Posted by Jason (AL) on April 10, 2007 at 12:21:25:
Thanks again, David.
I’ll keep those things in mind.
I’ll do more research on DCR.
And as far as I know…I don’t have any kids.
“Unity” used to buy a 6-unit? - Posted by Jason (AL)
Posted by Jason (AL) on April 07, 2007 at 19:09:50:
>>EXTREMELY<< simple example here…
Suppose I contracted with a seller of a 6-unit apt. building.
He agreed to finance the deal 100%, taking back 2 mortgages (the 1st at say, 25-40% of the purchase price).
To generate some cash upfront (down payment to him), he would agree to sell that 1st lien note and retain the 2nd as monthly income.
Would the investor/deal maker be able to purchase this building in this manner (no $ down), and would this entice a note funder?
I know one should have some “skin” in the deal, but I was wondering if this would matter given the low LTV 1st mtg.
Of course, this is not factoring in rental income & expenses.
Thanks.
Re: “Unity” concept still OK today - Posted by Michael Morrongiello
Posted by Michael Morrongiello on April 10, 2007 at 23:48:24:
Jason:
The no or limited money down, 100% financing, with the property seller agreeing to take back (2) two Notes - a 1st lien structured at a VERY conservative LOW LTV level so that it can be readily sold off, and then also a subordinate seller RETAINED 2nd lien is a formula that can work. The KEY is to get that LTV level down a LOW as possible so that the the seller is going to finance the majority of the sale. (this is the same concept in my Unity of Real Estate & “paper” Course materials I used to purchase the Tilsen Drive property years back)- the concept still holds true today.
We are currently involved in the sale of a 10 acre ranch and old circa 1895 farm home for $585K to a young couple as the buyers who are putting NOTHING DOWN.
Even though the property recently appraised at $635K, the very motivated property seller has agreed to finance the $585K sale by taking back (2) two purchase money deeds of trust. A $200K 1st lien DOT and a $385K 2nd lien DOT.
We have agreed to purchase the $200K 1st lien DOT at the time of closing and the seller will retain the $585K 2nd lien. The cash generated for the purchase of this $200K 1st lien DOT (which we are purchasing for around $155K cash) gets the property / Note seller where they need to go in the interim and they are perfectly willing to collect income on their remaining equity in the property which is what the $385K 2nd lien DOT will provide them.
The “art” is in the struturing of the transaction.
Happy Hunting!
Michael Morrongiello
Author of the Unity of Real Estate & “paper” study course & Paper Into Cash - Creating Marketable Notes
Re: Can The Powertrain Sustain?! - Posted by David Butler
Posted by David Butler on April 08, 2007 at 14:18:55:
Hello Jason,
Regardless of any impact the deal may have in terms of a future note sale, the reality is that from a CREI’s point of view, this type of financing structure is going to work best for a seller who does not have an immediate need, nor desire for cash. Still, as it seems you are prudently thinking about here - it is always a better idea to try and structure deals where the notes can be sold for a minimum discount, either at closing, or later on down the road.
But here’s the rub in the deal you are describing… outside of buyer’s down payment, a primary driver in commercial note investing (which includes multi-family residential of more than four units) IS the property’s historical ability to produce income. In fact, one of the benefits of this type of property is that the Debt Coverage Ratio can help make up for other weaknesses in the note. So asking the question without factoring in NOI (net operating income), is much like asking how efficient an automobile might be, without factoring in Its engine:-(.
A better question might be, “Suppose I find a 6 unit apt. bldg. where the seller is agreeable to giving me 100% financing, in the form of a (up to 65% LTV) senior mortgage amortized over 25 years at 8%; and a junior mortgage for the balance, amortized over 15 years at 9%. The property value is well-documented to be (at least 97% of sales price); and has a solid operating history that shows the ability to provide a solid 1.2 DCR for the financing structure above. Would this be enough to entice a buyer for the first position note?”
With that critical additional information (even though, as I have mentioned in prior discussions regarding “commercial notes”, the preferred minimum DCR is 1.4) the answer would be “absolutely… provided I can get a satisfactory return on my investment, if the note performs”. Even in the face of a Payor without any prior track record of owning and managing such property, and possibly even if Payor has poor credit (considered to be below 620 for commercial notes). At the same time, it would still be “maybe” for other buyers, especially out of area - pending more information.
