Posted by David Butler on May 28, 2007 at 16:35:02:
and no place to go, it sounds like.
I see your short-term objective - you take $10k down, then carry back what appears to be $62,000, wrapped around the existing first, so you then are earning 10% on $260,000, and paying interest of only 5.8% on the underlying $198,000 - for six months? This allows you to essentially earn roughly an extra $693 per month from this property for six more months, or roughly an overall return of about 23% on the $62,000 you have parked in the deal.
At the same time, you want to keep the first in place, apparently for your buyer?! So after the six months, you’ll want to “unwrap” the remaining second note balance, and try to sell it off separately. All in all, not a bad thought process!
The challenge you have here unfortunately is that you are working with a number of issues that make this a “throw-away second” junior position note - the biggest problem being that the senior position note all by itself has used up all the protective equity cushion a 2nd position note buyer needs to see (70% max Combined Investment To Value, after purchasing the 2nd). The senior position loan here is at 73% LTV. So even if I gave you $1,000 for that note in six months, I would still be over the preferrable equity limit.
No question I would do that, if a number of other important questions are answered as well… such as those we discuss in a number of existing threads related to 2nd position paper. But then the challenge is on you of course… why would you accept that kind of discount!
Of course, you could drop the objective of preserving the Subject To loan for your buyer, and simply sell the wrap off to a note investor (depending on the situation, the note buyer may or may not leave the senior in place, if there is no DOS clause in the underlying mortgage, but that won’t do the Payor any good). But the challenge you face there is a very short down with this Payor (5% - assuming excellent credit), and Payor equity through debt reduction won’t get to a minimum acceptable level for a couple of years it looks like. Also, as I mentioned, any DOS considerations that may be in the mix.
The upside is that if you are still investing, you may be able to use this note as valuable future “trade-bait”. Better yet, particularly from a tax standpoint, as additional collateral for acquiring more property.
Using a land trust for a future investment may allow you to obtain a lot of solutions. BTW… if you haven’t closed on the underlying transaction here yet (your purchase of the property from the seller who is on the “subject-to-loan”, using a land trust here could open up another valuable option from gaining use of the equity you have tied up in the deal.
Just bouncing some thoughts around in the short few minutes I had to visit the Forum today. Hope they help some way, and best wishes for your success! And…
Have Fun For A Living!
David P. Butler