How cheap is cheap enough on this second??? - Posted by Drew

Posted by Sean on February 03, 2000 at 18:58:16:

…I’m just thinking that to a judge it may look like the person filing bankruptcy sold an asset worth $17,500 (from his point of view) for $4,000 very shortly before filing.

Won’t the judge wonder if the transaction was conducted at arms length? Perhaps the judge thinks there’s a secret agreement between the purchaser and seller to share the profits after the bankruptcy is discharged. Perhaps the judge will think the sale is a sham designed to cheat creditors out of their rightful due.

I am not a bankruptcy lawyer. I’m just thinking aloud. I wonder what John thinks.

How cheap is cheap enough on this second??? - Posted by Drew

Posted by Drew on February 02, 2000 at 21:48:33:

Hello to all you cashflow junkies out there!

Just got off the phone with guy that is holding a $17,500 interest only, 3 year balloon, 2nd TD on home worth $185,000. The 1st is for $154,000 so the total LTV is a whopping 93%. Neither he nor the payors have any other colatteral to attach it to. Normally, I would send this guy to the butt-head across town just to waste some of his time (see John, I was paying attention at the bootcamp), but…

…then things started to get interesting. Just for kicks, I asked him what he wanted for it and what he intended to use the money for. He says he intends to file bankruptcy soon (a couple of weeks) and wants to get some cash for his assets prior to filing. He also says he was hoping to get $8,000 for the note. I chuckle a bit and tell him “good luck.” I tell him that his note is worth very very little and he proceeds to talk himself down to $4,000.

Now before anybody tears me a new one, I know John taught me (among other things) not to go over 80% LTV for safety’s sake, but at $4,000 for the note I could be making a 90% return assuming they are able to handle the balloon, a bit less if I renegotiate it with them. I’d bet I can get him down to $3,000 or maybe even less. I mean, 90% is better than most Lonnie deals without the wear and tear on my shocks.

So the question is…should I even be considering this note? Or is this something I should only put “Vegas” money into?

All of your input is much appreciated!


Speculative - but… - Posted by John Behle

Posted by John Behle on February 04, 2000 at 19:42:57:

The LTV is high and you do have a higher risk of them walking away or not being able to make the balloon. At the time of the balloon, they could also even do the Bankruptcy nonsense if they can’t refinance.

So - as you already have - first call it “speculative”.

Now, do you want to speculate on this? First question of course is “can you afford to lose the $4,000?” Some of your risks are:

  1. Can they make the balloon?
  2. How are they doing right now? (how old is the note?)
  3. How stable is the buyer?
  4. What’s happening with property values?

You have another risk you need to look at. That is that the bankruptcy judge could drag that note back into the bankruptcy - and put you as an unsecured creditor. It’s remote, but bankruptcy judges can undo transactions that happen as much as 120 days before a bankruptcy (1 year among relatives). Their powers are broad and I have seen them even throw secured creditors and unsecured creditors into a pool - even several years after the transaction.

So, you could buy the note and not get it. A creditor could even challenge the price you bought the note at and further boost the chance of it being drawn into the bankruptcy.

Now, most bankruptcies have little or no assets and the majority of creditors don’t even show up. People hide assets and transactions all the time and just slide right through. On the other side of things, I saw one bankruptcy a while back where the case went on for about 7 years. The attorney spent that time suing everyone that had been paid any money prior to the bankruptcy. As they settled, he billed it out in legal and accounting fees. Hundreds of thousands in fees, no money returned to creditors (most of which were actually sued for any money they had been paid), and the owner of the company escaped with at least a million dollars in funds.

Bottom line is bankruptcy is risky and un-predictable.

Hmmm… - Posted by Sean

Posted by Sean on February 03, 2000 at 11:24:40:

…will your purchase of this note get disallowed if he files bankruptcy too soon after you purchase it?

Every note is worth something. But let’s be realistic – the payors aren’t likely to be able to refinance when that balloon comes due. Accordingly you need to proceed on the expectation that you’ll have to continue receiving interest-only payments beyond the period of the balloon.

I think I heard that properties are refinanced on average every 7 years. How does that affect your calculation of yield?

Re: How cheap is cheap enough on this second??? - Posted by David Alexander

Posted by David Alexander on February 03, 2000 at 09:11:26:

I’d stay in the range your at if not lower. And be sure and do all your “due diligence” surprises arent fun even if it’s what you wanted, it’s better if it itsnt a surprise. Make sure you check out the status of the first, second and the payors.

Estoppell, Estoppell, Estoppell

David Alexander

Let’s be realistic… - Posted by Drew

Posted by Drew on February 03, 2000 at 18:47:01:


You might have a point regarding the bankruptcy, IF he is sells the note for well below market value. However, due to the LTV and it being in a 2nd position, the value ain’t all that much.

As for waiting for the payor’s to refinance, that would be my last resort. I don’t think I’ll have to wait for the balloon if I offer them a 50% discount to pay it off within the next 60 days or whatever. They save $8,750, I make a quick $5,000 and don’t have to worry about default or refinancing or presidential elections or hem lines . . .

I don’t have a calculator handy, but I think my yield would be pretty good too. :wink:

Of course, if they can’t come up with 50% now, I’d try to renegotiate to get rid of the balloon or at least reduce the size of it by offering to drop their interest rate if they’ll raise their payments. I’m sure John has a few dozen other options that slip my mind right now.


Re: Hmmm… - Posted by David Alexander

Posted by David Alexander on February 03, 2000 at 15:18:45:

Why would the purchase of the note be disallowed. If you’ve already purchased it the money is spent and the original holder is out of the picture??

Please explain. Is this a thought or a real life conjecture.

David Alexander

Thanks David - Posted by Drew

Posted by Drew on February 03, 2000 at 18:51:16:

I hear ya, I hear ya, I hear ya.

Although, should I get an estoppel from the payors since they may be willing to go directly to the seller and pay it off for a nice discount???

Then again, my contract and memorandum could prevent that if it came about. You are probably right.

Thanks David!


See my post above - Posted by John Behle

Posted by John Behle on February 04, 2000 at 19:45:09:

Judges could possibly set this aside - and keep Drew’s money!