Posted by David Butler on September 08, 2003 at 12:52:52:
Hey… there are no “cookie-cutter” formulas for such things. Each will depend on the totality of the circumstances. Many of the issues to consider have been covered extensively in previous threads related to “short sales”, “default”, “nonperforming” and similar terms. Use those terms as your keywords in the “Search” feature at the top of this Forum to pull up these threads, so you can fully explore everything you’ll need to factor in.
To these, you have to weigh your own objectives, and your own capabilities.
A couple of observations here…
You state property is worth $500,000 and that
Combined LTV is $306,000, or 61%
That is right in the reasonable range for picking up a defaulted note, whether the default is in the senior lien, the junior lien, or both. You don’t mention whether or not the junior loan balance you quoted includes the amount needed to cure that note, in terms of bringing that junior note holder current.
Couple of basics here:
When working with junior position paper, you need to be sure you have the stomach and the financial strength to cover up the senior debt in event of default. Obviously this is more so when buying junior paper that is already in default.
You must have a good handle on the local market place, and where the Subject property fits in it. This includes a good handle on typical “turn-around” times for this particular type of property in this price range, in this location.
When working with defaulted paper, you must be familiar with the foreclosure laws of the state where the property is located, and what all the ramifications are with regard to Payor’s rights, defenses, and bankruptcy options.
You generally want to purchase the paper in a manner that compares favorably to purchasing the property outright. Typically, a “distressed property” buyer will try to purchase property at 65% to 70% of FMV, less estimated costs of any rehap or repair. In special situations, they might go as high as 80% - depends on a number of factors. But 70% is the average “target range”.
The thing is, when you purchase paper, you are NOT gaining title to the property, and you face a number of uncertainties related to the issues discussed in the other items above. So, when buying such paper, you normally would be advised to be in a range that might be 10% to 15% less than what you would pay for the property itself, in a “distress sale” situation. That puts the typical range at 50% to 60% of property value. And again, you would deduct any estimated costs for rehab or repairs.
Here, taking 60% x $500,000, you have $300,000 as the total investment to value target range. Subtract the senior debt of $175,000, and that leaves $125,000 to offer for the junior note. Of course, using the 50% figure would take that offer even lower (about $75,000).
Alternatively, based on what you know in relation to the factors described above - you might feel you can pay the bank off in full, and still have one heck of a deal. Only you can know what is the best approach here, again - in relation to your own objectives and capabilities.
Also, as discussed in a number of the threads I mentioned above…
- the bank has a vote here too. To make a deal with them, you are going to have to satisfy there needs and objectives. So, you’ll have to do your homework to find out what those objectives, and the related motivations of the bank, are! Then you have to structure your offer to satisfy your objectives, while still meeting theirs. If that can be done, you have a deal. If not… NEXT!
Hope this helps get you headed in the right direction, and best wishes for your success!
David P. Butler