# Structuring Notes for Simultaneous Closings. - Posted by Kate

Posted by Stacy (AZ) on December 14, 1999 at 22:49:10:

Thanks for the explanation, Michael. It makes sense. Glad you came around to my way of thinking.

(smile)

Stacy

Structuring Notes for Simultaneous Closings. - Posted by Kate

Posted by Kate on December 10, 1999 at 20:30:32:

I have seen posts stating that 80% LTV is the norm, than others that state anywhere from 90 to 97% LTV. What is the best way to structure a deal to get the most out of it? (I know the higher the interest the better the buy rate)

Would a 80/10/10 bring a better purchase price at close than a 90% LTV with 10% down?

How about an 80% 1st, 15% second with 5% down?
How much would the buy rate be affected with only 5% down, even know the 1st note is still at 80% LTV?

Or 75% 1st, 10% down and a second for the remainder 15%?

With the above examples, how does the interest rate change with these?

Would you have to raise the rate or could you lower it in certain situations with the above examples?

Are there other ways I don’t know about to get the best rate without having to charge 13% to everyone, thus being able to close more deals?

How long do you have to hold on to a second to get it seasoned enough to get a better price for it?

If there is anyone out there that can email me some charts or something that addresses the best way to structure deals and what the average buy rates are for each, please let me know.

O.K. I’ve bothered you enough. But thank you just the same for putting up with me.
Kate

Re: Flip Paranoia? - Posted by Stacy (AZ)

Posted by Stacy (AZ) on December 11, 1999 at 11:07:12:

Michael, I have a follow-up regarding this statement:

1. Large run ups in values without justification for the increasd value is another big concern area

Suppose I bought from a motivated seller for \$100K, and a month later have a contract to sell the house for \$123K, which is FMV according to comps. Will this cause red flags to go off? If so, how should I get around any concerns? I’m worried that this “illegal flip” paranoia is going to work against me when all I did “wrong” was buy at a bargain price.

Any insights?

Stacy

Learn the fundamentals and then experiment - Posted by Michael Morrongiello American Note

Posted by Michael Morrongiello American Note on December 10, 1999 at 22:30:12:

There is no magic pill that can address all your questons at one time.

Some fundamental concepts you seem to have down;

1. The higher the note interest rate will mitigate the discount 10% -12% range will work for most credit grades from strong to weaker

2. Cash down also is important. A 5% down deal is considered more risky than a buyer who puts down 10% cash. However there are exceptions to this rule. Strong credit buyers who put down as little as 5% cash are acceptable where a note funder will fund and strech on their (ITV) investment to value exposure

3. Employment and stabilty of the proposed payors is another area of strengths and weaknesess

4. Conditon and location of property also can sometimes affect exposure comfort levels for a note funder.

5. Large run ups in values without justification for the increasd value is another big concern area

6. the KEY issue however is CREDIT. WIth stronger credit payors most note funders will be willing to be more agressive on the amount of cash they are wiling to invest into a deal. The lesser the credit and depending on the severity of the credit blemishes will determine to a great degree what the limit is for a particular proposed payor on a deal.

Whetther the note is an 80% note with either 5% or 10% cash down and a seller held 2nd OR a 90% LTV 1st lien with a 10% cash down payment buyer, IF the note rate, terms, etc. are STRUCTURED correctly one should be able to sell their paper all day long and obtain 93% -94% +/- in CASH of the actual note balance.

My suggestion is to work with an experienced note funder to get a few deals under your belt. Learn what documentation they require and when. Learn their process and how they look at deal. After a few deals are done you’ll have a good understanding on how to best start structuring the note so that it is tailor made for the proposed buyer and his /her set of circumstances.

Visit us at www.americannote.com for more FREE info on tips, tricks, & traps, about notes or feel free to call us toll free @ 800-659-2274 for assistance and deal structuring advice.

We greatly want you to suceed and most certaintly want to buy your paper.

Warmly,

Michael Morrongiello
Operations Manager

Kate, go read my e-mail (nt) - Posted by John (WA)

Posted by John (WA) on December 10, 1999 at 20:39:53:

nt

Prudent Investments - Posted by Michael Morrongiello American Note

Posted by Michael Morrongiello American Note on December 13, 1999 at 14:41:05:

Stacy:
No one begrudges you or any entrepeneur from making a profit. If you can purchase a home for \$100K and then resell it shortly thereafter for \$125K then by all means go ahead and go for it. However if you wish to use OUR funds to purchase it and then resell it for the higher price we may have some issues with that since essentially the majority of the risk in this type of deal is bieng shifited to the note funder or lender.

