Posted by Steve (CA) on July 26, 2005 at 11:48:03:
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Paper Investors, NEED YOUR HELP!! - Posted by Steve (CA)
Posted by Steve (CA) on July 25, 2005 at 16:57:04:
Here’s the scenario:
There is a Vacant house owned by a 102 year old woman. She is currently living in a Convalescent Home for the last couple of years. Her Granddaughter is the Executor of her estate, and has been renting out this house since her grandmother moved out. The money received from the tenants was being used to pay for the care of the grandmother. To make a long story short, they want to sell the house now, the house is free & clear and they are asking $370k.
Since the house is paid off, I want to see if they are willing to sell the property via Seller Financing. I figured that this would allow them to continue to collect monthly payments so they can apply the money received for the care of her Grandmother and allow me to buy the house with favorable terms, since I plan on being an owner occupant. But after speaking to the Executor, it seems as if she wants to cash out the equity and disperse it amongst her and her sisters.
Question 1) Can I create 2 notes with a commitment to sell the 1st note at closing, so they get a large portion of cash up front? Example:
Note 1: To Investor
$20K down
$250,000 @ 4% 30 yr. w/10yr. Balloon
Monthly Payment= $1193.54
67%LTV & 5.7% Annual ROI
Note 2: To Seller
0 down
$100,000 @ 0% 30 yr. w/ 10yr. Balloon
Monthly Payment= $277.77
As you can tell, I don’t know much about notes, but I was thinking that even though the 1st note has a low interest rate of 4% and the annual return isn’t yielding that much, it would still be appealing because the Investor would be buying @ 67%LTV. Am I wrong in assuming that? If I am, can any of you Paper Investors offer any suggestions on how I can structure the note so that it is appealing to an Investor & Seller as well as making the terms favorable for me, the buyer? By the way, my FICO is 750, so I don’t think credit will be a problem.
Question 2) Also, where do I find Paper Investors anyway? Thanks in advance!
Steve (CA)
Feeling beat up enough?.. - Posted by Randy (SD)
Posted by Randy (SD) on July 26, 2005 at 10:56:42:
There are numerous ways to structure a “note sale” to achieve your sellers desires while keeping your payments the same. I would agree with some of the other comments that the interest rate is lower than ideal but “paper” is still your best solution. For example adding together the two payment amounts you propose $1193.54 + $277.77 = $1473.31 now to solve for a interest rate based on that purchase price and that payment amount your interest rate would have to be 2.988%, that’s not going to happen. However take that same purchase price $350,000 at 5% payment amount $1471.31 with a 7 year balloon. (Before you ask, the same payment amount results in a higher yield {interest rate} because of the shorter term balloon) aren’t calculators a wonderful thing?
Full purchase $313,948 (all calculations include $20,000 down payment)
All the payments plus one-half of the balloon = $214,173.16 cash today plus $174,349.03 in seven years (grand total $388,522.19)
how about one-half of each payment and all the balloon = $266,749 cash today plus $735.66 monthly for 84 months… The seller gets cash today plus monthly income.
All of these calculations were derived by using your payment amount ($1471.31) with a equivalent interest rate of 2.988% if you amortized $350k. for 360 months. And the note buyers yield is 8%, not great but with your credit doable. Your mission should you choose to accept it is determin what the seller needs, how much cash today? How much monthly income? Or is it the total dollar amount? Of course you can follow the others suggestions and go get a conventional mortgage which if you’re lucky enough to get 6% interest on $350,000 your payment would be $2098.43 it’s your game you choose how to play…
Re: Paper Investors, NEED YOUR HELP!! - Posted by Kristine-CA
Posted by Kristine-CA on July 26, 2005 at 10:27:54:
Steve: the granddaughter isn’t the executor until the owner has died–
there is currently no estate Does anyone have power or attorney to sell
the property? Can the owner sign on her own? Your contract, the deed
and notes will need to be signed by the owner, not the granddaughter
or anyone else–unless they have power of attorney.
