Note structure - Best terms for Max resale - Posted by DonDE

Posted by Michael Morrongiello on March 30, 2000 at 12:10:32:

Don:
In regards to your questions regarding seller financing;

Question #1 - Why would someone with “A” credit rating use funding two points higher than current mortgage interest rates for conventional or other financing?

A- It happens more often than you think. There are plenty of buyers who are NEWLY self employed, may have excessive debt to income ratios, may be new on their jobs, have had a prior bad experience dealing with a more traditional mortgage lender, or who simply don’t want to be put under a “microscope” when it comes to obtaining their financing. To these people “How much down? and How Much per month?” and the ease of getting them into the home is FAR more important than obtaining the very lowest interest rate in the marketplace.

Just the other day I was presented with a newly created note where these self employed buyers who owned a construction company wanted to purchase the home. They had a 700+ credit score and they readily accepted a 12% interest rate on the seller financing offered.

What you are selling them on is that you CAN get them into the house fast and under a streamlined process. Later on if they decide to refinance to a lower rate loan they can do so since there is NO prepayment penalty in the seller financed loan.

If they want to run the “gauntlet” to obtain a better rate let them, however you will find that many buyers will welcome the opportunity to get into the home FAST even with an Off Market interest rate where along with that financng there are NO points, NO application fees, NO prepaid escrow setup fees, and none of the variety of other lender junk fees.

Question #2 - Basis for using 1st and 2nd (plus significant Down Pymt.) for lesser credit is ???

A- When there are lesser credit & Lower credit score borrowers most lenders and note funders will want to limit their exposure into a property to a comfort level that will be commensurate with the credit. Depending on how severe the credit derogatories are a lender may wish to stay at no more than 65%, or 75%, or perhaps up to 80% (ITV) investment to value.

If you take back a 90% LTV note and the buyers credit really only qualifies him for no more than a 75% ITV exposure then no matter what the terms of that note are, you are looking at least a 15% discount on the note so that note funder can keep their exposure to what is warranted.

However if with that same debtor you START the note’s (LTV) loan to value threshold out at 80% LTV and the credit calls for no more than 75% ITV then you now have limited the discount to around 5% off the note’s balance. The remaining equity you would have as the seller you would take back in the form of a 2nd lien note.

Now ask yourself this question? : Whats better a 5% discount off the note balance or a 15% discount? As a note funder if you want to give it to us, my firm would gladly purchase the same note at the larger discounted amount if it was incorrectly structured at the time of its creation. Deal STRUCTURE that ties in with the proposed payors credit and exposure risk is crucial to mitigating a note’s discount if and when it might be coverted for cash liquidty

I hope the above clarifies some your questions.

Warmly,

Michael Morrongiello

Note structure - Best terms for Max resale - Posted by DonDE

Posted by DonDE on March 29, 2000 at 11:50:34:

Need help setting up terms for my personal seller-financed property. Single family, residential, 3 BR, 1 bath, rural, nice area.

Selling Price - $77,000
Down Payment - $7,000
Years - ???
Interest Rate - ?? %
Monthly Pymt. - $650

Would like to achieve maximum return upon sale of Note and still keep monthly payment of approximately $650 (or less) for the property buyer.

I realize that a high interest rate and short term would be the criteria for a minimum discount, however, what would be acceptable terms for a note buyer in today’s market?

Am considering 1 year L/O with $650/mo., $2500 Option, 25% rent credit in lieu of owner-finance.

Thank you in advance for your time and consideration.

Off the Rack Vs Custom Tailored… - Posted by Michael Morrongiello

Posted by Michael Morrongiello on March 29, 2000 at 20:36:23:

Don:
Brian makes some good points regarding posssible note structure.

The KEY is to setting up this note deal is to find out what the buyers profile is like? What is their employment? How long on their jobs? What is their credit history like? is it well established? What is their FICO or BEACON credit scores?

With the #'s your are working with right now, Why not Keep the monthly P& I payment at $650.81 per month and then amortize out the $70K note over 360 months at 10.70 % . With a buyer that has a positive profile and a credit score in the 650 range (generally an A- type borrower) that note can be sold for 93%-94% on the dollar. With lesser credit then it might make sense to take back (2) two notes. A first lien that starts around the 80% LTV threshold and a smaller 2nd lien that you would retain.

One of the beauties of offering owner financing is that you have the ability to custom tailor the rate and the terms. Another alternative would be to start the payments out at $650.00 the 1st year and then increase them to $700.00 the 2nd year and thereon. I hope you get the idea.

Michael Morrongiello

Re: Note structure - Best terms for Max resale - Posted by B.L.Renfrow

Posted by B.L.Renfrow on March 29, 2000 at 13:58:20:

Don,

I’ll let the note guys speak for themselves, but I just want to point out your statement, “…a high interest rate and short term would be the criteria for minimum discount…” is not completely true. If the terms are otherwise identical, the 30 year note is worth more than the 10 year note, particularly if short-term amortization would result in payments so unrealistic that default would be likely. Because of the time value of money, the note buyer’s yield is, of course, greater for the longer term note.

Since a good portion of the value of a note is based on the payor’s credit, it’s tough to generalize without plugging that into the equation.

Some note buyers like balloons, some don’t; I have found the best quotes from notes amortized over 20-30 years, at 10-12% APR, depending upon the payor.

In your example, the APR would be 10.7%, which would be OK for a good credit buyer, but probably too low if they have any credit issues.

Best thing is to only quote approximate figures regarding monthly payment and interest to your prospective buyers, then call a couple note brokers or buyers and have them run the prospect’s credit and see what terms they need, then structure it accordingly.

Brian (NY)

Re: Off the Rack Vs Custom Tailored… - Posted by DonDE

Posted by DonDE on March 30, 2000 at 08:06:47:

Thanks for the reply Michael.

Question #1 - Why would someone with “A” credit rating use funding two points higher than current mortgage interest rates for conventional or other financing?

I have followed this NG for some time and know I have seen this answer posted, however, you know what time does to the old brain.

Question #2 - Basis for using 1st and 2nd (plus significant Down Pymt.) for lesser credit is ???

Re: Note structure - Best terms for Max resale - Posted by DonDE

Posted by DonDE on March 30, 2000 at 08:29:35:

Thanks for the reply Brian.

Naturally, I agree with your statements. “A high interest rate and short term would be the criteria for minimum discount…” was meant by me to question whether note brokers preferred these terms as opposed to “long term lower interest” notes.

I guess the answer I was fishing for was this…

The monthly quote of $650 for payment was used in the example to indicate the purchaser’s reply to me as to the amount of monthly they could afford in the event of a L/O. This could be sustained over to the note structure or reduced if the purchaser wished to reduce the monthly and adjust the note terms accordingly.

This would then give an indication to all parties concerned as to the way to proceed. My concern was as to what the note broker would consider more desireable to accept.

I am probably trying to “put the horse before the cart”. This is what you get when dealing with “dummies” like me.