Posted by Max W. on December 19, 1998 at 07:24:50:
David,
I understand everything you are saying. However, my point is that there are not any note buying institutions that do this (buy single unseasoned notes at or above par) as a general practice.
Prepayment penalty regulations vary by state and a prepayment penalty is not necessary if they simply buy at a discount.
An institution that could offer par would get a HUGE piece of the simultaneous market and word would spread like wildfire in the broker community. If you know of such an institution PLEASE let all of us know!
Posted by paul(ok) on December 17, 1998 at 14:15:50:
If you create a note on a house that appraises at 100k. You create the note @ 80k then sell that at 90 to 75% Hopefully you would get 10% down carry the other 10%. How do you cover loosing the 8k - 20k?
Posted by Max W. on December 18, 1998 at 07:39:11:
Selling a 80% LTV note for face value (par) is not realistic / common when selling a single unseasoned note to an institutional funding source
( principal discount note buyer). What you are describing is better if structured as a normal loan.
Obtaining par pricing might be easier when selling to a private investor (good idea to get legal advice to avoid potential problems with securities law in your state.)
The spread between the buy price and the face value mentioned in the original post is the discount. Work with the institutional funding source to constuct a note that has a minimal discount ($1,000 minimum discount is not uncommon)
Re: Par pricing is not common - Posted by paul(OK)
Posted by paul(OK) on December 18, 1998 at 10:11:52:
what I was trying to figure(oklahoman for determine), is offering financing or giving a mortgage to myself to rehab or flip. I am really trying to see what everyone else is seeing and I don’t have the correct perspective. If anyone could enlighten me I would appreciate it.
It is realistic, I’ve had Note Buyers offer me more
on the back end when the Interest Rate is Higher than
what they are getting. The note business is extremely
aggressive right now, with brokers fighting over notes
and Institutions going straight to the public. Back in the summer there was a portfolio of notes on SFH (800K). The payors all had bad credit, and the notes were unseasoned. We, thought we would have a chance to broker this portfolio, and make a few %. As it turned
out we were only going to make 1\2-1% on this portfolio,
just wasn’t worth it.
A first lien note with an interest rate at the return and ITV that the buyer wants is common in institutional buying. The property and the buyer must be able to support that. An 11.5% on a C/D borrower note can be sold at par. While the $1000 discount is common so is going thru a broker where the discount is much more.
Posted by Max W. on December 18, 1998 at 15:04:56:
There really isn’t any motivation for institutions to pay par for a single unseasoned note. Portfolios, private investors and very attractive notes with seasoning are a different story. Most major institutions have a minimum discount policy that is usually on their rate sheet. Sometimes it is a fixed Dollar amount and sometimes it is a percentage (1/2 point yield over face rate is common)
Let’s say for example that an institution buys a note at par and it is paid off in three months (a property flip or refi.) They will likely lose money on that deal since they have administrative costs associated with the deal and the payment stream was so short. But, If they buy at a discount (even $1,000) their yield is incredible (on an annualized basis) for that short period of time. Remember, note buying institutions don’t get points (or junk fees) like traditional B/C lenders. These points / junk fees guarantee a return for the B/C lenders if the loan is immediately paid off.
If you know of an institution that buys individual unseasoned residential notes at par please let me know! I will send them all of my business! 98% of the notes I work with fall into this category.
Posted by paul(OK) on December 18, 1998 at 11:17:08:
what is ITV? if a note can be sold at par why is $1000 discount common? So you should try to find an individual to sell the note to instead of a broker? and where does an institution fit into that scheme?
Say you have a payor with good credit and fico, 600,
who would normally get a loan at 7.5%, Notebuyer at say
8%. He can’t get a normal loan for whatever reason,
Ratios, Self Employed, etc. You sell a house to him
10.5% (he really wants the house). The notebuyers
will buy that note at a 101% or so, because they are
concerned about yield and points on there money.
They can put in Prepayment penalties to protect from early payout.
Posted by John Behle on December 19, 1998 at 11:47:27:
The LTV is the “Loan to Value” ratio. For example, if I were looking at buying an 80k loan on a 100k property, the LTV would be 80%.
If as an investor I am offering 70k for the 80k note, then I also look at my ITV or “Investment to Value” ratio that is 70% in this case - 70k invested, backed up by a 100k property.
Sometimes an LTV may be un-acceptable, but the ITV may sway the deal. For example, if the note were 100k and the property value were 100k, the LTV would be 100%. If my price were 70k, then I have a 70% ITV and may still buy the note.