Partials and LTV ratios - Posted by Joseph Turner

Real Estate Investing Real Estate Law
1

Posted by Joseph Turner on June 01, 1999 at 18:27:11:

Sean,

that is exactly what I was thinking…I would think that buying a first with say a balance of 15,000 while a second has say an 85,000 second or whatever would be one of the best/safest investments imaginable (assuming FMV equals 100,000)

Although no one ever answered my original question directly, I guess the LTV would be about 64%.

Assuming the above example, the value of the house would have to decline by 85% :)…its not going to happen. Hell, i would venture to say that there would even be plenty of note buyers out there who would buy that 15,000 first, even if the second equaled 100,000…thus making the total of the loans more than the FMV of the house…it wouldnt matter to the investor since the first would be extremely secure and have seniority over the second.

Someone fill me in if i am way off base with my thinking.

Joseph

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Partials and LTV ratios - Posted by Joseph Turner

Posted by Joseph Turner on May 26, 1999 at 18:10:54:

I wanted to run a patial scenario by you to see if this is
realistic. A seller owns his 85,000 (this is at fmv) house free and clear and wants to
sell and will carry the financing. However he needs 15,000 cash. A buyer
can only afford 5,000 down leaving a note of 80,000. Assume the interest
rate is 11.22% ( I realize that is really high…but it is for illustration
purposes) translating into 775 monthly payments.

If i was to offer the seller 10,000 for the first 3 years of those
payments, would i be able to flip it to another note investor or company
even though it has absolutely no seasoning? The present value would be in the neighborhood of 23,500 dollars. The reason i ask is that it
doesnt seem that risky in that assuming foreclosure, bankruptcy or
default or whatever, the holder of the partial would be compensated no
matter what since his obligation would be satisfied first. Am i missing
something here?

Also, I am a newbie so maybe this idea is not feasible…but could i try to get the owner to take a partial like this:

First = 55,000@ 11.22% 360 pym 532.94
Second = 25,000@ 11.22% 360 pym 242.25

I buy the first four years of the first note for 10,000. The present value = 20,535

In this example, would the LTV now = 64.71%? (ie 85,000-5,000down-25,000 second/85,000 balance)
Also, i could sell the idea like this:

  1. you get your needed 15,000 cash
  2. very little princ. is paid off on first note.
  3. you will subsequently receive the 532 dollar payment for the remaining 26 years
  4. you will still receive some income from the second

I get a great note at a great LTV with a very secure position that i wouldnt have been able to get because the original ltv was 94%

Everyone is happy right? Am i missing something?

Thanks,

Joe

PS-John, this scenario is not utilizing your comepensating note technique that you advise.

PS-John, please disregard my email to you from josephtu@usc.edu

3

Re: Partials and LTV ratios - Posted by Don

Posted by Don on May 27, 1999 at 20:58:31:

Well, here’s a possible scenario:

Sales Price: $85,000
Buyer’s Down Payment: $5,000
Seller carries 1st for $80,000 @ 9.875% for 30 yrs
Buyer’s monthly payment is $695
Investor buys the first 27 payments at a yield of 35% for $12,858
You get a 3% fee of $2,550 paid from the investor’s purchase

Seller gets $10,308 from Investor and $5,000 from Buyer for a total of $15,308 in cash.
When the monthly payments revert back to the Seller in 24 months, the loan balance will be $78,906.

I welcome any comments or observations…I’d like to hear some feedback from more experienced folks about whether this sounds like a real-life workable solution, or if there’s some “gotcha” that I’m not seeing, aside from the balloon (which I know is for clowns). And BTW, I just picked the 35% investor’s yield out of the air…seemed like a reasonable number from the 14-50% yields John Behle has mentioned getting.

4

Well… - Posted by Sean

Posted by Sean on May 27, 1999 at 11:38:29:

…that might work, but if he is looking to generate an additional $10,000 out of the property why not just create two mortgages?

A first for $12,000 a second for $68,000 and he gets $5,000 cash down payment from his buyer. Assume the first has an interest rate of 11.22% (as in your example) with payments of $197.80 a month.

You can buy this first for $10,000 and get a good yield and can immediately resell it to someone else for more money without the difficulty of structuring a partial and the legal headaches that may ensue.

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Re: Partials and LTV ratios - Posted by Joseph Turner

Posted by Joseph Turner on May 28, 1999 at 01:14:08:

Don,

That scenario you gave is a different take and I appreciate your response as it has given me another perspective. Your scenario is very appealing in that they are getting the 5,000 down and the 10,000 now and then 78,000 in 27 months…or 93,000…which is more than the original 85,000. That is definitely a selling point.

What fascinated me about the scenario I posted…was that it also allowed me to provide the seller with some monthly cash flow as well as the large up front cash payment.

However, I am still puzzled about the LTV ratio. Am I correct when I say that the LTV in my original post is 64%? Also, would the note outlined in my original post be easily marketable? Another question I have which is really an offshoot of the LTV ratio is this…since the first mortgage/note is at the 64% LTV ration (assuming i am correct) what could i realistically flip this note for?

Thank you to everyone who posts.

Joseph Turner

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Oops…forget I mentioned a balloon! (nt) - Posted by Don

Posted by Don on May 27, 1999 at 21:01:19:

(:wink:

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Re: Well… - Posted by gino

Posted by gino on June 01, 1999 at 15:50:41:

whose gonna buy a first that has a value less than the second?

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Me. - Posted by Sean

Posted by Sean on June 01, 1999 at 17:28:01:

I’ll buy it. Why not? Both the ITV and LTV will probably be VERY low. Now that’s safety.