PERFORMANCE MORTGAGE? What does one look like? - Posted by jerry

Posted by jerry on July 07, 2002 at 14:47:19:

I just carefully read the 5-page Sheets mortgage form. I crossed out Mortgagor and wrote Obligor, crossed out Mortgagee and wrote in Obligee. They are hereafter referred to as Borrower and Lender, which I am leaving, since they are used throughout the document and right from the getgo, we’ve straightened that out, right?

In your example, which I think I understand clearly, you use an option price of 82k and FMV of 100K, so your P.Mortgage is for 18K. What if you’re giving the guy FMV (100K). Would there be zero amount?

Further, If FMV is now 100K and my option price in three years is 82k, but I expect the FMV at that time to be 120K, wouldn’t I (in your example) add 20k, because at the end of my option period, any default of seller’s part (that totally loses me my deal) could cost me the 20k appreciation plus the 18k discount to FMV which = 38K.

Lastly (long applause), where and how do I make reference in the P.Mortgage to the option? Is there an addendum to this or is there an appropriate place to write in: “all covenants contained in one agreement between Obligor and Obligee dated ----”?

PERFORMANCE MORTGAGE? What does one look like? - Posted by jerry

Posted by jerry on July 05, 2002 at 19:48:45:

Based on what I’ve been hearing, there must not be such a thing as a PERFORMANCE MORTGAGE form, since (it seems) the specifics of the instrument are so tightly tailored to the transaction. Can anyone provide me with a sample of what one might look like?

Is it just a contract that says “the buyer is bound to perform the following or…” and “the seller is bound to perform the following or…”? “In the event that yada yada does not blankety blank by such and such date…etc.”

Is that all it is? Or is there a titled document: “Performance Mortgage”? If I understand what I’m trying to accomplish do I or my lawyer author this thing differently for each deal?

Re: PERFORMANCE MORTGAGE? - Posted by Brian M. Powers(MI)

Posted by Brian M. Powers(MI) on July 05, 2002 at 20:47:36:

before we talk about what a performance mortgage looks like jerry, do you know what a performance mortgage is and what it is used for?
BMP

Re: PERFORMANCE MORTGAGE? - Posted by jerry

Posted by jerry on July 06, 2002 at 24:25:42:

The extent of my understanding is that a performance mortgage is something that your seller might give you if he guaranteed you that his property would support a rental of X dollars per month and was willing to forego some level of remuneration to the extent that it did not. Or, in another example (if I’m anywhere close in my understanding), this instrument would somehow prevent a seller from invoking other lien-bearing encumbrances on a property you have under contract. I guess it calls for the performance of certain actions by a party to secure the other’s agreement to the note. Obviously, I’m missing some important information here, so rather than make me guess, would you please explain it for me? Thanks.

Re: PERFORMANCE MORTGAGE? - Posted by William Bronchick

Posted by William Bronchick on July 06, 2002 at 09:53:33:

Actually your description is a performance NOTE, which is secured by a regular mortgage or deed of trust. A performance mortgage is described accurately by Brian in the post below.

Re: PERFORMANCE MORTGAGE? - Posted by Brian M. Powers(MI)

Posted by Brian M. Powers(MI) on July 06, 2002 at 06:25:55:

a performance mortgage is a security instrument that secures performance of an underlying agreement, ie a Lease Option. it is stronger than recording a memorandum of option because it makes you a secured leinholder and you can foreclose on the property for non-performance by the seller.
any leins placed on the property after you file the performance mortgage will be junior in position to yours.
you can take the standard Fannie Mae mortgage and then simply add a “performance rider” to it to make it a performace mortgage.
BMP

Re: PERFORMANCE MORTGAGE? - Posted by jerry

Posted by jerry on July 06, 2002 at 16:58:07:

If I L/O a property from my seller and the seller is willing to guarantee me that the property will generate X dollars/month and further that he will not attempt to get any second mortgage loans, is it my seller giving me a performance mortgage? I just don’t understand where this instrument fits into the picture and how it differs from a rider to our L/O agreement.

Re: PERFORMANCE MORTGAGE? - Posted by Jim-AZ

Posted by Jim-AZ on July 09, 2002 at 21:43:23:

Brian,

Could you e-mail me a copy of your rider as well. BTW, where in MI are you located? I recently moved here to AZ from Grand Rapids about 6 months ago. Is MI a good place for creative RE? Thanks.

Jim-AZ

SINCE I STARTED THIS WHOLE POST… - Posted by jerry

Posted by jerry on July 08, 2002 at 17:27:29:

Since I started this whole post with the original question, may I please be included in the list of those who get a copy of a performance rider? Much thanks.
jerry

Re: PERFORMANCE MORTGAGE? - Posted by Dave

Posted by Dave on July 08, 2002 at 15:16:51:

Could you send me a copy of the standard fannie mae mortgage?

Thanks

Dave

Re: PERFORMANCE MORTGAGE? - Posted by Jim

Posted by Jim on July 08, 2002 at 11:07:46:

Brian,

Would you share your PM rider with me also?

