Posted by David Butler on March 19, 2006 at 11:07:39:
Nice to see you digging deeper, but again - you want to be sure to keep your mind wide open to the fact that deals don’t happen in a vacuum. The circumstances of each individual deal, including time, location, economic factors, objectives of the respective parties, and other “influencing factors” are always present in the equation for every deal ever closed - regardless of the structure!
Also helpful to realize early on what successful note finders and investors learn to recognize quickly. We really don’t explain to anybody “…what is in their best interest to structure a transaction…” in any particular way.
Instead… we endeavor to find out what the parties’ objectives are; offer the possible solutions we see as being viable alternatives - and let them then explain to us why it is in their best interest to do a deal structure in any particular way!
Again, like all things - the numbers must be subjected to analysis, and also to meeting objectives of the parties to each side of the deal.
But, assuming for the moment, just one scenario:
Hard-Money loan @ 100% LTV, with points rolled in, interest only, all due in one year (not always easy to get for many folks, but easy enough for enough folks that we’ll use that structure here).
So… with our $60,000 HML, with points rolled in (using 3% here); we’ll have a total loan balance of $61,855.67, with interest-only monthly payments of $773.20 @ 15%; with a total 12-month cost of $10,360.87 ($8,505.20 interest, plus $1,855.67 in points).
Going the seller-financed route, we give the seller a note for $66,000, paid interest-only at $550 per month at 10% interest; with a total 12-month cost of $12,050 ($6,050 interest, plus $6,000 in note premium).
In the above scenario, the “spread” in costs is $1,689 between the apparently cheaper HML, and what turns out to be the more expensive seller-financed note, in terms of total costs. But now several things to consider:
In THIS scenario, seller’s objectives are moot - he winds up with his $60,000 cash at closing, either way.
We’ll assume too that we’ve met the note investor’s objectives as well, in that he is willing to accept an ROI yield of 19.30% on this particular deal. Given the relatively short time frame, this compares somewhat favorably to the HML’s 17.13% APR (effective rate) for the LOAN SCENARIO described above.
So RE buyer/Payor’s objectives are what’s left here. One obvious potential “benefit” on a short term basis is that the seller-financed note AS DESCRIBED IN THE ABOVE SCENARIO is payable at $550 per month; versus the $773.20 monthly payment described for the Subject HML. Is this $223.20 savings in monthly holding costs a benefit for you on THIS deal? Maybe, maybe not! Only you (or the rehabber if it isn’t you) can ultimately that.
But keeping in mind that Mike wrote his course for a broader audience, it could very well be that this particular deal structure described above is just the ticket for another rehabber. Or a variation thereto, as Mike pointed out in his initial response.
Same thing for a novice just starting out who might be facing an HML in HIS AREA - where the best he can do on an HML is say, $50,000, with 5 points, 18% interest payable monthly and all due in six months.
What if THAT HML requires that points are paid up front? What if the buyer/Payor is not comfortable with only having six months to repay the HML? In fact, what if he knows that only having a six month fuse on his particular deal could blow the whole thing up in his face? What about any other “what if’s” you can think up?!?
As I touched on briefly in my previous response - and in much depth in many related types of posts where we address the need for identifying the objectives of the parties (as have Mike, John Behle, Terry Vaughan, and other contributors over the years) - skilled usage of seller-financing is simply one more tool in your CREI and/or note-finding toolbox.
The circumstances of each deal, and the objectives of the individual parties to THAT deal, at THAT point in time - dictate what structure the deal is going to take at the end of the day.
Hope that helps further, and again, best wishes for your success!
David P. Butler