Working with realtors - Posted by Dario

import · May 11, 2007, 11:39pm

Posted by David Butler on May 14, 2007 at 13:04:24:

Hey Dario,

Glad you found what you where looking for with regard to your P.S. here, and congratulations! I too look forward to doing some note purchases from you. Best of success in that regard.

As to the topic of this thread however, I am a bit confused, in that you indicate that you already have an institutional buyer at the ready, who has answered most of the questions for you based on the actual deal?

Even more perplexed in that you have the two critical questions left, in view of the fact that you are already talking with the likely buyer for the note?? But we’ll add what we can here and hope you find it helpful.

An issue you have here is that you are not able to create a first position lien, with an existing lien already on the property. What THE SELLER can do, is create a junior lien, in the form of an “All-Inclusive Mortgage” or AITD - “wrapped around” the existing senior debt. Then, after closing takes place, the property is sold, and the “wrap-note” is now “created”, the note buyer steps in and purchases the “wrap”, stipulating that the underlying lien be paid from proceeds of the note purchase, thus moving the wrap-note into senior position by natural consequence.

But ultimately, the note buyer you are working with should have also offered some generic mention of the structure they would prefer to see (keeping in mind that both you, and they, want to avoid performing acts that could lead to either of you being deemed an “arranger of credit” in this transaction!).

The same admonition applies with regard to the question of disbursement of funds. The funding source typically calls the shots in that regard, subject to certain elements being agreed upon by the parties, and included in the escrow instructions given to the escrow agent, or closing attorney.

The only decision for you in this regard is how the funds due to you (as your broker’s profit or finder’s fee - whichever the case may be in this transaction) are disbursed TO YOU. That is subject to agreement between you and the party who is paying you, which is typically the note buyer. You can be paid through a payout agreement being sent to the escrow agent, or directly from the note buyer, if you are comfortable with that. This should be one of the first things you discuss with the note buyer, so now would be a good time perhaps?

Sounds like you are on the way to closing a nice deal, so best wishes for your success on that, and…

Have Fun For A Living!

David P. Butler

import · May 11, 2007, 11:39pm

Working with realtors - Posted by Dario

Posted by Dario on May 11, 2007 at 23:39:10:

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?

I guess my question specifically addresses if the seller of the property has an existing mortgage.

Now, I know that the more equity the better but what should the minimum equity be on a given property. I spoke to 3 realtors yesterday and that was a question I sort of got caught on.

If you could give an example of how this would work in the real world it would great to help understand it better.

Thank you,
Dario

import · May 12, 2007, 12:43pm

Re: What’s The Deal?! - Posted by David Butler

Posted by David Butler on May 12, 2007 at 12:43:39:

Hello Dario,

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?!
http://www.creonline.com/cashflow/wwwboard3/messages/19709.html

Re: What Is For Sale - EXACTLY?!
http://www.creonline.com/cashflow/wwwboard3/messages/21008.html

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

import · May 12, 2007, 5:32pm

More Details - Posted by Dario

Posted by Dario on May 12, 2007 at 17:32:45:

Thank you very much David for your thorough and detailed response. I’m sorry that my question was so vague in nature, but in talking to a couple of Realtor friends of mine our dicussion was strictly limited to Single Family O/O resdiences.

The idea was to cash the seller of the property out at closing and if there is an existing mortgage, to pay it off from the prodeeds. We have no intentions, at least we haven’t talked about the possiblity of creating junior liens. We are looking at creating a 1st note and mortgage and sell it to an institution at closing.

The parameters we are looking at is a buyer with a 600 min credit score, that has been employed at the same job for at least 2 years, and can afford the monthly payments. The institution that buys these notes suggested that we calculate closing costs for the buyer at around 3% of purchase price and calculate the buyers monthly payments at 2% more from the intended interest rate charged (i.e., if a 10% mortgage, calculate at 12%)to make sure this buyer can afford the monthly payments. Also, we require a minimum of 10% down (the prospective buyer says he can put down $15,000).

We are looking at creating a note as follows: Price of Property= $150,000// Down Pmt= $15,000// 1st mortgage= %135,000// N=240, I=10, PV=-135,000, PMT=1,302.78, FV=0. All due and payable in 7 years (84 mos.) Balloon PMT, FV=113,497.53. The seller of the home still owes approximately $98,000 on their mortgage.

The funding source has already expressed that if these parameters are met and appraisal, title work and all other due dilligence is in par with what they want they will buy this note at closing to yield them 11.5% = 125,868.91. My question is what is the most appropriate way to disburse the funds to all parties involved? Underlying loan, realtor I’m working with, the seller and myself.

I know that the answer, as you pointed out, “depends” on many different factors, but a “scratch-book” opinion will do well to set me on the right path.

Thank you as always for your advise David!

Dario

P.S. I found “Tin Can Alley” 2 weeks ago on e-bay!!! I’m devouring it and looking forward to doing many deals with you!