Thanks

Re: PERFORMANCE MORTGAGE? - Posted by Craig (IL)

Posted by Craig (IL) on July 06, 2002 at 08:43:13:

Would you please forward a copy of your PM rider.

Re: PERFORMANCE MORTGAGE? - Posted by JohnBoy

Posted by JohnBoy on July 06, 2002 at 19:28:32:

Never heard of a seller guaranteeing their property will generate X dollars per month. That is YOUR job to know your market and know what YOU can generate for rent per month. The seller only guarantees to LEASE his property to you and to give you an OPTION to buy it at a predetermined price accoding to the terms you and the seller agree upon. The seller also guarantees to deliver clear title to you when you go to exercise your option and buy the property at the agreed upon option price. The performance mortgage is your lien against the property to secure your interest to insure the seller delivers clear title. If for some reason the seller tried to get out of selling to you when the time comes, and/or, if the seller caused any liens to be recorded against the property where the seller could not pay them off in order to deliver clear title, you can foreclose on the property because of the performance mortgage you have recorded and wipe any liens out through foreclosure if the seller couldn’t or wouldn’t take care of them to deliver clear title to you as promised. But it has nothing to do with how much you can get per month for the property. That is your problem and up to you to determine that BEFORE you enter into any contracts with the seller.

Re: PERFORMANCE MORTGAGE? - Posted by jerry

Posted by jerry on July 06, 2002 at 20:23:48:

Thanks, JohnBoy, as always. Your patience with my inability to grasp this is appreciated.

Obviously, I’m getting my facts mixed up. I guess everything I’m thinking of in the way of promises could fall into addendum territory - even the sanctions provided for in the performance mortgage, although I guess you can’t record your sales contract with its addendum like you can record the performance mortgage. Apparently, I have a serious learning deficit here.

It seems that as investors, it is easy to invoke (I’ll speak only for myself) a predatory mindset. Well sometimes, it would seem, a motivated seller is telling us how great the house is, how much money it would rent for, how maintenance-free it is, etc. What if you’re giving the seller “50% of all rent over $1,000/month” for example? Is it just a “rider” to whatever contract you arrange that would state the “what-if’s”? I thought that would call for a performance mortgage, but I guess I’m mistaken. What if, for example, there was a huge employer in the area recently hit with huge losses, such as a defense contractor not getting a contract, and fears of layoffs and severe recession. It seems there is something to cover the buyer relying on the puffery of the seller. What, if anything, is that mechanism?

Second, if I were to record a performance mortgage (still not clear on the form it would take), wouldn’t that likely trigger a DOS?

Re: PERFORMANCE MORTGAGE? - Posted by JohnBoy

Posted by JohnBoy on July 07, 2002 at 10:51:50:

If the seller is MOTIVATED then you will probably never be giving them anything over any rent over any amount, period! You will just be paying them X amount for rent, period! If they have equity in the property where they have a low mortgage payment compared to market rents, then you might pay them rent that exceeds what their mortgage payments are.

Example:

Seller has a property worth $100k.

Seller has a $60k mortgage with PITI payments of $600 per month.

Market rents are $1000 per month for a property like this.

You know if you L/O the property to someone you can get $1200 per month.

So you may agree to pay the seller $800 rent with an option to buy the property for $90k.

Or you may agree to pay the seller $800 rent with an option to buy for full market value of $100k, but get the seller to credit $500 of the rent paid towards your $100k option price.

Seller owes $60k which means they have $40k in equity.

You get a 3 year L/O with $500 per month rent credits on a $100k option price.

If you have the property for the full 3 years then you would have 36 months of rent credits at $500 each for a total credit of $18,000.

So at the end of 3 years you would deduct $18k from your $100k option price where you would need to pay the seller $82k to exercise your option.

The seller would get $82k at closing where after paying off his $60k mortgage the seller would walk away with $22k cash, minus any closing costs.

Regardless of what you can rent it for, or what a seller tells you it can rent for, or regardless of what happens with the economy, or regardless of what major employer has a major lay off…none of this is the seller’s concern as far as YOUR liability is involved. That is YOUR problem and up to YOU to know your market and know what any of YOUR risks involved are going to be. Then you work out your agreement accordingly to justify YOUR risks involved as to what you can pay and L/O the property from the seller for.

You don’t say to the seller that you will L/O his property for x amount and then anything you can get in rent over that amount you will pay the seller x amount of that amount over that! You need to already KNOW what YOU can get for the property and make your deal based on knowing that ahead of time.

Lets say you want to offer the seller $600 rent just to cover his mortgage payment and you are willing to give the seller 50% of any rent you can get over $600 per month. You figure you can get $1200 from your tenant/buyer so you would be splitting $600 per month with the seller where you would get $300 and the seller would get $300 over the $600 rent you are obligated to pay.

Well you NEED to already know this is what you can get and if that was the deal you were willing to make then you would just agree to pay the seller a flat $900 rent regardless of what you can get. You NEED to KNOW what YOU can get and base what you will pay the seller according to that. You can’t expect a seller to KNOW these things. YOU need to know these things. MOST seller haven’t a clue as to what they can get. If sellers KNEW all this stuff then they wouldn’t NEED someone like you. They could just do this on their own and make all the profits for themselves.

