High LTV 2nd's to sell property - Posted by matt

Posted by matt on February 12, 2000 at 09:43:45:


Thanks for the response. I thought I left most of the info. in my post but to clarify here’s the full details.

This is a 80/15/5 deal. He’s putting up $3,375 down payment plus closing costs. My 2nd will be at 10% interest, 2 year balloon (settlement coming in?!?), $88.87 per month (30 yr am) on the principal of $10,125. The house has an ARV right around the sales price of $67,500. The lender is putting up 80% of that or $54,000. As David A. said, I wouldn’t be too comfortable ever spending the dollars or time to foreclose on this, if necessary, with such a small spread between the $54,000 and $67,500 value. About the only decent thing I see here is this guy will have some “skin” in the deal at least of around $5-6,000 with his closing costs. Might be hard for him to ever walk away from that (I hope). Thanks to everyone else (Bud, David, Michael M) for your help and thoughts!!

High LTV 2nd’s to sell property - Posted by matt

Posted by matt on February 11, 2000 at 16:49:09:

Hi all,

Just reluctantly accepted another sales contract whereby the buyer has asked me to take back a 15% second DOT. I did this a few months ago and have had no problems, but I’d like to just cash out even if it means taking less (making less).

This is another b/c buyer who is getting a settlement (isn’t everyone these days?) and would like to pay me off in full in 24 months. Willing to pay 10%. I took the deal because I’ll make about 19k on the deal (9k cash and this would be a 10,125 second). Worst case-he screws up and I still took good cash out. Selling the property for full ARV at 67,500…could be worth a few thou more but I’m happy with the price.

My question…what is a reasonable discount to accept here if I sold this unseasoned note at the closing table or shortly thereafter? The broker on the other side has some contacts that buy these and he thinks he can get me 50% of face value (I’d probably take that–$5,000 hit is tough to swallow…but I’ve got more deals in the pipeline).

What do you all think? THANKS!


Not enough information - Posted by Sean

Posted by Sean on February 12, 2000 at 09:32:47:

We don’t have enough information to determine what the right price is for that note. We’d need to know the interest rate, the payment structure, when the balloon comes due, etc.

I just plucked some numbers out of the air, like 12% interest, payments interest only and a 24 month balloon borrower having FICO score of 620-630 and I came up with a price around $6250. I believe that’s a 40% yield.

I suggest you just don’t sell the note unless you can get at least $7000 for it. You’ll be much better off to just borrow against it and use the income from the note to make the payments.

Re: High LTV 2nd’s to sell property - Posted by Bud Branstetter

Posted by Bud Branstetter on February 12, 2000 at 08:59:19:

Good suggestions so far. Here are a couple more things to consider. Spit your note into a second and a third. Seconds up to 90% of value that are aged 6-12 months can be sold better.

Investors continually look for those subject to deals where there is little equity and they can take over payments and L/O until they can get cashed out by the tenant buyer. You have one of those if your buyer defaults. If foreclosure in you state is not unduly lengthy this can be a source of that type of deal. You also need to learn how to tap your IRA to fund some of these small seconds. Your IRA buys one of my seconds, my IRA buys one of your seconds.

You can also use those seconds to buy equity in the next deal or even trade for cars or boats.

If you are impatient(and uncreative :slight_smile: )and want only cash then you are motivated to take the 50% type offers.

WHY take back a “throw away” 2nd ? (LONG) - Posted by Michael Morrongiello

Posted by Michael Morrongiello on February 11, 2000 at 21:58:19:

Lets be frank here. You did what many investors do (Heck, I’ve have even done on occasion) and that is you accomodated your buyers. You helped them into the deal and you were willing to be flexible so that you could sell this home. That 2nd lien you took back is risky, its posistion is tenuous, it sits behind a much much larger 1st lien lender that is in the “drivers seat”. IF the underlying 1st goes bad, or your 2nd lien goes bad, it will not be a pretty picture. You’ll be feeding the 1st lien, and your attorney, while you foreclose on the smaller 2nd lien. With only 10% intital cash put down by your buyers there is little in the way of cushion.

Now you are finding out that cash liquidity & Marketability for that 2nd lien virtually does not exist unless you are willing to DISCOUNT that note substantially to offset the risk.

Obviously the buyers could not meet a lenders qualifying for a 90% loan to value loan or you would not have had to carry back any financing.

My suggestion next time is to consider using SELLER FINANCING to sell your flipper property.

I submit to you that when you are dealing with a B/C type credit borrower who can put down at least a 5% or more cash down payment that a note funder can in most cases ADVANCE more CASH up front to you than a lender would be willing to originate for these same payors.

That means you may not have to carry any 2nd lien at all OR at the very least the amout and size of the 2nd lien that you will carry would be LESS than what you would have to carry had the payors gone and originated a new 1st lien loan through a B/C type lender.

A professional note funder who has lots of experiece with simutlaneous closings and deal structuring can most time assist in this type of transaction.

You’ll get more CASH at closing and don’t have to carry a 2nd lien at all or at the very least the amout of the 2nd lien is lessend. More CASH at closing so that you go out and chase another deal. Isn’t that what you really were after?

Michael Morrongiello

Re: High LTV 2nd’s to sell property - Posted by David Alexander

Posted by David Alexander on February 11, 2000 at 17:30:57:

Then let your your broker buy it. I know that sounds harsh, but unseasoned and high LTV on a small property leaves little breathing room with a b/c type buyer.

Unseasoned probably in the neighborhood of 30 cents on the dollar, give or take. Once it’s seasoned up around 50 cents. That’s based on what I would pay if I were to buy, others may have more input.

David Alexander