Creative Financing Questions - Posted by Inquiring Mind

Real Estate Investing
1

Posted by Michael Morrongiello American Note on December 15, 1999 at 19:15:47:

Here is my take on some of your questions:

  1. Most note funders do not like to see an underlying 1st lien that represents much more than a 3 to 1 ratio in terms of the size of the 1st lien to the 2nd lien. eg. A $75K 1st lien would be 3 x the size of a $25K 2nd lien.

2nd lien notes that are outside those boundaries really have limited marketabilty.

In genral most note funders want to purchase 1st lien poistion notes.

The equity lending side of the mortgage industry has many other flexible 2nd lien programs including lose up to 125% or more of a property’s value.

  1. It all depends on the credit profile of the proposed payor. Some lenders will go up to 80% LTV and allow for a 2nd lien for the other 20% making the combined financing 100% CLTV. Most note funders are not too receptive being asked to purchase a note where the payor has nothing at risk. However if the LTV is under 65% and the credit is strong that is even feasible sometimes.

  2. Balloon payments and interest rate increases on a seller held 2nd lien are typically not a major issue for most lenders. Note funders as well are primarily concerned with the 1st lien note that presumably there are buying?

  3. Somewhere around 50% LTV to 65% LTV a note can be generated and sold with the emphasis primarily on the3 collateral. However other factors have to be looked at as well (payor down payment, payor credit, seasoning, etc.)

  4. It is preferable to have a due on sale clause provision contained in the mortgage and note. Otherwise in evaluating a deal based on a payor who has good credit, if no clause exists, the note funder may end up with a “deadbeat” (trying to be politically correct) payor who “assumes” the debt.

  5. Most note funder do not want a prepayment penalty in their note and encourage early prepayment. WHY?
    Because they are buying the note at a discounted pay price. If the note pays early this “pops” their return somewhat.

Michael Morrongiello
Operations Manager

2

Creative Financing Questions - Posted by Inquiring Mind

Posted by Inquiring Mind on December 15, 1999 at 10:19:17:

The following questions apply to transactions using creative, high interest “money sources” such as note buyers, hard money lenders, personal finance companies, private investors…

  1. Ratio of 1st, 2nd, 3rd mortgages…
    Do most of these “money sources” have guidelines for how small a funded first can be in relation to a seller-held second or third? In general, can a funded first be smaller than a seller-held 2nd or combined 2nd & 3rd? Does a smaller funded first require a larger cash down payment to keep the 2nd from being too big for the comfort of the “money source”?

  2. CLTV of 100%…
    If a “money source” allows a smaller funded first, is there generally a point where the LTV of the first is low enough that the “money source” will not care if the CLTV is 100%?

  3. Balloon payments or interest rate increases for 2nds…
    At what point is a “money source” generally concerned about balloon payments or interest rate increases for seller-held 2nds? 1 year, 2 years, 5 years, etc.?

  4. Low enough to be hard money…
    If a low LTV seller-held first mortgage is sold to a note buyer, at what LTV will the note buyer consider the first mortgage to generally be a hard money mortgage and look primarily to the value of the real estate instead of credit? Can the LTV of the first mortgage be low enough for a note buyer that a new corporation or LLC can be the mortgagor without personal gurantees?

  5. Due on sale with seller financing…
    Do note buyers generally like to see due on sale clauses in the mortgage notes they buy…or can most mortgage notes be assumed later by another buyer?

  6. Prepayment penalties with seller financing…
    Do note buyers generally like to see prepayment penalties in the mortgage notes they buy? If so, how much prepayment?

Thanks for your answers!

3

Re: Creative Financing Questions - Posted by Ed Garcia

Posted by Ed Garcia on December 16, 1999 at 01:33:12:

Inquiring Mind:

I am answering these questions in regards to the lenders that you have addressed
in your posting.

Your questions can only be answered by opinions.

The reason being , we cannot speak for other independent lenders, and so I’m
going to give you a general idea or rule of thumb of someone who’s been doing this
for 30 years.

(1) This question rates with how high is high. As far as first mortgages go, lenders
as a rule prefer to have a first at least $40,000 and above for a first mortgage.

Now if the lender is to do a loan in second position, they want it to be at least
20%, of the size of the first. In California, the lenders that will do a third, will
require more LTV for example they’ll want to be at n 60% LTV rather than 65%
because they have two loans to service in front of them if the deal should fail.

When a hard money lender does a first, they really are not concerned about the
size of the second behind their first. Remember a second protects the first, it’s like
having a co-signer. The other lenders your in reference to such as finance companies,
in the old days we referred to them as PPBs , Personal Property Brokers. For them to
make a loan that has real-estate involved , they think their in hog heaven. Right now
as I’m writing this posting, I’m doing a deal for Terry Vaughans brother at 100%
LTV on an NOO (none owner occupied). So you see each deal is different.

(2) In most cases, this group of lenders are not concerned about CLTV. Their concern
is their own LTV.

(3) If the lender is in first position, they don’t care about the junior loans behind
them. If the loans is written in second position, then of course there is a concern
if and when the balloon payments would come due on the first. The seconds main
concern is that the loan is current on any senior liens in front of it, and any
balloon payment due are after renew date of the second.

(4) On this one your mixing your apples with your oranges. The Note market is no
different than the other lending markets. There are different buyers that would buy at different criteria.
Since you have indicated hard money lenders, you’re telling me that the loan was originated
based on equity and can it be sold that way? Yes, Mike below answered this question with in the
note market he deals in. Remember the note was originated at 65% LTV to begin with and
because it is hard money, you also know that it was written at a high yield or rate. I’m going

to cheat you on this one, and tell you what ever the market bares. The reason
can be as Mike said and the property itself. Is it a nice property or is it a rough property in a
crime driven area?

(5) Due on sale clauses are usually written in every deal. But it the case of hard . money
they are usually ignored. Remember the main reason a due on sale is
written in the deal is because the lender doesn’t want a buyer that is not
qualified. Hard money loan qualifications are equity. I have rarely seen a deal
where they wouldn’t accept the next buyer unless the investor want to be paid
off. In that event with the equity that were talking about, it would be easy to
replace the investor.

(6) Were back to opinion. I saw Mike’s answer in regards to notes. In hard money
the investors can go both ways. In California most of the lenders want a prepay
and will wave it if they want a early payoff. Remember these notes are written . at a high rate to begin with.

Ed Garcia