Selling created notes (long) - Posted by Dewey (NJ)

Posted by Ben on January 25, 2000 at 15:28:46:

it is to be as comfortable as possible in investing my own personal funds. I am a full time attorney and tax lien purchaser who does some lending on the side. I do not need to do lending, I do not market or seek out borrowers and in fact I turn away 95% of what comes across my desk. If a deal fits my parameters, I will do it, if not c’est la vie.

Selling created notes (long) - Posted by Dewey (NJ)

Posted by Dewey (NJ) on January 24, 2000 at 17:01:56:

This is my first posting here and would just like to say thanks to all involved. It is a great site and it is unbelievable how much information I have gathered in the last few weeks since discovering this site. I have a whole new outlook on my real estate investing.

My partner and I currently purchase, rehab and sell/rent real estate (part time) with some moderate success. We have
not used much creative financing (or selling) but would like to start.

My question involves a recent posting regarding creating and
selling notes. Judy Miller replied with some excellent
information and I have visited her site but still have some

What we are looking to do looks like this:

Buy bank owned single family property for 25K cash
Invest 10K in repairs (we do all work)

Sell the property for 50K (It should appraise for this after repairs).
Using some of Judy’s guidelines, arrange a sale something
like this:
5K down
40K 1st (we hold with intention of selling)
5K 2nd (we hold)

If we can sell the 1st for (lets assume 88% of face value)
35K, this would leave an investor with a 70% ITV (as
recommended by Judy)

If this seems reasonable, I have several questions. I realize the selling of the note depends on many issues, but I am trying to get an idea of what is typical or average with respect to rates, terms etc…

Should the 1st note be in the area of 30 years at 10% to
achieve the above results? If so, with what kind of credit rating or score? How much of a higher interest rate (or change in term) is recommended to achieve the above results if the credit is very poor.

Will an investor look to the original purchase price and
possibly not be interested (or want much more of a discount)? Does he/she even care?

Would there be a significant benefit to seasoning (holding the note ourselves for 3-6 months) before selling? If so,
approximately how much?

Many potential buyers in this area will not have 5K
downpayment. Will it have a great effect if the 2nd was
changed to 10K to allow the buyer to acquire the property for little or no money down?

Sorry for the long post but I really would like to have some
ballpark figures for these types of deals and all replies are greatly appreciated. Once again, I would like to thank all who help maintain this great forum and encourage them to keep up the good work. I will be happy to relay my experiences with a deal like this in the future (hopefully in the success category and not as “lesson learned the hard way”).

Thanks, Dewey

P.S. I realize we would only make 5K with a 5K note on the
above deal, but it is only a property we are looking at and we feel we could probably get it for 5K less and sell it for a little
more also.

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.

Judy Miller

Re: Selling created notes (long) - Posted by SCook85

Posted by SCook85 on January 25, 2000 at 06:31:41:

You just received two completely different points of view. Ben is basically offering to be a hard money lender. Most of the institutional note buyers will purchase your note with less of a discount then you used in your example provided that the property will appraise and your buyer has reasonable credit.

You will find 2 distinct different types of note buyers, the ones more concerned with credit of the payor, and those more concerned with the property and it’s value (like Ben). Those more concerned with the credit of the buyer will pay the most for your notes provided they have a good downpayment, good credit and the appraisal is adequate.
A note buyer who is concerned more with the value of the property is purchasing your note based strictly on the value of the property. They will generally invest 60-70% of the value of the property into the note regardless of the the discount (as long as they are achieving the desired yield). Most of these types of buyers do not care about the credit of the payor, how much down payment the payor had, or the actual sales price. They move quicker, and require less paperwork to get the deal done. They usually don’t care if the payor stops making payments because the opportunity to foreclose is the opportunity to make more money.

The desired yield of most institutional note buyers right now is around 11-12%, they will consider less for extremely good paper. The desired yields of note buyers concerned more with property value is usually 15% and up.

