Re: Selling created notes (long) - Posted by Judy Miller - American Note
Posted by Judy Miller - American Note on January 25, 2000 at 11:48:17:
Dewey, your questions are very good ones. The answers don’t appear on our website. We encourage you to call our office and one of our buyers will work with you deal by deal to maximize your value out of every transaction. We do this all day long. But to answer some of your questions…
In your scenario, this property is more than just a “flipper”. You are actually bringing significant value to the property in the form of $10,000 cash and your labor. Going from $25,000 in value to $50,000 in value is not difficult to understand, and will overcome any concerns by an investor as to whether value was added. It was.
You now need to recover $35,000 to break even, plus some profit for the $35,000 you have spent. In order to get you what you need, everything DEPENDS UPON THE OTHER! I don’t mean to be vague, but if the credit is low, the investor doesn’t want to be into a note investment for as much as if the credit were great. Same with the down payment. So if you have poor credit and a low down payment, the investor is looking at 60-70% ITV (investment to value of the sales price or appraised value of $50,000). Seasoning won’t help this scenario much. Yes, there is a definite benefit to seasoning 6 months, particularly if you have low down payment and poor credit. A year’s seasoning definitely overcomes bad credit. That is an industry standard.
But your goal, I imagine, is to get your $35,000 plus some profit out of the property and move on to another investment with your cash. If you carry a 2nd, that is also an income/profit stream, but most investors like yourself need to fix them up, sell them, turn your cash, make some profit and move on and do it over and over. So how do we solve the problems?
Your deal structure of $5,000 down, a $40,000 note, and a $5,000 2nd will work as long as you get a high enough interest rate on the 1st, something more like 11 or 12%. Remember, you are probably lending to a non-qualified-for-conventional financing borrower, so the price they pay to get into a house is a higher interest rate. That minimizes your discount on the note. 360 months is fine, perhaps with a balloon in 10 years. The shorter the term until the heavy part of the principal is received, plus a higher interest rate, all minimizes your discount. However, don’t throw some unrealistic short-term balloon in because no investor believes it will get paid, and note investors really don’t want the properties. What they do want is to get their yield on investment with as little hassle as possible!
I hear you when you say it would be difficult for some of your potential purchasers to come up with $5,000 down payment. That is true universally with these rehabbed properties. A 5% down payment and a 15% 2nd will work if the credit isn’t horrendous. Remember, we’re trying to get you some profit and your cash back. Getting 85 to 88% on your $40,000 note IS POSSIBLE, but we must look at all factors, including credit scores, neighborhood, previous foreclosures in borrower’s history, employment and earnings of borrower, face interest rate, amount of cash into the property, and on and on.
A no money down transaction with you taking back a 20% 2nd is not going to make your 1st mortgage note marketable for the price you need to get.
We look at every transaction individually. No matter what books say, what courses are sold, what “home studies” are sold, THERE IS NO COOKIE CUTTER FORMULA for what is paid for these notes. It is one of the more difficult analysis we do every day. But these general principles are ones for you to keep in mind. But, yes, you can get 85-88% of your note’s balance in the right circumstances, maybe even more. Once you have purchased and refurbished the house, and put it on the market, why not get a 1003 Uniform Residential Loan Application from us, have it filled out by your potential borrower or borrowers, and we’ll help you identify the best potential deal for you that gets you the best return on your investment.
Hope this helps.