Re: What’s The Deal?! - Posted by David Butler
Posted by David Butler on May 12, 2007 at 12:43:39:
You’ve posed a complex question here that calls for much more than can be completely addressed in a Forum such as this. Fortunately, there is much extensive and detailed discussion - including several “real-life” examples - that you can spend about three to four hours studying here, and making notes from - to give yourself a fairly comprehensive insight into the best answers for your several questions here. I’ll explore that with you in a moment.
But first, be aware that each of your three questions poses multiple scenarios that call for different answers. Let’s deal with each in the generic context here…
Q. “When working with realtors to create notes at the point of purchase, what would you suggest
the minimum amount of equity in the property to be and why?”
A. Depends on the deal, the property, and the Payor.
What type of property is securing the note to be secured? SFR, MFR, Commmercial, or Industrial. If commercial or industrial, is it multi-use property, single-use property, or special use property? How is it zoned, how is it currently used, what is its operating history for the past three years (or since it’s been in operation - if less than three years).
If land… is it prime buildable lots, development property (is so, is it residential, commercial, or industrial - and what is its current build-out status), vacation property, rural property, resort property, agricultural property, or vacant raw land? All have different parameters in terms of what is considered to viable equity at time of purchase, and also later down the road. Also, is it a real estate note at all, or instead, a MH note, business note, or other secured paper?
What is Payor’s credit score, income history, and debt ratio? Is the note to be created in senior position, or junior? What is total dollar balance of the note going to be? What is seller’s objective for the transaction and/or each transaction, and why? Does he really need cash now, and if so, how much? Is he able to do a partial note sale? Can he take a huge second, and sell off a smaller senior position note?
Is the intent to sell for cash at the closing table; within six months; within 12 months; or beyond?
Q. “I guess my question specifically addresses if the seller of the property has an existing mortgage?”
A. That poses a whole other set of parameters, over and above each of the questions above. Is the intent to create a note that will be junior to the existing senior financing? Or to cash it out? Keep in mind that other than SFR and MFR, it is very difficult to find a market for other types of seconds until they have achieved at least 12 months seasoning, and even then, that is very limited - usually requiring some very compelling circumstances to achieve a sale of the note. A possible exception is a scenario where a “Wrap” note can be created, and the circumstances then play out to be similar to selling a senior position note, with the underlying financing paid off out of the proceeds from the note sale.
In any event, the key question - any time existing financing is already in place, and the note to be created is going to be junior to that note - will be… what is the LTV of the senior financing? As a general rule of thumb, if the senior financing is more than 60% LTV of the sale price, the junior paper will usually be unattractive to most note buyers, and the market will be limited more to smaller local buyers who are more risk tolerant due to knowledge and proximity to the collateral, and/or the Payor.
Q. “What should the minimum equity be on a given property?”
A. Depends on the answers to all of the above. Also, the proclivities and preferences of the note investors who see the deal. Minimum equity required can be anywhere from 0% to 50% of sale price, to make the deal fly.
BTW… for some strange reason, many real estate agents consider closing costs to count as Payor equity when talking private paper. Not sure why that is, given the fact that they should know better. Those costs don’t count as equity with traditional lenders, or subprime lenders for that matter. Be sure to make sure they understand that when discussion Payor down payments.
Okay… as I mentioned, just in the past few weeks there has been some more recent good discussion on the topic, in the context of simo closes and MFR deals, that offer a solid range of coverage for what you are looking for here. Mike Morrongiello, John Behle, and myself have all contributed to one or more of these threads, and if you read carefully, you will see that we each have said very much the same thing, with only slight variation.
See my reply posted yesterday Re: You Mean The Seller’s Note! at: http://www.creonline.com/cashflow/wwwboard3/messages/22661.html
as your starting point, and then follow through with the links given there to move forward.
Some other helpful links on point here would be…
Re: Fiddler on the Roof?!
Re: What Is For Sale - EXACTLY?!
Also be sure to keep an eye out for similar discussions by John Behle and Mike Morrongiello, among others, for additional insights to your questions here.
Good Hunting, and best wishes for your continuing success in working with Realtors - particularly in the changing marketplace we are currently going through… where “…something old is new again!”
Have Fun For A Living
David P. Butler