Another conflicting element in such a deal - as we have mentioned in several previous discussions related to commercial notes, the FMV of the property is immediately brought into question in the face of such a concession as 100% financing being given by the seller. (See my response, “Fair Market Value Clarified” at: http://www.creonline.com/cashflow/wwwboard3/messages/9377.html
If the seller needed cash, why did he sell the property with 100% financing?
Something to keep in mind… I don’t know why it is, but it seems to be almost a universal that whenever we see “low-down” seller carryback commercial notes on smaller multi-family properties (less than $500k property value), that huge concession is not the only one the seller makes. Almost always, the terms are way below market as well.
These concessions are usually an accurate reflection of the true value, when “transaction value” is converted to “cash equivalent value” (see the “Fair Market Value Clarified” discussion referenced above). The note holder is arguing that the property is worth $$$, when he only sold it two weeks ago for much less. The reality is the property probalby sold for more that it was worth, with too much “blue sky” in the mix. This is likely due to the Dealmaker’s Creed factor (“I’ll pay whatever price you name, if you’ll let me name the terms!”).
Hope this is helpful Eye Candy for your Easter Basket, and Good Hunting. And…
Have Fun For A Living!
David P. Butler
OK today - Posted by Jason (AL)
Posted by Jason (AL) on April 14, 2007 at 18:00:19:
Thanks for that Michael.
That’s what I was looking for.
I know that you structured a similar deal outlined in your course (The $60k purchase price; seller took back 2 mortgages - 1st for $15k, 2nd for $45k. The 1st was bought for $12k – No $ down for you).
I was just wondering if this was feasible for multi unit deals.
I’ll know to contact should I’m able to structure one of these.
Thanks again.
Of Course! - Posted by Jason (AL)
Posted by Jason (AL) on April 08, 2007 at 18:17:09:
Thanks for your detailed response.
Yes, I realize I left out an important factor in this question, and that was the NOI.
I asked the question in haste.
So, therefore, I didn’t take the time to come up with a hypothetical example that made sense. Even more so, an example that was “favorable”.
So in a nut shell (given favorable conditions and NOI figures)…yes, these can be done?
Thanks again, David.
Re: United Way! - Posted by David Butler
Posted by David Butler on April 09, 2007 at 18:26:14:
Hello Again Jason,
Actually, when putting “in a nutshell…” ;-), so many things can be done in the private cash flow industry. The key to that is understanding that there are several secondary markets in the private cash flow industry, and many, many types of buyers. There are types of notes that institutional types will gobble up, that individual buyers won’t touch, and vice versa.
There are many, many notes that are very difficult to see on the open market, but relatively easy to sell to local individual EXPERIENCED investors - even if they haven’t purchased a note before… and even if they haven’t purchased that particular type of note before.
It is also a good exercise to learn what can’t be done, or most likely can’t be done. This tends to come more from experience, but can be learned easier and faster if underlying conceptual knowledge is learned first.
Going back to your original example, and adding in my qualifying info - you still will have more limited pool of buyers than you would with a down payment being made. Knowing that, before you put too much time into shopping the note, you would see from many discussions here in the Forum that simultaneous closings are less probably on commercial properties, though multifamily is the surest thing when looking to do simos on commercial notes. Then factor in that while note buyers in generaly prefer to see down payments being made for all notes - commercial note buyers have even tighter requirements,in general (25% down, 15% minimum preferred for commercial notes) - and all note investors purchasing simos are even more demanding in that regard.
That tells you before you even go looking - all right, knowing these things, I must answer two questions before I spend much time trying to make a deal…
-
how can I offset the negatives with very compelling factors that still make the deal attractive, at least to somebody;
-
what are the probabilities of me finding that somebody in a profitable time frame and effort ratio.
Biggest challenge in the scenario we have been discussing in this thread is being able to achieve a 1.2 DCR in the face of 100% financing (using bells and whistle repayment terms won’t work in DCR calcs, as we’ve described in previous threads). So you would want airtight documentation on it, before approaching a potential note buyer. Minimum two year operating history is usually required, with three+ years being preferred.
Hope that helps additionally, and Good Hunting!
David P. Butler
P.S. Did you let the kids find any eggs this Easter? 