I hope this helps.


Re: Selling created notes (long) - Posted by Ben

Posted by Ben on January 24, 2000 at 20:09:49:

Dewey, I am an attorney/investor who also happens to be in NJ so your post piqued my interest. I can tell you from my perspective I would be looking for a yield of at least 15% and would discount the note accordingly.Therefore the higher the rate you charge the less discount you would have to take. Secondly,although Judy may be comfortable with 70% it is a bit high for me, I would like to be closer to 60-65%. Forget the no money down deal, this would be a deal killer for me because the payor has no reason to stick around if times get tough. Also, any seasoning would only benefit you as the seller of the note because the more risk I have to take, the more discount I am going to be looking for. I am personally not concerned with purchase price just appraisal value. I am not going to penalize you for negotiating a good deal. If you have something on the table send it my way! I am a principal, not a broker and can close very quickly. Ben

Re: Selling created notes (long) - Posted by phil fernandez

Posted by phil fernandez on January 24, 2000 at 19:53:19:

Welcome aboard Dewey,

Some answers to your questions. I have found that the note buyers don’t like 0% down deals as the banks don’t. They like to see 5% to 10% of the buyers money into the deal.

Although you could do a simultaneous closing, note buyers like to see some seasoning. The longer the better to establish a track record of payment. I have seen 6 months being acceptable. The more seasoning the less the discount.

Loan to value is looked at. They like to see 80% or less for a smaller discount.

As far as terms. Some want balloons and some don’t. The argument I hear about short term balloons is that the note buyer has concerns about the borrowers ability to be able to pay the balloon off when it comes due. They seem to like balloons in the 7 to 10 year range.

Interest rates are a function of the overall market. I recently sold a note that had an interest rate of 10%. As bank mortgage interest rates increase, so will the rates on owner financed mortgages. Right now 10% to 13% interest would probably work for the note buyers.

There are alot of variables including the borrowers credit that come into play here. I would establish a relationship with a good note buyer who can come through and find out what they want and then structure your note accordingly.

Great post! See also mine under Phil’s (nt) - Posted by DanM(OR)

Posted by DanM(OR) on January 25, 2000 at 11:18:36:


Re: Selling created notes (long) - Posted by JPiper

Posted by JPiper on January 25, 2000 at 08:21:51:

While I understand why you would want to see a down payment, and why you might like seasoning…at the same time I think desiring those two factors (especially the first) and still wanting to be at 60-65% LTV makes me wonder if you are competitive in the loan arena.

When you’re at 60-65% LTV, it’s hard to see why you would care at all whether the borrower paid. Taking the property back should be quite profitable. I can understand a lender wanting the lowest possible LTV, a down payment, great credit, seasoning and high rates. Kind of like I’d prefer to buy properties at 60% LTV with no repairs and no cash in the deal.


Re: Selling created notes (long) - Posted by DanM(OR)

Posted by DanM(OR) on January 25, 2000 at 11:15:53:


Phil is right on here. The only thing I would add is that you can often get ITVs of up to 75% for no seasoning and up to 85% ITV on 6 months seasoning.

One investment firm I work with will go a low as 8.5 % yields if it is a peach of a deal and the credit of the payor is good. Generally though, the market rate right now for yields on residential paper is about 11.5 - 12.5 % for a retail transaction (the note buyer pays for appraisals and title search). Commercial rates are anywhere from 12.5 - 14.5.

Please keep in mind that every deal is different and you should work with a Note Buyer directly or with a good broker. A good broker knows what the principals out there buy (Houses, Condos, Mobile Homes, Businesses, or Land) and what they pay for them. That’s why we get paid.

A side note: I think Ben’s rate is very high, but what I would probably charge to keep for my portfolio. A national note buyer however, would pay you much more, but they make it up in volume.

Let me know if you need help. I could point you in the right direction.

Dan Matejsek