BiggerPockets

I have several 1st Mortgage Notes available to sell. They are all around $90,000 Principle Balance, 9% Interest Only payments, with 3 year terms and all 3+2 SFR's in Phoenix, AZ. Nice properties, great borrowers, all current and owner occupied. I will sell each note at a 20% Discount from Principle Balance, that is $72,000 Purchase Price for a $90,000 Note. I will sell individually or package several together. Can anyone suggest the most cost effective and timely method for selling these off fast?

Thanks

Hi George,
Thanks for your reply. As to seasoning, these notes are all fairly newly originated. My company buys these homes directly from banks or at trustee sale. We then have the property appraised and sell it at the appraised value
immediately. So my seller-carryback notes have a principle balance that is equal to the appraised value of the property. Your 20% discount from face value is there to provide an 80% LTV with 20% protective equity. The appraisals were all done within 30 days of the sale of the property to the homeowners. I have nine notes, they range from 6 months to days from origination. All are current and owner occupied. We record a 1st Trust Deed on each property, which is the only lien on the property. As to your question about our borrowers FICO scores. You must understand our niche in this marketplace. Our property profile is a nice working class home in an area with good schools, access to public transportation, and close to blue collar type jobs. These homes are not luxury trophy houses overlooking the 18th fairway. Our buyers are bus drivers, construction workers, we have a butcher in one of our properties. You probably get the picture. Our buyers are not attorneys and CEO's, they are hard working middle class folks who work for a living and love their families. Please forgive me if this sounds corny, I'm just trying to make the following point. Most of our borrowers don't have a FICO score at all, please don't stop reading there is a good reason that we make these loans, using our own money I might add. These people do not have credit cards or auto loans, they pay cash for everything. So how do we underwrite these borrowers? We take a 1003 Standard Loan Application. We require at least five years of job history verified by W-2's and paycheck stubs. Job history carries a lot of weight with us.We document five years of rent or mortgage payment history. We use FHA guidelines for Debt to Income Ratio of 38-40%. We require double the 3 1/2% FHA down payment from our borrowers. They typically bring between $7,000-$9,000 to escrow to close. That is substantial skin in the game for these borrowers. We do all of our own underwriting. One of my partners is a former FHA underwriter. Remember we use our own money to buy these deals. I provide potential note buyers with a complete Investor Package so you can complete your own review of the property and the borrower. This is another point to understand about my deals. In our area of Phoenix, AZ rents for comparable properties run $900-$950/mo. If you look at our typical $90,000 Note, at 9% interest only payment, that is $675/mo. Add taxes and insurance of $125/mo. which are impounded by our servicing company and our homeowner has a mortgage payment of $800/mo. We are currently underwriting two dozen new buyers. You can see pictures of some of our properties on our website, or contact me directly. I hope I have answered your questions, let me leave you with this information on yields. Our 9% Note Rate pays you 11.25% on your money because of the Discount. When the homeowner refinances the loan at the end of three years, they must pay off the $90,000 Principle Balance and you earn the $18,000 Discount at that time. That return is equal to 19.58% Annual ROI. Your the 1st Mortgage lender on this property. I look forward to hearing from you.

Cherif Medawar?

I personally only look at LTV's in the 60% range. At 80% LTV I'd better be earning 14%+
The borrower's skin of $7,000-$9,000 is way too small for my liking. I'd only consider a 80% LTV if the borrower was bring $15,000 - $20,000. The $7,000 - $9,000 makes me think that in 3 years these borrowers would walk away if times got tough. They are more likely to stick with it if they had $20,000 invested in the home.

Wow, if business wasn't so good I might start to get low self-esteem reading these posts!

First to Ben, after the discounted purchase price on my notes, our yields are north of 18-20%. Secondly, conservative financial institutions have for decades used and continue to use today an 80% LTV to provide enough security for them to make loans on housing. Around 8% of all home loans are currently in trouble, that means there are TENS of TRILLIONS of dollars worth of performing home loans and the vast majority of them are 80% LTV deals. That is a track record that speaks for itself. Sure everyone likes higher down payments, but you can't always get what you want, right? I have a homeowner with ten years at the same job, a 30-35% Income to Debt Ratio and a couple of kids in the school down the block, who's current on his $800/mo. payment, which includes taxes and insurance. Comparable properties rent in Phoenix for $900-$950. We looked at the whole picture, and we decided to approve the loan. This borrower is already working on his FHA refinance, and he's only been in the house for four months.

