Posted by David Butler on April 10, 2002 at 14:10:23:
You don’t say, but it looks like you are talking about a brand new “green” note, with no Payor equity going into the deal, sitting in second position behind a first that has a balance which is 3.7 times the amount of the second note, with a 100% LTV. What price would you pay this type of note, if you were going to put your money into it? This thought process can often help you see the big picture.
True, the private cash flow marketplace does offer a lot of flexibility, and there are some very risk tolerant players on the field. Still, the objective is to make a profit. Who can make a profit out of this deal? The note holder possibly, if the Payor performs, and/or the market is strong enough to support a foreclosure and resale of the property in event of default.
An investor possibly, for the same reasons as above… but at what trade-off between risk and reward? I know that looking at a note like this, I would want to keep my combined investment-to-value at about 60% to 65% of the property value… maybe 70% if the Payor is Superman (strong credit, solid gold financial statement), and/or preferably, there is additional collateral for the note. As you can see, the first loan amount already exceeds this amount!
This kind of 2nd position note you are talking about is what we commonly refer to as a “throw-away” note, due to the lack of security, the high risk, and the opportunity cost of sitting on a reserve to protect the investor against a default on the first position lien.
How can you profit from it? Depends on what your own involvement is in this thing. Are you the note holder? Possibly you can exchange the note for full value on another piece of real estate or other property transaction. Maybe you can give it to a lender who is willing to accept it for a loan you owe on. Maybe you can use it as additional collateral on another deal you are structuring.
Are you a property seller, looking to sell to the note holder? Perhaps you can accept the note at a deep discount as part of the purchase price, and hope it performs. Perhaps you can accept it as additional collateral for a note the noteholder is asking you to take back in the purchase of your property.
Are you a real estate agent? Perhaps you can factor in one of the possibilities above, to help either a buyer or a seller conclude a transaction.
There are other limited possibilities as well… but, whether they will profit you, depends on the deal. As a note finder… I’m not so sure - because I can’t see anybody (a very hungry, a very ignorant, and/or a very risk tolerant investor)paying more than about $5,000 tops for a note like this . Would he give you a $500 finder fee for bringing him the deal? Possibly. Is that enough to make it worth your while? That’s up to you, right?
Anyway, some things to think about, I hope. And best wishes for working something out here.
David P. Butler