Need help...trying to save this deal...create a Note?? - Posted by Tyler

Posted by David (TN) on May 27, 1999 at 13:50:11:


Need help…trying to save this deal…create a Note?? - Posted by Tyler

Posted by Tyler on May 26, 1999 at 16:16:45:

I have a property on contract for $40k which would probably sell for 70-75k if on private contract, but is not bank financable due to poor foundation.

It has a 23k privately held first, and desperate owner agreed to only 17k in equity to get motorhome, pay off bills, and be on their way.

The owner needs payed off by the 8th of June because husband is going into surgery next week and will not be able to return to work. This means she will not be able to afford the 450 payment for June, and wants to pay off the loan before then.

I immediately tried to flip the prop, but I can’t find any investors that are interested because of the fact that it wouldn’t be “bank financable”. I had one guy who was going to buy the property from me for the land which is zoned multi family. The next day, we found out that the city changed the zoning for that area so that he would be limited to only 3 units on the lot, instead of 4-8. Needless to say, he withdrew.

I really want to solve this problem for the sellers, so I’m forced to get creative beyond my experience…

The only thing I can think to do is to create a note and sell it at a discount, but having not done this before, there are a few areas in which I’m unclear. I’ve got a couple buyers from my T/B list that I’m sure would jump at this house at 75k, with 5k down. I was thinking I could maybe create a note at 75, sell at a discount and use the cash to payoff (and try to discount) the first, give the seller her cash, and stick quite a bit in my pocket.
My questions:

  1. Will a note buyer want to buy a note secured by a property that is non conforming?

  2. How strict would they be re the buyer I have lined up? The buyers I have in mind have credit problems, but have the down and the monthly income.

  3. How fast could I realisticly turn this deal around? The note would have no seasoning, and I haven’t sold a note myself yet.

I’m willing to pay her payment next month to buy some time, if I see a way to work the deal.

I would appreciate some direction on this and/or any ideas I may have overlooked…



Re: Need help…trying to save this deal…create a Note?? - Posted by David (TN)

Posted by David (TN) on May 26, 1999 at 16:38:09:

All the notes I have worked with have gone like this…

They take the appraised value ( in your case you hope it appraises at 75,000 ). They usually expect you to put 20 percent down. Then they start discounting the note at 80% depending on the credit and income. They usually want the interest to be 10.5 - 12 percent for 30 years with a 10 year balloon.

So your note would probably go something like this (best case scenario):

sales price and appraised value 75,000
20 % down 15,000
Note created 60,000
best price for note 48,000
monthly payment for $60,000 note 548.00

They can do a simultaneous closing ( which eliminates your seasoning problem ), but their credit history could cause them problems with the interest rate. As for the fact that it is non-conforming, I have created and sold a note that was non-conforming and didn’t have any problems.

These are my experiences only, they may not work for you, but I wanted to share what I have encountered !

Good luck !

Re: Wow! - Posted by JPiper

Posted by JPiper on May 26, 1999 at 21:31:43:

You’re saying your notebroker would discount a $60K first mortgage (10.5%) which is 80% LTV to $48K??

You’re dealing with the worst note broker on earth. Nothing personal here…but that’s how I see it if that’s what you really mean. That’s a 20% discount! That puts the ITV at 64%. I’d ditch that notebroker immediately if not sooner. You’d be better off using a non-conforming loan.


Re: Need help…trying to save this deal…create a Note?? - Posted by Tyler

Posted by Tyler on May 26, 1999 at 18:32:42:


Are you saying that they typically won’t go above 80% LTV, or that I would actually have to come in with the 20%??

The latter seems unrealistic, but this is all new ground for me…


Re: Need help…trying to save this deal…create a Note?? - Posted by Bud Branstetter

Posted by Bud Branstetter on May 26, 1999 at 17:02:02:

Your note value is in order but it is more because they would only fund 80%. Even with B/C credit buyer you should be able to sell that note much closer to the 60K than the 48K. With higher credit scores the ITV goes up and the rate goes down so you can get more money.

The problem here is that with a foundation problem even a note buyer may balk because an appraiser may comment on the problem and discount because of it. I would also be contacting the first to see if anything can be worked out.

Re: Wow! - Posted by Rick Vesole

Posted by Rick Vesole on May 27, 1999 at 24:04:53:

Jim, not really so bad of a discount. The investor makes 14.379%. I would want more discount than that if the buyer has rotten credit.

