What's the "freshest" a note can be to be sold?

Question

I'm becoming very interested in owner financing houses.  I've been reading a lot about wraparound mortgages.  Now I'm wondering if the wraparound mortgage can be avoided all together.  Here's my thought:

Do the first two steps of a BRRRR

Buy a distressed house

Rehab (with cash)

Then owner finance to a buyer.  Require a 15-20% downpayment.  Setup up a 15-30 year note.

Collect payments

Sell note

My question is this:  How soon after I sell the house and collect payments till I can sell that note?  What what is a reasonable % on the dollar of the note?  Here's a numbers example (I'm buying in Missouri so the numbers are reasonable):

Purchase Price: 28k

Rehab and Holding: 25k

Owner finance for 85K @ 8% over 20 years.  Get a 15% down payment (12.75k), and have a 20 year note for 72.25k @ 8% (670.99 monthly payments).

How long would I need the buyer to perform before I could sell the note?  What's a reasonable price for this note?

Account Closed · Answer

I OWNER FINANCED MANY OF MY UNITS IN ST. JOE---- ITS A BEAUTIFUL THING I HAVE TO SAY. BIG DOWN PAYMENT AND MONTHLY INCOME FOR THE NEXT 30 YRS. IF YOU FORECLOSE- SIMPLY REPEAT.

Logan Hassinger · Answer

@Pat Jackson

What others have said in regards to interest rate on the note, value of home, payment history (highly recommend using a servicer and not servicing yourself), LTV at time of sale to note investor, records of payment history, market conditions and a number of other factors are all great points.

I would say that most performing Note investors are looking to achieve a 12-15% yield.

So let’s say that you have “sold” the home owner financed for more than the actual As-is Value at what you have stated at 8%. In order for a note investor to achieve at 12% yield, they will be looking to value the note based on the value of the home and not UPB (unpaid principal balance). You would be surprised at the number of owner financier’s that “sell” the home for more than it’s actually worth due to a borrower unable to obtain traditional financing.

Example:

As is Value : $70,000

UPB : $72,250

Rate : 8%

P&I : $671.00

Note Sales Price : $67,100 or 95.8% of As-is Value for investor to get a 12% yield.

Now unfortunately, that is not enough LTV to get a note investor comfortable. Therefore a greater discount is applied (say more like 75% LTV or better). In this scenario I would be looking to buy at 75% of $70k or $52.5k resulting in a 15.3% yield.

Now reverse the situation; you “sold” the home for the As-is value while also collecting a 15% down payment as you stated earlier.

Example:

As-is Value : $85,000

UPB : $72,250

Rate : 8%

P&I : $671.00

Note Sales Price : $63,750 (75% LTV) or 88.2% of UPB providing the note investor with a 12.6% yield.

This scenario may also not prove worthwhile to the note investor as you begin to factor in servicing costs and a housing market on the decline (LTV shrinks and limits the exit for a note investor).

My point being in either scenario is that there are many factors that play in to pricing a note. While generally we can say just apply a 20% discount to UPB or As-is Value, which ever is less, there are reasons why it can deviate from that.

Be sure that you understand your exit but also your note investors exit. They BOTH matter.

Sejj Jackson · Answer

@Pat Jackson 6mo seasoning with paper trail. And the mortgage discount depends on tenants credit. But min 20% discount...most will only do up to a 15yr term

Roman M. · Answer

it is beautiful in non judicial foreclosure state. Can't same the same in judicial state.

Pat Jackson · Answer

@Roman M. Thanks!

So hypothetically 90 cents on the dollar, pending some unknown variables? How does one determine the demand for such notes? I’ve never played in this sandbox.

Roman M. · Answer

Selling price will fluctuate on a note buyers appetite for internal rate of return and time. You probably looking at a selling price of around $65,000. The note will need to be couple of months seasoned for compliance purpose.

There are other factors at play. State, borrowers credit, value of the home, etc.