1st position note on CA home with balloon??

Question

Hi Folks,

I'm looking a buying a first position note for $150k UPB on a home with an apparent value of >$300K located in So. Cal. via the FCIxchange site. Its listed as "newly originated". I looked at the note and DOT and it was generated with a LLC as the lender and a different LLC as the borrower, both located in CA. the note is for 12.95% interest payable as interest only with a balloon in 2016. There is also an exclusion for the requirement for the borrower to occupy the home. Both the note and DOT was originated on Feb. 3, 2014.

So, this bit of detective work makes me wonder if this note is compliant with Dodd Frank since it has a balloon, although the borrower occupancy is waived and there is an Assignment of Rents rider on the DOT. Any thoughts on this?

The seller says the property is vacant, so I'm thinking either it will be used as a rental or cannabis grow house. Any other thoughts on how this is executed?

Account Closed · Answer

50% down is a great thing, but that's not what's going on here.  The property was purchased, presumably for cash at auction in 2009.  And now there is a new loan originated in February 2014 for 50% of values with a high interest rate. Someone originated that loan to sell, for a discount, without seasoning. I'd want to know for sure that the loan was truly arms length and that the borrower really received funds.

@Bob Malecki  Was there an escrow? The escrow number is on the deed of trust.

Account Closed · Answer

You are correct, is is not nefarious to create paper and immediately resell it, with or without a discount.  I'd do it in a heartbeat if I could create the right paper. So I'm not sure what about the OPs post made me wonder about making sure the loan was arms length. I think maybe I've seen too many paper scams.  I checked out the property on FCI.  The owner's LLC and and lender's LLC appear to be arms length.  But a little search on the borrower's many varied businesses and LLCs, all supposedly previously run out of the subject property, made me think I would stay far away.  But of course, as you point out, that's without knowing all the details.  I don't need anymore on that one.

Account Closed · Answer

I'm confused.  If the loan is for a commercial purpose and the borrower signed something that indicated that they know they can't live there, then there shouldn't be any concern.  Loans for a commercial purpose are exempt from the DF issues you mention.

The assignment of rents is customary here, and recorded with the Deed of Trust.

I'd want to see the entire title picture and know that the sale and loan to the owner/borrower was arms length.  I'd want to make sure it's not an LLC, creating a straw sale to one of it's entities, carrying back a straw note and then selling the note for cash.  Sorry for the paranoia, but something about the new origination and the 50% down that's making me suspicious.

@Jeff S Account Closed  Any thoughts on this?

Account Closed · Answer

I think we are getting way ahead of ourselves here.  If you are interested, examine the escrow closing statement, appraisal, prelim and vet the lender and borrower then see where you are.  If you are uneasy Bob, that's fine, move on, I totally understand.

I originate my own loans, that way I am totally comfortable with what's going on.  I don't like at all buying loans from another originator simply because it's difficult or impossible to know all the facts.  I won't even entertain another broker that brings me a borrower, who knows what is going on, unless I know the broker, well.

K. Marie: I have originated loans to borrowers after they have owned the property for a while and have considered posting it on FCI.  It wouldn't be sold at a discount and there would be no seasoning and it would probably be for around 12% for about a 6 mo term.  Is that nefarious?  I don't think so.  There are all kinds of circumstances that you can't see until you have all the facts.  I have trust deed investors that I know well and they know me well that I sell loans to without FCI, with no discount and no seasoning.  Happens all day every day, nothing underhanded everybody's happy and everybody makes money.

Bob Malecki · Answer

I don't have access to the DOT any longer since I cancelled my offer, but I think there was escrow set up. The seasoning issue you point out is another reason this note lost it's appeal to me, although a default could be quite lucrative if the home was not being used for nefarious purposes!

Bob Malecki · Answer

I was able to text the seller on the FCIXchange site after I got to the due diligence phase of their note purchase system. What I found is that the house was purchased by the borrower in 2009 from a bank via foreclosure. This note holder provisioned a hard money loan to the owner for the $150K and he's wanting to sell it to recoup his cash to redeploy. So, other than a 13% annual interest rate, there is no big upside to purchase this, since my initial impression was that it was a NPN that I could foreclose upon.

Thanks to all for your comments and insights!

Account Closed · Answer

I've seen FCIexchange but never bought or sold a loan with them.  I know there are some closing fees, you might look into who pays for that.

If it were me I would attempt to contact the lender directly and try to get the whole story.  Maybe they could be a source of future loans or maybe they have another loan for sale that you would like better.  Google the lender, it might be one of the big hard money lenders here local in So Cal ... Anchor, Aztec, etc.

I agree with K. Marie, if there is an affidavit as to the business purpose then DF doesn't apply.  Having said that, I would want to truly know that the money is for a business purpose ... does the borrower have a history of rehabs and this loan is just one in a series for example.

If it's going to be a rental, what's up with the high interest loan, even at 50% ltv it's unlikely to cash flow in So Cal.

The balloon in 2016 worries me.  Why such a long term loan.  Just who is it that is willing (and able) to pay 13% for so long.  Doesn't sound like a fix and flip to me, if it is a fix and flip and it takes multiple years then something is wrong.  Sounds to me the guy has some long term plans and might not realize he is going to be eaten alive by holding costs.  Some lenders don't care if their borrowers crash and burn.  I like to run the numbers to make sure there is a profit for the borrower, if none it's headaches for everybody.

I see 50% down as a good thing.  It shows borrower strength and gives lender safety. Also, recent legislation in CA requires big down payments when a trust deed investor, like yourself, is involved, and, you must be "suitable" for the investment.  The loan may have been structured that way to comply with legislation and be safe. I have borrowers that put 50% down and pay all their rehab costs, it helps them control costs...they love it and I love it.

You definitely need a lenders title policy, and, imo, an appraisal.

There really is a lot to this.  Maybe the best advice is, in addition to doing your due diligence, know and trust who you are buying the note from.

Account Closed · Answer

I can do a cursory one, as I have several data accounts. I don't know how sales work on the site you mentioned, but you'll definitely want to get a lender's title policy.  Send me the address and I'm happy to look it up and see what I see.

Bob Malecki · Answer

Ah, good point on the arms length idea. The listing history on Redfin shows the home was bought out of auction in Aug. 2009 for $210K with no new sale data since. Would a O&E be sufficient for me to determine the nature of the new note? Do you know if there is a way to do a title search for properties in San Bernadino CA online by chance?

Thanks