Re: Double check my math?? - Posted by David Butler
Posted by David Butler on February 23, 2001 at 02:13:00:
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
David P. Butler