Double check my math?? - Posted by Mark (SDCA)

Posted by Mark (SDCA) on February 23, 2001 at 11:31:41:

I appreciate the thought provoking answers. You pretty much re-inforced what I was thinking. (That the financing IS favorable- even with the balloon- and I don’t feel a huge need to play around with it.)
To answer Mike’s question, I KNOW why he needs the cash. He has at least one other loan due NOW and multiple properties in foreclosure. He was 3 years behind in property/personal taxes when I bought the park so I don’t have much trouble believing that he needs to move the note.
As for the cash… I probably could raise cash to pay down to the underlying first (but I don’t think I would do that deal). But I would have to get new financing to buy out the whole note. And I am not sure I want to do that (or even could do that since it is such a small commercial transaction.)

Thanks again!!

Double check my math?? - Posted by Mark (SDCA)

Posted by Mark (SDCA) on February 22, 2001 at 09:03:57:

Could someone double check my calculation on a yield for a note buyout?

The note has a 30 year amortization, due in 15 years. Interest rate is 8.5, payment of 2254.00 per month. Face value of note is 292,500. 3 payments have been made. So I am figuring current balance is just under 292K. The note holder will take 220K for the note today. The yield on that deal is 12.5?? Am I close??
For what it’s worth, the original down payment on the property was 10% and the collateral is a mobile
home park. The noteseller says he has quotes from institutional buyers at 220k I am beginning to wonder…



Re: Double check my math?? - Posted by David Butler

Posted by David Butler on February 22, 2001 at 12:25:46:

Hello Mark,

Well, right off the bat we see one of the problems we frequently encounter in the private note industry. The numbers aren’t right! I’ve run the numbers on both my TI BAII Plus, and my TValue software, and I show the monthly payment for $292,500 amortized at 8.5% over 360 months should be $2249.07, rather than the $2254 you indicated above (doesn’t seem like much, huh? But full term, that difference cuts 3.6 months off of the total payments, and creates a $6286.85 difference in total payments). So we always wind up wasting time trying to figure out what exactly we are buying???

The higher payment amount would slightly front load the contract in this instance, subsequently skewering toward a slightly higher price… but I won’t interpret that it that way. Using the calculated payment of $2249.07 for this note, it would appear the $220k price is right in the ballpark, give or take $2k to $5k.

As a personal note, I would be a little more conservative if I was buying the note - I don’t like to see commercial loans with only 10% down. Based on a price of $220k however (and indicated sale price of $325,000 for the property - if $292500 represents 90%)
the ITV of 68% is acceptable… but I would sure like to see a very strong financial statement on the Payor, and a solid appraisal and supporting 3 year operating history on the property - one that would clearly support at least a 1.2 debt coverage ratio.

If it were me, I think I would likely be looking to price the deal somewhere between $195k to maybe $210k max… depending on review of the Payor and property histories… or, I would look at doing either a partial, of split-funded purchase in order to incorporate a little “space and time” into the deal so it works a little more in my favor in terms of both yield and equity…

I’d feel much better giving him $185,000 today, and a $40,000 final payment in 24 months… he makes more, I make more, and the deal has a lot less risk on my end of it. Plus, if the note is performing, I pay the $40,000 installment on a better note due to the accrued seasoning at that point in time.

Just a matter of personal preference.

Hope this helps, and good luck on your deal.

David P. Butler

Re: Double check my math?? - Posted by David Butler

Posted by David Butler on February 23, 2001 at 02:13:00:

Hello Mark,

Hey… I didn’t work from a “number” per se, other than your numbers (and working around the 12.5% gauge), and measuring them up to some of the limiting conditions I discussed… i.e. $2k to $5k margin, strong financial condition of Payor, strong operating history on the property, and 1.2 debt coverage ratio (and of course, assuming good credit).

And we could go into several pages of discussion explaining the interaction of these factors in making a final pricing decision.

But it is very academic… if you are the Payor. We could cover several pages of that too… like, how would you rate the deal, if you were GRADING the Payor. (if you go strictly off of your own opinion of yourself… you would normally be willing to pay much more for the note, right… settling for 10% or 11% yield, ;-)))

But there is another thought. What the note is worth to someone else really has absolutely no bearing whatsoever on what it is worth TO YOU!.. So, you can pay the seller a price all the way up to the point where it no longer has any advantages for you.

Here’s your frame of reference… you presently have an excellent loan sitting in place. Do you have cash available to pay that loan off? Do you have no better place to put the cash? Under those circumstances, you could literally pay up to a price giving only 9% yield, and be way ahead of your present situation. What if you have to borrow the money? Now, you have to figure in the cost of funds, the term of repayment, and how it dovetails with your present deal.

For example, right now, you have a monthly payment of $2240.07, and a balance owing of $291,964. Just for drill, say you were able to get a 20 year loan at 10%, for $235,000, with $227,000 net at close. You give the seller $227,000 to buy out the note.

With the new loan, your payment is now $2267.80 per month. Hmmm… that’s about $18 more than you are paying now! On the other hand, you traded 357 payments of $2249.07 ($802,918.68), for only 240 payments of $2267.80 ($544,272.21). That’s a $258,646.47 savings if you go full term, AND you have eliminated the balloon payment. On the other hand, you will have some potential taxable gain on the debt relief arising from the discount. I don’t know… is that worth your time?

What about the 15 year mark? Under the current deal, you’ll have a balloon payment of $228,392.53 due at that time. With the note purchase and new loan, you’ll have a balance remaining in 177 months, of $110,801… you’re about $117,500 ahead after the deal… is that worth it to you? Only you know, right? And, you can see that if paying $227k under the circumstances I just described turns out those numbers… well, paying $220k
would generate a much greater spread!

It’s true that other bidders may help set the bar lower for you… and if so, that’s great. But, if not… or the seller won’t break from $220k, who cares? What matters at that point is can you make a better deal for yourself than you already have - by paying off the note, after factoring in whatever you are dealing with (cost of new loan, tax impact, etc.)

Hope that helps… and happy discounting :wink:

David P. Butler

Re: Double check my math?? - Posted by Mark (SDCA)

Posted by Mark (SDCA) on February 22, 2001 at 16:23:13:

The reason for the payment discrepancy is that the note is a wrap and the servicing company takes $5 from the buyer and $5 from the seller each month. So in reality only 2249.00 goes to the service the note.
You say the 220K price is “in the ballpark”. What number told you this?? (I am the payor and am trying to decide if it is worth my time to find the cash to buy out the note.)


Why Cash now? - Posted by Michael Morrongiello

Posted by Michael Morrongiello on February 22, 2001 at 23:41:46:

Other than what David hinted are some possible discrepancies in the repayment terms, I’d say that this note seller is “bluffing” when he says he can get $220K cash for this note.

My KEY question is WHY does he want the cash now? Perhaps some alternative structure can be reach that gets him cash now, solves his problem, and you can make some $$$ brokering your own note that you are paying on.

There was only 10% cash down on this commerical property, the note currently has an outstanding LTV still of almost 90%, there have only been 3 payments paid to date so there limited payment seasoning, and the $220K cash to be paid for the note would represent almost a 70% ITV or investment to value for the note.

While the note holder may have surely received “quotes” for this note, it is unlikely that it will close at that threshold. Since you are payor, what you will want to weighh is what you can borrow or raise $220K cash for as opposed to what appear to be VERY favorable long term repayment terms that exists on the note currently.

To your success,
Michael Morrongiello