The problem is that many lenders, note funders, etc. have been getting “stung” by an inordinate increase of loan defaults, and deliquencies that stem from deals like this. I don’t want to “paint everyone that does these types of deals with the same brush” BUT there are many individuals who ARE doing these types of deals where there are corners being cut, paperwork may be fradulent, down payments questionable, straw buyers utilized, appraisals fudged, etc. This has hurt everyone.

We are willing to do these types of deals as long as certain “GROUND RULES” are followed. In your example if there really has not been any significant comprehensive renovation that has taken place to this property that can be conclusively documented to justified the increase in value over such a short period of time, then depending on the proposed payors credit & employment background, we might internally limit our exposure to a certain (LTV) loan to value threshold and allow you to take back some of your “profit” in the form a subordinate 2nd lien mortgage.

You can still make the deal happen and create some profit however the comfort level for the paper investor will depend on how some of those ground rules have been followed.

Why not run the deal by us and let see how we can assist you in earning a profit.

Michael Morrongiello
Operations Manager

Re: I thought buying smart was a good thing - Posted by Stacy (AZ)

Posted by Stacy (AZ) on December 13, 1999 at 16:22:38:

I usually don’t like to expound on deals I have in the works for fear of jinxing them…superstition, I know. But I think this one’s going to go through, so I’ll take the risk.

I bought a house from an out-of state owner who was trying his hand at remote landlording. He’s a busy branch manager of a mortgage company in Washington, and had owned the Phoenix home for a few years. It was a \$200 per month alligator for the past two years, since he didn’t know what market rents were. He was afraid if his tenants moved he’d have a real problem on his hands, being out of state, so he just kept the rent low. He also had no clear idea what the home was now worth.

He was into it for \$90K and agreed to sell it to me for \$3000 cash, subject-to the two underlying loans, and deed to my land trust. We closed Nov 1, and his tenants moved-out that week. They left the house in great condition, and even had the carpets cleaned.

I immediately started to try to sell the house without doing anything to it but clean the pool and place some pots of plants and flowers around the grounds. A month later a realtor made me an offer (she wants to live in it). We settled on a selling price of \$113,750, and she’s going for a new FHA loan. The comps fully support this price. A realtor would know.

But, here’s the question. If I had decided to owner finance and sell the note, what possible difference should my purchase price make? If the comps and the appraisal support a FMV of \$113,750, why should anyone care if I bought for \$90K or \$112K? It’s almost as if the industry doesn’t trust their own due diligence.

I am not taking shots at American Note…as a matter of fact I’m sure I’ll do business with you in the future. I guess I find it amazing that we are all on this board to learn how to buy smart and profit, and when we do so, we run up against forces that won’t do business with us because we did it too well.

Can you understand my point of view?

Stacy

Your OK But beware of the following … - Posted by Michael Morrongiello American Note

Posted by Michael Morrongiello American Note on December 14, 1999 at 18:34:14:

Buying smart is great, buy low sell high is the great American Way. We always encourage RE Investors to make money and to bring us plently of continued business (owner financed paper)

The example you provided will work for us IF you chose to create a seller financed note and then sold the note to us at a discounted CASH pay price. Your sales price of \$113,750.00 is less than a 25% increase in value over what you acquired the home for (\$90K) and I believe you stated that you used your OWN cash to actually close on the purchase 1st, taking legal title, all before selling it for the \$113,750.00.

There really is no problem with YOUR deal.

Our concern is where we see “FLIP” type deals that are presented to us where you are buying (or under contract to buy) the home for \$90K and then selling it almost immediatly for a large run up in value that is over a 25% increase. Lets say you sell for \$150,000.00 (thats a 40% increase in value). You don’t actually own the property yet, and in essence you are using OUR Funds that will be generated from the sale of the seller financed note with the ultimate buyer who is purchasing the home for \$150K to consumate your purchase of the home for \$90K.

Even with an appraisal that supports the \$150K FMV and / or sales price we would have some areas of concern over a deal that is like this. Many times the buyers later on feel find out what transpired, they feel taken advantage of. They overpaid for the home and mainly purchased it because “easy” financing was offered. Guess WHO they go after? (their attorneys called it the deep pocket theory). These are the types of deals that have HIGH delinquency ratios, defaults, and overall problems. These are the types of deals that most funders have issue with.

As long as the short term increase in value and sale price is resonable (within 25% of the acquistion price) then we can consider these. We will even conside them with larger increases in value as long as some justification of the increase can be made.

Hope this claifies the position.

Michael Morrongiello
Operations Manager