Many relatives and potential heirs think they have powers that they do
not. The fact that you are referring to an estate and an executor
indicates to me that this is not your area of expertise either. Tread
carefullly here. Be sure to use title and escrow services. Kristine
Re: Real owner needed - Posted by Ed Copp (OH)
Posted by Ed Copp (OH) on July 26, 2005 at 09:10:58:
You are dealing with a person who does not own the house and can not sell it to you, today. I doubt that you will find an investor under this circumstance. Why not deal with me. I don’t own it either and can make you a real good deal. Just bring cash.
Re: Paper Investors, NEED YOUR HELP!! - Posted by Brian (UT)
Posted by Brian (UT) on July 25, 2005 at 23:17:11:
Steve
You better check with an attorney! This woman can’t be the executor of the woman’s estate, she isn’t dead!
She is probably a conservator, and that requires a specific duty to the owner and the owner’s estate, she shouln’t be dividing up anything at the moment, this money should still be marked for the owners needs, etc. until she actually dies.
Brian
Re: Paper Investors, NEED YOUR HELP!! - Posted by John B. Corey Jr.
Posted by John B. Corey Jr. on July 25, 2005 at 22:53:45:
Steve,
You are approaching this wrong.
They want all cash. How low will they go for a clean, all cash deal? If it is low enough you can borrower the funds and pay them off. You have the credit score. If you can not get conventional financing and the loan amount is low enough (65% LTV or less) you can use hard money to do the deal and then refinance after the value has seasoned.
Selling new paper means selling for a large discount. You will own the face amount but the seller will get the reduced amount. They get less and you pay more.
If you can use your credit to get the deal done you have likely locked in a better price for you and more cash to them.
If you lack a down payment see if they will carry a second with you getting a new first.
BTW - There are some estate planning things going on which you do not want to involved with. You should understand what it all means so you can tailor the solution to the individual needs (and the tax implications, etc). It could be 1 individual will carry a note rather then the group, etc. There is also issues about the long term care for the owner being drain on the estate so moving assets around can shift the burden to the state if enough time passes. Just be aware of the multiple sellers’ motivations. They will not all be the same.
John Corey
Chelsea Private Equity LLC
Re: Paper Investors, NEED YOUR HELP!! - Posted by Stu
Posted by Stu on July 25, 2005 at 21:18:05:
Steve,
Mike is right in that you can expect some discounting on the note in its proposed form. Every note in a simo close will be discounted though due to lack of seasoning. Balloon notes are always discounted much more heavily than fully amortized notes are since the balloon pmt is an added point of uncertainty (cant come up with the $$ or cant refi for some reason). Not to mention the fact you have 2 6 figure (or nearly 6 on the 2nd) balloons to come up with in 10 yrs increases the risk more.
also, with prime in the low 6’s, id be suspect of a note written at 4% int for 10 yrs that you intend to amortize. i personally have only seen int only rates that low. you can get a good rate with your fico score but a little closer to prime and a fully amortized note would get more value in the secondary market.
HTH,
Stu
p.s. id be happy to help you structure your note if you’d like you can send me an email.
Re: Paper Investors, NEED YOUR HELP!! - Posted by Mike (Seattle WA)
Posted by Mike (Seattle WA) on July 25, 2005 at 19:00:22:
As an investor, why would I want to tie up 250K at 4% interest for 10 years? 10 Year T-Bonds pay better much than that. You would have to SERIOUSLY discount this note before I would be interested. Also, how are you calculating that ROI? 4% return is 4%. If you are including your downpayment, the ROI goes to 4.7%.
Maybe other people will disagree, but if I’m going to tie up a quarter million dollars in a non-guarenteed investment (1st position yes, but default is possible), I am going to want a much higher yield.
Re: Paper Investors, NEED YOUR HELP!! - Posted by Steve (CA)
Posted by Steve (CA) on July 25, 2005 at 20:45:44:
Thanks for your imput Mike, so you’re saying that you wouldn’t touch a note structured this way even if it was for 67%LTV or $122,000 instant equity and you were in first position?
