Note Buyer(s) Needed for Potential Portfolio of Properties in MD

13 Replies

Hi everyone! I'm looking to potentially buy 4 properties (owned by one investor). He's selling them for $170k and says he has a loan of approximately $100k on them. All of the properties are turnkey (recently renovated) and have tenants with property management in place. I offered 20% down and a rate of 5.25% over 30 years. He wants the cash so that he can pay off the loan(s). 

Side note: The owner will have 6 more properties that he needs to sell. 

My questions are:

  1. How do I find note buyers? Is there a database?
  2. How do I setup an attractive note that note buyers would actually want to purchase? 
  3. Will note buyers require a significant discount to buy a performing note?
  4. How long does it need to be seasoned before the note can be sold?

Thanks for any help/tips that you may be able to provide.

I'm assuming the missing piece of information here is that the owner is willing to seller finance the 4 properties to you at the terms you provided and that you are telling him that he will be able to sell the note at some later date because he doesn't want to carry it to full term. 

1. There is no database. There are note buyers everywhere. Someone doesn't need to already be a note buyer to be willing to buy the note if it's performing. You might have a friend in a high paying job who you could explain it to that might be interested. Or you could post here in the marketplace or sell to a company like FNAC.

2. Shorter term notes with higher interest and the borrower shouldering a large chunk of equity and good pay history tend to be more valuable.

3. I have heard of notes that sell for 100% of value. Not common buy possible. Typically most performing notes I would expect to sell at 70-85% of the unpaid balance.

4. Typically 12 months is used as the standard, but there are ways to sell sooner depending on what resources you have available to you.

Think there's something missing? He wants $100k upfront to payoff his loan, so offering to buy the house with him carrying a 5.25% 30 year loan doesn't seem like it would solve his desire to payoff the $100k loan?

Even if he wanted to seller finance the properties to you, he couldn't because the $100k first lien loan is still there and needs to be paid off (unless he is doing a wrap around structure which has its own hurdles). If he did seller finance to you, it would mean now there is a $100k first lien loan, plus a $136k (80% x 170k) second lien loan between you and the seller, and the property is only worth $170k...so no one comes out doing well?

It seems like you need a separate lender to provide you with the funds to buy the house and payoff the seller with cash so the $100k loan can be paid off. Seller financing is usually for properties that have little to no debt on them.

@Odie Ayaga Hi Odie, initially the owner was open to the idea until he gave it more thought and informed me that each of the 4 properties had about $30k of debt on them. Thank you for the FNAC lead! I want to take action on these properties and need a way to structure this deal so everyone wins. 😊
@Abel T. Hi Abel, I was hoping that once he received the funds from selling the note he would pay off the first lien. Also, I'm willing to pay a slightly higher sales price or interest rate if the numbers still work in order to make the note marketable/appealing.
Originally posted by @Candace Noel :
@Abel Teklu Hi Abel, I was hoping that once he received the funds from selling the note he would pay off the first lien.  

Hi - I don't think any rationale investor will want to pay $136k for a note unless the $100k note was paid off first, regardless of the terms. Why would a note investor trust that this guy will payoff the $100k loan after he gets the cash? And if the seller for any reason cannot sell the note, why would you want to take the risk of owning a $170k property that now has $236k of debt on it? 

I really don't think seller financing is the solution here. Rather than spend time looking for note investors, I'd recommend you look for private lenders or a bank that can provide you with funds at closing. That way the $100k loan can be paid off at closing and everyone is happy.

@Candace Noel No note buyer is going to buy a note, even performing for 12 months, for anything close to par at 5.25%....they’ll be looking for a 10-12% return. 

@Abel T. While I agree this scenario is unlikely to work, you are confusing the issue here a bit....if the seller agreed to this there wouldn’t be a first for $110k Plus a second for $136k......there would be one wrap mortgage for $136k.....a $36k loan from the seller wrapped on a $100k first. 

A note buyer, if such a unicorn existed that would pay $136k for it, would pay off $100k directly to the first, and the balance of $36k to the seller. 

Good points @Abel T. I neglected to address the outstanding lien issue. I would think it generally easier to find a lender to buy him out than trying to seller finance and create a note etc. Lot of moving parts to do that.

@Wayne Brooks thanks Wayne. I have no idea what note buyers are looking for as far as criterion. I'm surprised to see that they expect a 10 to 20% returns. Is that interest rates or the whole amount repaid vs what they got on discount? So essentially, is 5.25% too low of an interest rate in general? Are NBs looking for double digit interest rates? Does the difference of the loan's face value and the discount amount they pay not factor in (i.e. loan amt $170k they pay $136k and they get $34k in additional profit once the loan is repaid in full?)

@Candace Noel Yes, note would deeply discount a 5.25% loan. If your seller had to take a$36k discount to sell the note, that would be like him selling you the property for $134k instead of $170k.....not an attractive deal for the seller. 

You’ll likely need to financing on your own. 30 year conventional loans are out since each loan would be less than $50 k or so, and very few if any would or could loan that little. A commercial blanket loan will have a 5-10 refi requirement but you’ll not likely do better.