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Tax Liens & Mortgage Notes

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Phil Moore
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  • Oak Harbor, WA
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Purchase Money Mortgage Note Investing

Phil Moore
  • Rental Property Investor
  • Oak Harbor, WA
Posted Jan 5 2023, 16:04

Storytime: I've recently taken a deep dive into the world of creative finance specifically in regards to owner financing and subject-to. I've been generating a number of offers for sellers to finance their properties to my company on terms that work for both parties involved. Often times these terms include 7 or 10 year balloon payments. While the terms of the deal make for a solid investment for the seller, I find often times that folks simply aren't willing to wait until the balloon is due to reap the rewards of their investments. This is a problem that I know has a solution. I put on my thinking cap to figure out the solution, and I want to know if the "solution" that I have devised is possible, feasible, and legal.

My questions: Is it possible to sell a promissory note from a purchase money mortgage? If so, how exactly is this done? What kind of terms would make it enticing for a seller turned lender to do such a deal? 

If it is possible to conduct transactions with this kind of note, is it also possible to purchase a portion of the note in conjunction with a group of investors if one is also the borrower on the underlying note or has a relationship to the borrower? In other words:  can you have the cake, and eat a piece of it too?


I would appreciate any insight to this. I don't know if I want to have to go back to drawing board...

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Phil Moore
  • Rental Property Investor
  • Oak Harbor, WA
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Phil Moore
  • Rental Property Investor
  • Oak Harbor, WA
Replied Jan 5 2023, 17:16

I suppose that I should have done a bit more research into the nature of promissory notes as financial instruments to answer a couple of my own questions. I found the info about the sale of a note before the maturity and what goes into the valuation. 

https://math.libretexts.org/Bo...

I do, however, still have the question about the terms surrounding the deal that would make it enticing to the noteholder to sell the note prior to its maturity. Also, does the preexisting relationship hinder investing in such a note once it is sold?

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Don Konipol
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Don Konipol
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Replied Jan 11 2023, 05:41
Quote from @Phil Moore:

Storytime: I've recently taken a deep dive into the world of creative finance specifically in regards to owner financing and subject-to. I've been generating a number of offers for sellers to finance their properties to my company on terms that work for both parties involved. Often times these terms include 7 or 10 year balloon payments. While the terms of the deal make for a solid investment for the seller, I find often times that folks simply aren't willing to wait until the balloon is due to reap the rewards of their investments. This is a problem that I know has a solution. I put on my thinking cap to figure out the solution, and I want to know if the "solution" that I have devised is possible, feasible, and legal.

My questions: Is it possible to sell a promissory note from a purchase money mortgage? If so, how exactly is this done? What kind of terms would make it enticing for a seller turned lender to do such a deal? 

If it is possible to conduct transactions with this kind of note, is it also possible to purchase a portion of the note in conjunction with a group of investors if one is also the borrower on the underlying note or has a relationship to the borrower? In other words:  can you have the cake, and eat a piece of it too?


I would appreciate any insight to this. I don't know if I want to have to go back to drawing board...

Note Investors are looking for 12% + yields to maturity on unseasoned or relatively new owner carry notes.  The yield necessary can go higher depending on the LTV, down payment, borrower credit, note terms, and asset class/location.  Some notes I wouldn’t touch unless I received an 18% yield.  Herein lies the rub.  If a property is sold with owner financing at an above market interest rate but still reasonable of say 7%, then on the secondary market the note will sell for a lot less than principal balance.  
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Phil Moore
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  • Oak Harbor, WA
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Phil Moore
  • Rental Property Investor
  • Oak Harbor, WA
Replied Jan 13 2023, 14:58

@Don Konipol I appreciate the response on this. That explanation paints a clearer picture for me. What I want to do may not be feasible without a significantly larger influx of capital. Thank you!

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Chris Seveney
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Chris Seveney
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Replied Jan 14 2023, 12:10

@Phil Moore

As mentioned you can sell your note on the secondary market but it will most likely sell at a discount. Owning a few notes may not be worth it unless you are growing it into a larger business. If you are using cash it’s ordinary income tax and risk involved.

Really depends on your goals and what your seeking

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Marco Bario
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  • Frederick, MD
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Marco Bario
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  • Frederick, MD
Replied Jan 17 2023, 10:28

@Phil Moore -

You might encourage your sellers to create a first and a second.

Example:

10% down payment

70% 1st lien

20% 2nd lien

Should the note holder wish to sell the 1st, they'll receive a smaller discount because there's greater equity protection.

Personally, I underwrite balloon notes as if they will fully amortize. The risk is too great the payor won't be able to make the ballon payment at maturity. Better to keep the term under 15 years and let it fully amortize.

Buyers are going to want to see a personal guarantee. It sounds like you're purchasing in the name of your entity. There's a market for paper with no PG, but the higher discount will be in line with the increased risk.

Purchasing any investment with a group of investors enters into the area of securities law and something you'll want to seek legal council for.

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Phil Moore
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  • Oak Harbor, WA
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Phil Moore
  • Rental Property Investor
  • Oak Harbor, WA
Replied Jan 21 2023, 23:38

@Chris Seveney and @Marco Bario Thank you both for the input! David Putz was able to share a video with me about the 70/20 structure that I think may be super beneficial to those folks who may be looking to get more cash upfront. 

To what extent does a personal guarantee or lack thereof impact the discount rate of a note?

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Marco Bario
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Marco Bario
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Replied Jan 23 2023, 13:59
Quote from @Phil Moore:


To what extent does a personal guarantee or lack thereof impact the discount rate of a note?

It depends on the collateral, down payment, ITV and other factors. It's not unreasonable to assume an investor will want an additional two to five percentage points or more in discounted return. 

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Chris Seveney
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Chris Seveney
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Replied Jan 23 2023, 15:06

@Phil Moore

70/20 can work but it also goes to what the property value is. If a seller jacked up the price then it doesn’t matter

I see a company who couldn’t sell a home for 100k as it sat on market for months and then it seller financed for $140k with some creative finance and now selling the note. To me that note is nearly unmarketable as house is worth $80-$90k