Now LocR. I take you at your word. OK, so you have 14% at 70% LTV all day long.
Great go buy them. If anyone reading this wants to see deals at 18-20% at 80% LTV I not only have several of them, I will email you a complete Profile of the Property and the Borrower to review, or you can go to my website and see some right now. Or you can go out and look for the deals Mr. LocR. says are out there all day long. Secondly, I/O and ballon payments are common in this type of bridge financing, which might be negatives to you but they are not negatives to my investors who are earning double-digit yields using this investment model. Some refinance sooner than the three year term which actually increases my yields. As far as leaving your money out there longer, most of my investors LIKE to leave it out there longer. It is secured, it is generating a monthly income and there is 20% appreciation over three years built into the front end in the form of the Discount. If you buy Treasuries, from short term up to the 10-Year Note, your yields, when adjusted for inflation are negative. Same with bank CD's and that interest is taxed. The point is this, if you have a performing mortgage note paying you double-digit returns, why would you want your money back as quickly as possible? Unless you are flipping notes or property, or have some emergency requiring cash, my investors prefer to keep that money working.

Thanks for your comments guys, I love these exchanges.

Time for a shout out to BiggerPockets. I signed up to the site last month, made my ten comments and then posted my Discounted 1st Mortgage Notes last week. I'm finding that the posts in the Forum are generally negative. Which is fine, I have a great product and I enjoy explaining it. The private correspondence on the other hand is completely different. I have been contacted by several people asking about my Notes. Some are private note buyers and some are brokers. We pay 5% on Gross to our outside brokers. The point is that in this day and age of over promising and under delivering BiggerPockets has vastly over delivered for me.

Thank you.

George,
Thank you for your posts, I enjoy our exchanges.
We have found a very active niche in the Phoenix, AZ residential real estate market.
We don't advertise at all, our buyers come from agents and brokers who offer great properties with seller financing. They are well connected in the communities that they serve. Most have been in business for many years, and they have in the past and continue today to advertise. We pay these buyers representatives a fee through escrow, fully disclosed.
Most of our homebuyers/borrowers are Mexican-American/Hispanic/Latino. These are hardworking folks, in this country legally, able to document and verify their incomes. They have tax returns, identification and rent or mortgage payment history. As you are aware, licensed and bonded escrow and tittle companies require notarized confirmation documentation of who the borrower is, and that they have the right to live and work in the U.S. We provide all that information to our note buyers as well.
What our borrowers typically don't have is a lot of credit history, hence the lean FICO. These folks are what we call FHA near misses. They cannot get conventional financing at this time. We teach them what to do in order to qualify for FHA loans as quickly as possible. They want a longer term loan with a better interest rate, and we want them to pay off our loan as soon as possible. Our loan has no pre-payment penalty.
What we offer them is an opportunity for home ownership. That is still a big part of the American Dream that people will work extremely hard to achieve. In our area of Phoenix, AZ, rents for comparable properties run $900-$950/mo. If you look at our typical $90,000 Note, at 9% interest only payment, that is $675/mo. Add taxes and insurance of $125/mo. which are impounded by our servicing company and our homeowner has a mortgage payment of $800/mo. What does all this mean? It means we have qualified buyers standing in line for our properties. We are very comfortable with our borrowers. Remember I buy a house with my own money, I take the note back. If I don't sell off my notes to investors, I live with the borrowers. My borrowers have pride of ownership at a monthly cost lower than rents, in a market that has begun to appreciate (see most recent Case-Shiller for Phoenix), in a state with a relatively strong economy. Our buyers make their payments, they want what they have and are working hard to keep it. As you pointed out, beauty is in the eye of the beholder, and our Notes aren't for everyone, just the investors who find these yields beautiful.