John Behle on April 19, 1999 at 12:27:02:

As far as how much to pay, that is a matter of negotiation and you are probably in the right range with 2-4%. Of course it depends on any risk factors, etc. As a matter of practice, I don’t usually offer or negotiate less than 2% and don’t do risky ventures with borrowed money or encourage others to do so.

If it is purely the spread (on a safe deal) that the investor is looking at, then a couple percent could work. When I began, I offered investors more of a spread and a piece of the “upside”. For example, I had one of my first investors that had a minimum of 4% and 50% of the improvement profit on notes that we bought. For added security for the investor, they owned and controlled the notes. Now I view that as too much too give away and I will not broker notes to a private individual.

I will borrow from them secured by the note, but I will guarantee the note(s) and handle collections. If you give control to the investor, they may do a lousy job of note collections and management and then blame you.

I’d approach a collateral rental strategy very cautiously and make sure that the notes are high quality and you are prepared to back them up. There is a different approach between a “collateral rental” technique and “equity arbitrage”. The scenario you desribe is better suited to equity arbitrage. Collateral rental is more of a technique I use to put some less liquid collateral to use. For example, we’ve used it for security for “partials” (compensating note collateral).

Forms of collateral we’ve dealt with in the past range from developable land to Limited partnership equities. Solid assets that may be hard to finance in the conventional realm, yet provide substantial security. Many times it is just added in to top off a deal that already has some other collateral. An example of this is a “risk pool” to buy notes - especially “amortized partials”. Think “Lloyds of Loans”.

Sorry for all the terminology, but your question is about an advanced technique. Most of this can be researched in the archives or we can discuss questions further.

Collateral Rental - Posted by David Alexander

Posted by David Alexander on April 18, 1999 at 23:25:46:

Ok, knowing that everything is always negotiable, what is fair to pay someone for Renting their equity, 2,3,4%. Are their any other advantages? I mean they could rent the property and deal with tenants and toilets.

I mean unless your talking alot of equity the spread Doesn’t give them that much cash flow.

What objections do you get when approaching people for the rental of their equity. No several people with free and clear houses and I believe I can sell them on it if I can show the what’s in it for them factor. Please help me understand some of the objections I might encounter.

David Alexander