Re: dealing with UNMOTIVATED sellers - Posted by David Butler
Posted by David Butler on January 09, 2001 at 17:10:36:
I have been pondering on how to answer this for the past day, because of the can of worms it always seems to open up - but you have alluded to several dangerous points that have already been picked up on, and which really need to be addressed.
Before addressing those dangers however, I do want to mention that NO… notes are not the only tool for structuring “no money out of pocket” (or even the less frequent “no money” down) deals (as demonstrated throughout this website, there are many various techniques for structuring such deals)… although they certainly are a prevalent method. And over time, you definitely will want to become as familiar with as many of these techniques as you are comfortable with - so you have a broader selection of options for solving a seller’s agenda.
Now… to where my concern lies. I have discussed the potential legal ramifications of the structure above and attempts to “pass-through” exempt seller carryback financing at some length previously, so I don’t want to revisit that issue at this time. But, the financing issues by themselves raise some questions of merit.
I see some crazy stuff thrown around from time to time, and not being privy to the exact details of another individual’s particular deal structure, I can not “conclusively” state what can or can not ABSOLUTELY be done.
But, I can deal with probabilities… and the likelihood of such a note structure as described in your post, being created and sold to a note investor
for the price suggested - although not as remote as hitting the lottery, is certainly as “long of odds” as randomly picking the winning number at the roulette table two spins in a row - under all but the most exceptional of circumstances!
And those exceptions may generally be found in three scenarios - you are fortunate to deal with either 1) a very ignorant note buyer; 2) a risk tolerant “deep-pocket” buyer who doesn’t have enough notes and too much money to put to work; or 3) an extremely experienced smaller note buyer who is also risk tolerant, and who has found some EXTREMELY compelling factors in the deal that offset the tremendous amount of risk that is apparent on the face of the deal you describe.
Much like the lending business, in the note industry we too see some program flyers frequently, offering some pretty far out rates and terms. Sometimes they pan out, but most are programs that are close to impossible to actually get pushed through. It’s a simple equation of probabilities.
Again, I won’t say it can’t be done… but let’s evaluate some common denominators. Roughly 85% of private note paper can be considered subprime, one way or another. An investor with half a brain knows this, so he is going to set his risk rating accordingly.
Subsequently, he is going to purchase under parameters that mitigate the risk. Now, he might advertise that he will pay up to 96% on the $1.00, (although honestly, 93% is the most I have ever seen truthfully offered), based on the face amount of the note (not the property value). But two things immediately come to mind - property value, and rate of return.
Outside of exceptional circumstances, a knowledgeable investor is going to look at the lower of purchase price versus appraised value, and how we got to that value. And he is going to use that value to limit his exposure in the deal (invested dollars as a percentage of that value). This is especially so in view of the rampant valuation fraud that has swallowed up the industry over the past 18 months.
More critically, is the rate of return. I believe that you will be hardpressed to find an investor that will actually CLOSE on a 90/10 table funded deal, on a Payor with less that 650 credit score… who will accept less than at least 13% as a risk rate of return.
So, unless the nominal face rate of the note is at least that amount, or the term is very short, it will be extremely difficult to get anywhere close to 96 cents on the dollar for a 90% LTV note, IN MOST SITUATIONS, and most particularly on a table-funded deal.
Yes, we have been spoiled a great deal the past five years, thanks to aggressive subprime lenders, and overly aggressive corporate note buyers. And we are seeing the fruit of their craziness, by the ever increasing bloodbath that has already led to a major restructuring in both industries - as many of these high octane players are now drowning in their red ink.
Sooner or later, investors begin feeling the pain - start scratching their heads, and ponder - “what the heck were we thinking about?”
Still, we’ll see some marketing offering some unbelievably wonderful programs - we are still seeing it in subprime lending - but a fellow is better off planning his investment strategies on probabilities, as opposed to counting on financing that technically doesn’t make good common sense on its face.
To get a better feel for working with paper, I highly recommend that you invest $30 in William Broadbent’s OWNER WILL CARRY, excellent primer on the the subject.
Also, I encourage you to have a thorough look at our FREE report, NOTE GRADING/PRICING GUIDELINES, at:
Hope all this helps, and may the Force be with you
David P. Butler