Seller creating note to sell at closing-deal in progress - Posted by breeves

Posted by SCook85 on May 09, 1999 at 09:51:52:

A few things to consider:

  1. You are paying 9 points on a transaction that will put you in at above market value. I know it has been preached many times to not worry about the points when the deal is good enough, but in this case it isn’t.

  2. You are not considering that 4 closings have to take place and the cost of 4 closings will come out of your $20,000. On top of that you have to get 2 full appraisals most likely from National appraisal companies (another $700). In Maryland where I’m from those 4 closing would run you about $10,000 and that is taking into consideration not paying for taxes twice or for title insurance. It is probably less where you live but may not be. So you could potentially walk with less than $10,000.

  3. The tax implications to your partner (friend) are not attractive. Has this been considered?

  4. The note buyers won’t tell you what to do in your best interest, they just want to broker a note and don’t care what happens to you, the note, the property etc…

  5. Pulling off a 90% first in the secondary market as a NOO (non owner occupant) is very difficult and the rates will not be attractive. Have the actual note buyers been informed that you will not occupy this property? What rates have you been quoted? With good credit you may get 9.5%, will you have a positive cash flow, or are you willing to sacrifice that for the up front cash (not a smart thing to do; $10,000-$20,000 will be gone before you know it, especially if the property does need repairs)

  6. If the end buyer of this note catches wind of how this transaction is going down you deal won’t happen. They will not allow you to do these types of deals.

  7. I would venture to guess that the settlement company that you are using has never closed one of these types of transactions and you will most likely become an educator, trying to teach someone to do something you have never done before. I have only come across one title company so far that picked up on this concept right away and understood it. Most of them can’t see the real way the transaction is taking place. They can’t think outside of the box. They can’t see that the note buyer is not the lender. Where a hat and keep your hair inside otherwise you will pull it all out.

  8. Realistically these type of transactions are supposed to settle quickly. That is what everyone preaches. But I think most who come to this site who have done these types of deals will agree that 3 weeks (especially if you are just getting the process started) is not much time for one of these deals. You will go back and forth numberous times with the note seller and can find yourself 6 weeks from now still trying to put the deal together.

I’m speaking from personal experience. I like the way you think, my second deal that I ever did was just like this except on one property. I will never do it again. Closing costs cost me $8,000 to pull it off. I had a larger spread in my deal then you do and mine was smaller so from a percentage standpoint my deal looked much better then yours.
Others may have had better experiences then I have, and I’m not saying that this is the way that it has to be, but I have been involved with 7 note deals to date and everytime I think that it will get easier. It hasn’t.
I’m not saying do this deal but I am asking you to take a lot harder look at it. It doesn’t come out as rosy as it looks.


Seller creating note to sell at closing-deal in progress - Posted by breeves

Posted by breeves on May 09, 1999 at 08:11:37:

I posted this in the cash flow section, but there does’nt seem to be much activity.

I have currently opened escrow with signed contracts and my earnest money is submitted to title company. I am buying a SFH and Townhome from one seller. In order to take cash out, this is how the deal is structured. This arrangement was suggested by the note buyer. My partner (friend with no real estate interest)will buy from seller at my bargained for price 105k (both properties). Partner will sell to me at appraised value of 135k. Partner will create note at 90% of FMV =121.5k and sell at closing for 91%=110.5k. I’m putting down 10% cash=13.5k. My partner will take (110.5k + 13.5k )123.5k, pay seller 90k, seller taking 15k second secured by a property I own outside this transaction. So seller has what she wanted-90k cash and a 15k second. Partner will rebate to me as repair credit the cash left on the table 123.5-90=33.5k. I will take 20k out of deal at closing. 33.5k - 13.5k(my dwn pymt)=20k.

I will sale on L/O and get approx.6k dwn for both properties. So bottom line I will have 26k in pocket. I will owe (note 121.5 + 15k second) approx 101% of FMV, but since I have 26k in cash, I figure thats ok. I will sale at 140k on the L/O and pick up a couple thousand on the back end.

This is my first at this type of deal. I’m working with “No Banks Required” and I’m assuming they are brokering the note to JEM investments. I got in touch with “No Banks Required” through the LeGrand newsletter I get. They have been very good about walking me through this transaction. Closing about 3 wks away. We’ll see if it all pans out as noted above.

I would welcome comments on how I could have improved on this deal. I know I could have just got an option on the deal and tried to find a buyer and have the orginal seller create the first and flipped the note, but she need this done quickly to close on another house in June and this
deal seemed good enough for me to take title and sell via L/O.

Also, I’m new to the note business, and am wondering how to save by
going directly to note buyer. For the first time this seem fine sense they
are walking me through this and I’m getting an education as well.

Thanks for your feedback.

Re: Seller creating note to sell at closing-deal in progress - Posted by David Alexander

Posted by David Alexander on May 09, 1999 at 16:42:08:

You could also create the notes closer to the 80% mark and go directly to the Institutions instead of dealing with a Broker. The large discount is because they won’t go above the 80% mark. But, doing note deals on originations, you still have to jump through hoops.

David Alexander

Re: Seller creating note - Posted by JPiper

Posted by JPiper on May 09, 1999 at 13:37:48:

In addition to Steve’s comments, which I felt were very good, I would add the tax problem from your perspective. When you partner hands you $33.5K (see Steve’s comments about transaction costs as to whether it will REALLY be this amount)?.this becomes taxable income in my opinion. You’ll not only pay tax on your profit, you pay tax on the rebated down payment that you made. Ouch!! There has to be an easier way.