I agree with you that it would be a huge risk to “tie up” $250k, and can get a better return on your money with the “less risky” 10 year T-Bonds, but do 10YTB’S provide you the opportunity of acquiring $120k of equity on top of the interest? Mike, help me understand your logic, like I’ve said before, I’m obviously no expert on paper investing, but to me it seems like this risky note has higher “earning potential” than the “conservative” T-Bond. Thanks again for your time Mike.
Steve
Re: Paper Investors, NEED YOUR HELP!! - Posted by John B. Corey Jr.
Posted by John B. Corey Jr. on July 25, 2005 at 22:47:50:
Steve,
What are you talking about when you say ‘$122,000 instant equity?’ As a lender ‘instant equity’ is not always to be believed. If there was a fire sale that equity would get pretty singed.
I agree that 67% LTV sounds good. If it is based on ARV and not on as-is value then the LTV is a whole lot worse. So, numbers out of context can be misleading.
The equity is not exactly the same for the lender as the investor. Investors see ‘instant equity’ and hear paper profits. A lender hears ‘instant equity’ and wonders why the investor was able to steal the deal so cheap. What else is going on? Will the equity be there is the loan goes bad? Was the appraisal fixed. If not appraisal, just who did the comp work and should it be believed?
When you talk about ‘instant equity’ you are warning the lender that something is not right. Investors love to hear about instant equity. They are betting on a positive future. Lenders are assuming the worst and wondering if they can still get their money back.
John Corey
Chelsea Private Equity LLC
Re: Paper Investors, NEED YOUR HELP!! - Posted by Mike (Seattle WA)
Posted by Mike (Seattle WA) on July 25, 2005 at 22:11:10:
67% LTV is great security. I’d consider this a very secure note - even with the balloon, the high dollar amount 2nd, and the high face value. But, the return on investment is just way too low to get my attention. For the price of tying up 250K (non-liquid), I’m gaining 0.5% interest over a ING saving account. That is not enough of a gain for the loss of liquidity (opportunity cost). Also, I do not consider the remote possibility (considering your credit) of you defaulting as adding any additional value. If I were looking to pick up a note for the potential LTV on default, I’d want double-digit yields and hopefully an agreement to obtain deed-in-lieu as the foreclosure process is slow and expensive.
For a strong A paper note, (in which I personally woudln’t invest) I’d want yields similiar to what a 30 year fixed mortgage on a NOO property is at plus a touch more for my trouble - say 6.5 - 7.0%. If the banks can demand this rate, why can’t I?
I know you are trying to structure this note for your best benefit, but you have to make it at least as attractive as what other’s are getting. The sellers are motivated to take a 0% note to get out from under their house. Use that leverage to raise to yield on the investor note to a level where someone will bite and you’ve got a good chance of selling it. Good luck!
Re: Paper Investors, NEED YOUR HELP!! - Posted by Ryan
Posted by Ryan on July 25, 2005 at 21:10:31:
If you have taken microeconomics, there’s a term called “Opportunity Cost”! If you understand what it means then you’ll know exactly what Mike is talking about!
Ryan
Re: Paper Investors, NEED YOUR HELP!! - Posted by John B. Corey Jr.
Posted by John B. Corey Jr. on July 25, 2005 at 22:42:56:
Mike is being kind if he would even consider buying a note offering a 7% yield.
I offer my investors 15% Most like it better then 7%. The notes are short term so they are much more liquid then a 10 year note.
You have to understand. The risk for single point of failure is high. A bank does a lot of loans and can spread the risk. A bank also raises capital at very low rates so lending at 7% is still profitable. There are lots of other reasons. The point is you need to do better.
Terry Vaughan teaches you want to be 2%-4% higher then what a bank will offer (4% higher then CD’s and 2% higher then their par loan). Some of the time you have to do even better then that if the investor who has the cash you need has other investments they could be making at higher rates they you were considering.
John Corey
Chelsea Private Equity LLC.