Question for Michael Morrongiello - Posted by Newbie

Real Estate Investing
1

Posted by Michael Morrongiello on February 03, 2001 at 11:17:39:

Mike:
This is an issue that that cannot be addressed fully in such a short forum as we have here.

The interaction of the following variables will determine how to best structured a marektable note:

Property type, conditon, location, use, occupancy, Proposed payors cash down payment, Proposed payors overall credit background, credit scores, employment, stability on their jobs, and then ofcourse the actual repayment terms of the note; its interest rate, starting LTV %, amortization, balloon or no balloon, etc.

The dynamics of how these variables interact with one another is going to direct you as to how to optimize the structured of a seller financed note that you may wish to liquidate.

For more detail info, you may request a copy of the latest FREE REPORT “Creating Marketable Notes” simply by sending in a request.

To your success,
Michael Morrongiello

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Question for Michael Morrongiello - Posted by Newbie

Posted by Newbie on January 26, 2001 at 08:11:26:

Hi,
Sorry to drag up old stuff, but I was searching the archives, just trying to learn and absorb, and I ran across a post of yours that I have 2 questions about. I quoted the post below:

"YES it is possible to purchase the home and close with your seller (with American Note’s) using our money, and then sell it at the same time for MORE than your purchase price to an owner user buyer who intends to make this home their primary residence.
Here are some general Guidelines. Remember I say GUIDELINES as there is a tremedosue degreee of Flexibility:

  1. The value of the property will have to be verified with a FULL BLOWN appraial including interior inspection by an appraiser approved by us.

  2. The payor will have to be fairly “clean” with good employment stability, credit, and evidence of their income (pay stubs, W-2’s, etc.). If self employed then they usually must be in business for a while.

  3. The cash down payment from the ultimate buyer will have to be documented some way.

  4. Finally, as a prudent note funder we might limit the amount of cash we are willing to invest into a deal like this as a safety precaution. It has been suggested that some of your “profit” may have to take the form of a 2nd lien that you would retain and collect monthly income from. All in all that is not too bad to create an income stream like this from nothing but the creative thinking and foresight to make match the parties together."

My questions:

  1. It sounds like the requirements you place on the buyers would make them eligible for conventional financing. If so, what then is the advantage of doing the deal using American Note’s money?

  2. If I (the investor) hold a 2nd lien, as described in item #4, and the buyer ends up declaring BK, do I then lose that money or do I still have some recourse?

Thanks so much for your time.
Newbie

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Re: Question for Michael Morrongiello - Posted by Michael Morrongiello

Posted by Michael Morrongiello on January 26, 2001 at 20:57:24:

Newbie:

First Off, I am NO Longer with American Note. That company to my knowlegde is no longer in business, or is not in business in the same structure as they were previously.

My firm is Sunvest Corp. - a company that has been around a long time (over 17 years) and still purchasing real estate paper as a portfolio investor.

We all were a “newbie” at some time or another, so NO question is a foolish question. I also constantly learn new techniques, concepts, ideas from interfacing with others, so ask away.

Now to address your issues, Ihave answered in CAPS, not to shout but to simply distinguish the response from the question, please forgive me:

Your questions:

  1. It sounds like the requirements you place on the buyers would make them eligible for conventional financing. If so, what then is the advantage of doing the deal using American Note’s money?

THE UNDERWRITING REQUIREMENTS ARE NOT THE SAME AS A TRADITONAL MORTGAGE LENDERS. THERE ARE NO DEBT TO INCOME REQUIREMENTS, LIMITED INCOME DOCUMENTATION, ETC. ALSO MOST LENDERS WILL NOT ALLOW YOU TO BOTH BUY AND THEN RE-SELL A PROPERTY AND BE COMFORTABLE LENDING OFF THE RAPID AND QUICK INCREASE IN THE PROPERTIES VALUE. THIS “SEASONING OF OWNERSHIP” ISSUE IS A BIG PROBLEM THESE DAYS. ADDITIONALLY, MOST BUYERS EITHER DO NOT WANT TO BE PUT UNDER THE “MICROSCOPE” AND ARE WILLING TO SACRAFICE SCRUTINY FOR SPEED AND THE EASE OF GETTING INTO A PROPERTY.

