Create Note for Down Payment? Large Amount - How? - Posted by Jaime

Posted by John Behle on March 24, 1999 at 19:41:39:

Notes are created for some of the following reasons - not necessarily in order:

  1. The seller needs an installment sale
  2. The buyer does not want to get conventional financing
  3. The buyer can not get conventional financing
  4. The buyer does not know they could get conventional financing
  5. The property is non-conforming
  6. Buyer and/or Seller want to keep some existing financing in place

Create Note for Down Payment? Large Amount - How? - Posted by Jaime

Posted by Jaime on March 23, 1999 at 10:57:46:

We have been looking at an apt building to purchase and the owners do not want to hold a mortgage due to partners ages, etc.

I think purchase price will be about $1,500,000 and we would want to create a note, to be sold at closing for $150,000 or $300,000.

Can anyone tell me what amount note we would have to create, at what interest rate, and how to arrange the sale at closing?

Or, if this is something we can even accomplish for this property.

Thanks in advance for your help.

A very definite MAYBE - Posted by John Behle

Posted by John Behle on March 23, 1999 at 15:48:46:

We don’t know enough to say. There are factors like the value of the property and downpayment that I am going to have to assume. So, without mention of a discount, I have to assume the property is worth the sales price. If it is worth more - that would make all the difference in the world.

Since no down payment is mentioned and you say the owners are not willing to carry any financing, then it looks like you are planning on a nothing down deal with a new loan or assumption of the existing loan.

Doesn’t happen. Not when it comes to creating a note. A note buyer looks at the loan to value ratio and no note buyers in their right mind go much above 80%. Some do, but like I said…

So, a deal can work if you have a down payment of 10-30% or a seller that is willing to take back a “junior” lien. We call that “creating a second and a third and selling the second”.

Unless your property you are looking at is way below market, it isn’t going to happen the way you envision it.

Re: A very definite MAYBE - Posted by Jaime Raskulinecz

Posted by Jaime Raskulinecz on March 25, 1999 at 11:19:42:

Thanks for the reply, John.

You’re right. I’m looking at a property that will probably sell for 1.5 mil. It is worth that, no more, no less.

Sellers are not interested in carrying any paper since they are a partnership and older - want to retire and get completely out.

To get conventional financing I’m going to need 150K-300K, which we don’t have. My thought was to create a note, in order to get 100% (or close to it) financing.

Guess that’s not possible. Of course, it would have to be in second position as well.

Oh well, back to the drawing board.

I know absolutely nothing about notes…


Follow up question… - Posted by Mark (SDCA)

Posted by Mark (SDCA) on March 24, 1999 at 10:35:51:

This pretty much dovetails with the info I got last week. (I want to do the same thing Michael does.) Here is my question: If I have 10-30% to put down, why would I bother selling the note (at a discount). I could go to any mortgage broker and get new financing with no discount. Tks,

Other collateral - Posted by John Behle

Posted by John Behle on March 25, 1999 at 13:36:40:

If you have equities in other properties, you could create and sell notes for the capital you need for this property. You would need to have attractive LTV ratios on those notes.

People mis-understand LTV - Posted by John Behle

Posted by John Behle on March 24, 1999 at 12:15:42:

Of course you would go to a conventional lender if you had as much as 10-30% down. The most common mis-understanding I see about paper is the people that try to get all the financing at the bank they can and then create and sell a high leverage note like a 10% second on top of a 90% first.

Most paper investors are more conservative when it comes to LTV’s than conventional lenders. One of the most common calls I get is from people wanting to do an 80/10/10 deal. I just don’t want a 10% second in back of an 80% first that results in a 90% LTV.

Some paper buyers are sacrificing both their yield and safety right now - so you can find buyers for notes willing to exceed the traditional LTV’s. We just covered that yesterday.

Am I missing something? - Posted by Mark (SDCA)

Posted by Mark (SDCA) on March 24, 1999 at 13:00:53:

If I have 10% down, then I go to a conventional lender.
If I don’t have 10% down, the note investors won’t take my note.
Why would I ever create and sell a note??
(The only examples I have seen were JP’s example of buying at extremely, EXTREMELY low LTV and a case where the buyer had cash but couldn’t get financing due to bad credit, insufficient time on the job, self-employment etc.) Is that it??
Thanks again,