Question on value of note - Posted by Anna

Posted by Michael Morrongiello on January 22, 2001 at 15:54:59:

Anna:
There would be NO points, NO application fees, NO prepayment penalty in the financing, NO PMI premiums, NO lender junk fees for underwriting, warehousing, etc. and NO requirement to prepay an escrow impound account for taxes and insurance above and beyond your $17K cash down payment.

An 85% LTV 1st lien would be $144,500.00 that could be written @ 11%-to 11.5% interest rate range. At the 11% rate Amortized over 360 months payments would be $1,376.11 in monthly P&I, no balloon payment and NO prepayment penalty either.

Under ideal circumstances (your credit, cash down, the condition, location, and current rental income of the property, etc.) This note could be converted into a lump sum payout in the $137,000.00 -$138,000.00 +/- range. The seller would still hold a smaller 2nd lien of $8,500.00 that they would retain.

Contact me for more input on how this might work.

To your success,

Michael Morrongiello

Question on value of note - Posted by Anna

Posted by Anna on January 21, 2001 at 16:25:59:

Hi,
I am making an offer to a seller and thought i would cover my bases before pitching her.
I am asking her to take a 17k second on a fourplex.
Purchase price 170000, first of 136, second of 17, 17k down payment. The fourplex is worth around 190k.
The second will be at 9% 30 years with a 5 year balloon.
I have exceptionally good credit and great beacon scores. I and am wondering what i might be able to tell her this note would be worth if she wanted to sell it at close to a broker.
Any ballpark ideas would be appreciated.

Re: Question on value of note - Posted by David Butler

Posted by David Butler on January 22, 2001 at 13:31:11:

Hello Anna,

You have already received some pretty good answers here from some top people… but there is still one more side to the equation… which as we always like to say in both the note biz - and the CREI biz - find the seller’s MOTIVATION. It could very well be that she doesn’t really NEED the additional cash right now today (although admittedly most sellers THINK they need cash). And, she will have some options down the road with that note, if she needs to do something differently. You might find it helpful in planning your strategies, to have a look at some of the things to think about from the seller’s side of the table.

A good place to start might be to have a look at a FREE copy of our ANN Update On Real Estate Newsletter (#4), which discusses some of these possible strategies for using notes and benefits to sellers besides cash, at:
http://notenetwork.com/at.cgi?a=118510&e=info1/samples/sample4-1.html

Hope that helps, and best wishes for your success on this deal!

David P. Butler

Why sell a 2nd lien… - Posted by Michael Morrongiello

Posted by Michael Morrongiello on January 21, 2001 at 21:09:11:

Anna:
I submit to you that a properly structured 1st lien note at 85% LTV can probably bring more cash to your seller than evidently your current lender is willing to lend you (80% LTV = $136 K / $170K sales price).

This will not eliminate the need for the seller to still carry some secondary financing However it will allow you to perhaps get him / her some additional cash UP FRONT, which is usually where most sellers want it.

To your success,
Michael Morrongiello

The second is not worth very much… - Posted by Rick Roberts - KC

Posted by Rick Roberts - KC on January 21, 2001 at 19:36:00:

A critical factor in determining the marketability of a second note is the size of the second in comparison to the size of the existing first. In general, seasoned seconds that are of a 3:1 ratio or better in comparison to the senior lien are marketable (e.g. a 30,000+ second behind a 90,000 first). Seconds that are much smaller than that relative to the first are not very marketable, but often can be sold at .25-.35 cents on the dollar (e.g. 10,000 second behind a 90,000 first). The discount is steep because of the potential risks/costs that would be incurred by the holder of the second note if either lien goes bad.

I hope that these GENERAL thoughts help.

Re: Question on value of note - Posted by Terry (IN)

Posted by Terry (IN) on January 21, 2001 at 18:44:09:

Anna,

It would be considered a miracle if your seller were to find a buyer for a $17,000 second. Most buyers don’t want to mess with a First that’s less than $40,000. A second isn’t very desirable for a note buyer anyway. IF she could find someone to purchase it, she would likely take a huge hit.

Terry (IN)

Re: Why sell a 2nd lien… - Posted by Anna

Posted by Anna on January 22, 2001 at 13:29:41:

Michael.
What type of interest rate, points, etc. could i expect for a 85%LTV?