  1. If I (the investor) hold a 2nd lien, as described in item #4, and the buyer ends up declaring BK, do I then lose that money or do I still have some recourse?

AS A SECURED CREDITOR YOU WOULD HAVE SUPERIOR RIGHTS OVER MOST OTHER CREDITORS PARTICULARY ANY UNSECURED CREDITORS (LIKE CREDIT CARDS, AUTO LOANS, ETC.), SO WILL YOU LOSE OUT? WELL IT IS POSSIBLE, BUT THEN AGAIN YOU MAY GET PAID DURING THE BANKRUPCTY FILING AND ALSO AFTER THE DEBTOR EXITS THE BANKRUPTCY AS WELL.

YOU REAL DANGER IS IF THE UNDERLYING 1ST LIEN LENDER FORECLOSES. THEN YOUR 2ND LIEN MAY GET WIPED OUT. HOWEVER IN MANY STATES YOU CAN ELECT TO ABANDON THE COLLATERAL AN SUE THE DEBTOR UNDER YOUR NOTE.

Hope this helps

Michael Morrongiello

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Re: Question for Michael Morrongiello - Posted by Newbie

Posted by Newbie on January 29, 2001 at 09:01:26:

Thank you Michael for the information. You have been very helpful in clearing these things up for me. Also, further time spent studying these archives and reading many other posts has helped tremendously. What a great resource!
One more question for you. If I wanted Sunvest to help me create a note for a transaction, and then cash out that note at the closing table, would you be able to do it even though I live in MD? If so, how?

Thanks,
Newbie

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“Create a Note”… Important - Posted by Michael Morrongiello

Posted by Michael Morrongiello on January 29, 2001 at 09:50:29:

Brenda:
Always happy to assist.
My firm, Sunvest has been purchasing real estate secured paper on a Nationwide basis for over 17+ years. We have purchased thousands of notes in almost every state in the Union, including Alaska and Hawaii. We invest primarily as a portfolio investor.

The terminology “create a note” is often misused;

We will purchase Real Estate secured notes that are “created” as the result of the SALE of a property. This is commonly called a “purchase money mortgage” or PMM (or a Purchase money Deed of Trust, etc.). These privately held or created security instruments and the promissory notes that they secure are typically exempt from state and federal disclosure requirements, (truth in lending, Good faith estimates, REG Z, etc.) and RESPA (Real Estate Settlement and Procedures Act).

These type of notes are VERY marketable and certainly can be easily liquidated for cash, often at a minimal discount if structured correctly. Sunvest purchases these notes whether they are newly created (sometimes called a “Simultaneous closing”) or where they are “seasoned” and a payment history has already been established.

The term “Create a note” is often misused in the following context and example: You own a home free and clear of any debt or liens that is worth $100K. You now want to “extract” some of your equity in that property in cash. So you consider “creating a note” that would be in 1st lien posistion, perhaps for $65K, that you would now like to sell and convert to cash.

This type of “created note” is akin to what a refinancing might do, it is NOT resulting from the sale of the property (remember the PMM referenced above), it is also not considered a “squeaky clean” scenario, or arrangement, under the circumstances of how and why the note is being created. It begs the question; WHY not simply refinance the property and pull out your cash?..

Bottom line: A “Created note” under these circumstances is generally not considered in the secondary mortgage market as being a very marketable. It will present a lot of problems for one to create the liquidity they desire.

So if you are going to “create notes” - try to create them as the result of a genuine arms length SALE of a property.