Dead end? - Posted by Tyler

Posted by Tyler on May 26, 1999 at 18:12:00:


I’ve thought about contacting the first about discounting, but beyond that I’m not sure how they will help. The bottom line is, I need to get the owner 17k in cash.

You also mentioned that the note buyer may balk at the foundation dilemna, as I suspected. Do you think it would be difficult to find an exception to this?

I don’t want to put any effort in a direction that is likely a dead-end…


Re: Wow! - Posted by JPiper

Posted by JPiper on May 27, 1999 at 24:20:43:

I hear that Rick…but as a seller I’d rather do a nonconforming loan…pay his closing costs for him of maybe $2500…versus take a $12K beating on a note discount.


Foundation - Posted by Bud Branstetter

Posted by Bud Branstetter on May 26, 1999 at 21:58:41:

I sold a house with a definite slope on the slab. It was divulged to the buyer and the appraiser didn’t say anything to the non-conforming lender. You could get a option to buy, get estimates to repair and sell if it is not too bad. Or fix with escrowed money if not too much. Their date is strictly artifical.

Re: Dead end? - Posted by JPiper

Posted by JPiper on May 26, 1999 at 21:25:58:

Maybe I’m missing something here. According to what you’ve posted the owner didn’t say she needed the loan paid off and $17K…she said she couldn’t afford the $450 payment in June because of the surgery.

Can you figure out a way to handle the $450 payment?

What’s wrong with the foundation? Do you have an estimate on the cost to fix it?

This house can be sold “as is”…but that won’t put $17K cash in the owner’s pocket. So what? What’s she going to do? What happens if she just can’t sell? No one else is going to buy this prior to June 8. Look’s to me like she has a big problem. It’s her foundation problem…not yours.

What if you can get the payments made for her?

Right now it seems to me you’re going down the wrong road.


Re: Wow! - Posted by David (TN)

Posted by David (TN) on May 27, 1999 at 08:37:24:

I work with American Note buyers ( they have a banner on this site ). I think that is the typical discount for someone with B/C credit.

I also would rather go non-conforming (that was the point I was trying to make !!) :slight_smile:

Re: Dead end? - Posted by Tyler

Posted by Tyler on May 27, 1999 at 01:54:13:


I keep reading over your post, trying to figure out what to conclude from it.

You have emphasized an important point, which is that she has a big problem if she can’t make her payment in two weeks. This is very true.

Under the circumstances, however, I’m not sure what she would do. I can make her payment for her, but where does that put her? And me?

I’m still unclear of my exit, and that is the problem.

Re: Wow! - Posted by JPiper

Posted by JPiper on May 27, 1999 at 10:58:27:

As I reread my post this morning I thought it sounded a little harsh…sorry about that. Nothing personal intended.

My stance has been that these discounts on notes usually exceed the closing costs on non-conforming loans. I’ve yet to see the advantage of the note sale process on newly created notes versus non-conforming loans.

This particular discount though exceeded what I typically HEAR (note the stress on hear…I don’t know what discount is actually being DONE)…which is 90-95% of face value on an 80% LTV note. So I guess it surprised me.

Anyway, if the discount was $12K I wouldn’t do that particular transaction.


Re: Dead end? - Posted by JPiper

Posted by JPiper on May 27, 1999 at 10:17:34:


What I’m getting from all this is that this house may be unsaleable??.UNLESS, there are different terms?.or a different price.

No where in this thread do I see an estimate of the cost of repairing the foundation. But certainly the cost of that particular repair is vital to knowing what this house is worth. Someone somewhere in your location will probably buy a house, all cash, that needs foundation repair?.but it’s going to have to be priced accordingly. Here’s what drives the value of this house?.the after fixed up value and the repairs. Here’s what doesn’t drive the value?..when she needs the money because her husband is having surgery. Hard?but true.

You said you could sell this for $70-$70K on a “private contract”. Fair enough?.that solve ONE problem of the seller?.she can’t make the payment in June. She sells to you on terms?.you sell to your new buyer on terms.

Bottom line here is that this is a classic case of what the seller WANTS and what the seller NEEDS are two completely different things. She WANTS her loan paid off, and she wants $17K by June 8. She NEEDS that payment made in June.

You may have a contract here which didn’t reflect all of the facts. Now you know the foundation situation. So now you have to go back and RE-DETERMINE quickly what the facts are concerning the repair of the foundation. Following that assessment, you may need to restructure your deal. She’s either going to have to sell on terms?.or she’s going to have to sell at a price which reflects the repairs of the foundation.