What you are talking about is you want 100% guarantees. There are NO guarantees! This is why you MUST know your market and know your risks involved and know your limits to how much risk you are willing to take and know how much you can get to justify any of the risks you are willing to take.

The good part about a L/O is that you can structure them as one year terms with the automatic right to renew for 3, 4 , 5 or however many more years you can get that many more one year terms. Then IF the market goes bad where you wanted to get out of the deal you are only obligated to honor however many months are left on that current one year term.

So lets say you are 7 months into the deal where you have a one year lease option with the option to renew for 4 more one year terms. 7 months into the deal the economy dumps, market values dump, you lose your tenant/buyer, you can’t get someone in the property to cover the amount you are obligated to pay the seller each month…the most you have to worry about is covering 5 more months of rent to the seller and then you can just walk away by NOT exercising your option to renew for another one year term.

Now if you can’t cover the rents should you end up in a position like this then you have NO business getting involved with ANY type of deal that requires you to remain in middle of. You NEED to first focus on buolding cash reserves so you can cover this should it ever become a problem. Then you don’t have to worry about about getting into a deal where if the economy dumps and lots of jobs are lost making it impossible to rent the property just to cover your obligations. You would have the reserves on hand to carry you until at least your one year term ends where you can then just walk away with no further liability.

As for the performance mortgage, it looks exactly like a mortgage, but instead of a mortgage securing the repayment of a loan given by a lender, a performance mortgage is a mortgage securing the pereformance of the seller to honor his contract he has with you. With a mortgage securing a loan the lender forecloses if the buyer defaults on making payments, or defaults of paying property taxes, or defaults on paying insurance, or defaults on not maintaining the property, or defaults on any other terms of the mortgage. Same with a performance mortgage only instead of defaulting on a loan with you as optionee, you are secured to cover the seller from defaulting on your contract.

Take a standard mortgage and where ever it says grantor, mortgagor, trustor or borrower and replace that with the word Obligor.

Where ever it says mortgagee, beneficiary, or lender, replace that with the word Obligee.

Then you basically have a performance mortgage!

Will the lender find out about this and call the loan because of the DOSC? They “could” IF they find out about it!

But to find out the lender would have to run a title search. If they run a title search they would see your performance mortgage recorded. BUT! The performance mortgage will just say “MORTGAGE”. So the performance mortgage recorded will just LOOK like any other mortgage where the lender will just “assume” that is a second mortgage the seller must have taken out on the property. The only way the lender will know anything otherwise is IF they READ the entire mortgage agreement. Since it just “LOOKS” like a standard mortgage then it will be unlikely they will READ the thing. They will likely only look at the amount listed to see how much the owner “borrowed” against the property as a second mortgage. But in this case that isn’t an amount the seller “borrowed”, it is just the amount YOU listed as the amount of your interest in the property. The amount of your interest is the difference in the amount of what the property is worth and what your option price is.

So if the property is worth $100k and your option price will be only $82k to exercise your option in 3 years, the amount of your interest in the property would be $18,000. That is the amount of your potential equity that you will have in the property.

IF the lender was to check title and see the “mortgage” recorded, they would see the $18k listed and just “assume” that that is just a second mortgage the seller took out against the property borrowing $18k. But its not really a LOAN the seller took out for $18k. Its really a mortgage the seller gave you to secure his performance that he will honor the terms of your contract you have with him showing the amount of your interest in the property is $18k should you decide to exercise your option in 3 years and buy the property. Only to the lender it just LOOKS like a standard mortgage for a loan. The lender would have to READ the entire mortgage agreement in order to figure out that its really a performance mortgage securing a contract the seller entered into with something that actually violates the DOSC of their first mortgage they have secured against the property.

So this is just another thing that helps to hide the transfer or that the seller sold on a L/O from the lender.

There is no guarantee the lender would never find out or that they would never actually READ the mortgage recorded, its just another step that helps to prevent them from finding out. There is always a RISK involved that a lender will find out. But that doesn’t mean they WILL call the loan just because they did find out. Even if they find out it is unlikely they would call the loan if all the payments have been made on time and the loan is current. It is unlikely they would just screw up a perfectly good performing loan just because the seller sold on a L/O. By calling the loan due over that would just create a good loan turning into a bad loan on their books and cost them money to enforce the DOSC by having to foreclose if you refused to pay them off IF they did attempt to call the loan due. Lenders are in the business to MAKE MONEY, not create bad loans and lose money by calling them due over some L/O the seller agreed to sell the property under. But there is always the “risk” that some lender may be dumb enough to call a loan and enforce it by actually foreclosing on the property. But using a performance mortgage just adds another shield to help hide the fact a L/O exists!

Re: PERFORMANCE MORTGAGE? - Posted by jerry

Posted by jerry on July 06, 2002 at 20:25:53:

P.S. Two minutes later: I STILL think I’d stand a better chance of catching on if I saw a sample of a performance mortgage.