Hope this helps

To your success,

Michael Morrongiello

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Thanks Michael - and yet another question?? - Posted by Newbie

Posted by Newbie on January 31, 2001 at 11:15:36:

Sorry to keep bugging you on this. I want to make sure I completely understand the opportunities that exist in this arena. I’m trying to determine if this is a technique that will help a lot of homebuyers in my area who are currently being forced to sell their high-priced homes at deep discounts due to their dot-com business failures.

So say I am flipping a house for a profit to a self employed guy looking for private financing. I want to create a note as a result of this sale and I want Sunvest to help me structure it and then buy it at the closing table. Assuming I can structure it exactly as told, what kind of discount can I expect to sell it for?

Thanks again for all your help on this,
Newbie

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Re: Thanks Michael - and yet another question?? - Posted by Michael Morrongiello

Posted by Michael Morrongiello on January 31, 2001 at 11:28:48:

You are on the righ path. It is very feasible to sell a property FASTER and to expose it to many more potential buyers by using seller financing. However the property seller must be flexible and motivated to unload.

With a properly structured 1st lien note and mortgage (or trust deed, etc.)you can expect somewhere in the low to mid 90% range for cashing out the seller financed note through its sale.

Hope this helps.

Michael Morrongiello

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been doing more reading - is this legal? - Posted by Newbie

Posted by Newbie on February 05, 2001 at 11:01:17:

Hi again Michael - haven’t bugged you for a while, so here goes:
I have been doing more reading on the note broker’s message boards, and have encountered some controversy over using simultaneous closings to sell a note created as the result of a sale. The argument against it is that the seller never intended to hold the note, and so the note is merely a loan disguised as a seller financed note. The argument also is that the note broker (me?) and the note buyer (your company or whatever company buys the note at the table to cash out the seller) would be writing a loan without a license. What is your position on this argument, and is there any validity to it?

Thanks for all your help.
Newbie

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Properly Structured Note? - Posted by MikeA

Posted by MikeA on February 03, 2001 at 06:27:21:

Hi Michael,

First, a sincere thank you for the informative answers on notes. In depth and detailed answers from a working pro like yourself are more valuable than anything I might read in a book.

Would you please define “properly structured note.” How can we make sure our notes are properly stuctured for an easy resale?

Many thanks,
Mike A.

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With correct form - legal yes - Posted by Michael Morrongiello

Posted by Michael Morrongiello on February 05, 2001 at 21:28:11:

There is nothing wrong with purchasing a newly created seller financed note from the seller at the time the property is sold. Could it be construed as a loan and thereby subject to lending disclosures, licensing, etc.? Absolutley it could.

The key is the form and mechanics of how such a transaction is put together and closed. It must be understood by all parties (Buyer, seller, realtor, note broker, etc.) that the SELLER is financing the sale. If the seller is not in the business of regularly extending credit to borrowers then this is considered a Non-“RESPA” (Real Estate Settlement & Procedures Act) transaction and thus exempt from traditional truth in lending disclosures, good faith estimates, Reg Z disclosures, etc.

The fact that the seller wishes to SELL their purchase money mortgage AFTER it is closed also is considered a “secondary market assignment” of a mortgage instrument. It is NOT considered a loan, or origination of a loan.

The HUD -1 settlement statement should reflect the seller as the “lender”. There should be no contractural agreement to purchase a note before it is closed, and the fine tuning of the notes repayment terms, etc. should be done between the buyer and the seller.

Where there might be some potential issues, is where an over zealous note broker attempts to control and orchestrate the repayment terms between parties, contracturally agrees to purchase a note that is yet to be created, and sets forth or places certain underwriting requirments. Now the lines become blurred as to whether this is a secondary market assignment of a mortgage, or really a loan being originated.

A final tip: the more time that can elaspe between the time the mortgage is actually created and the time that it is actually sold the better. This could be several hours, to several days, etc. - We currently like to fund our newly created note deals the following morning after the initial property sale closing and in some cases not until at least a payment is paid on the note.

To your success,

Michael Morrongiello