What are the issues with this note.

Question

We are trying to settle an estate: 3 siblings want to hold a note for a 4th .

Property is appraised at $360,000

3 siblings will hold a 270,000 5%  interest only note with a 5 year 270k balloon.

Taxes on this property are now $,8,000 and insurance is $2400.

We will escrow taxes and ins.

Questions:

What are the issues if any re the note we propose?

Is there a 3rd party that could be paid to administer and if so cost?

Are there legal issues?

would a note like this be marketable and if not is there a solution that could be marketable?

What income and credit score would be necessary to re finance out of this note in 5 years.?

Bill Gulley · Answer

Michael, first, this is in an estate settlement among family, the seller finance rules, D-F and SAFE Act do not apply.

It's a high risk as there is no principal reduction, down the road any institutional lender will be looking at the past loan performance for a new loan, besides credit issues. A loan requiring a principal reduction may be much higher in payments, there will be no track record of making a similar payment, if it's considered they will rely more heavily on credit and ability to pay.

I/O notes are less marketable as they are a higher risk. The loan amount also effects marketability at a higher UPB, fewer investors are willing to go that high meaning the discount to expect will be higher.

You can search on line for loan servicers, GreenTree is one, usually fees are about $30/35 a month, could be more or less, they need to take several thing into consideration and depends on what services they provide, just collections or everything including securing collateral and disposal in the event of default.

To make it more marketable, have a mortgage broker at least process it as a conventional loan and make up a loan package in a conventional manner. Get an appraisal, may have been done for the estate, at least get a BPO. Document the collateral value and the estate settlement as to the deeded interests transferred. #4 is buying, so you'll have a settlement and get title insurance along with an assignable lender's policy (which should be free, BTW). HUD-1 if it's a residence, settlement statement if commercial.

What is the property type, that too is an issue...?

As to qualifying in 5 years? Who knows, use the current guidelines from your bank for the type property currently used.

If there are credit issues now, chances are without handholding and guidance there will be later, perhaps not as bad, but again, interest only doesn't demonstrate the ability to reduce the debt, just to carry it.

No legal issues really on this as it is family in connection with an estate, the note must be properly made however and secured.

There are usually more issues with these matters and not knowing the goals of the note holders, I can't advise. But notes can be made with different principal parts with different terms under one obligation that may allow an investor to buy one part out earlier, another to receive various payments or balloons or other terms designed to meet specific needs. If you know one wants the cash now, that part may be sold "at the table" so to speak.

Many loan servicers also buy notes, they can also assist in devising terms as to what they may purchase, so getting with a servicer prior to doing the note is a good idea.  You can shop the loan before you make it too, see brokers or investors. Again, it's a hefty amount.

Might consider a smaller first mortgage, opens the buyers up, lower LTV, principal reduction, that would be more marketable and carry a second, a larger second would indicate more of a guarantee to a buyer of the first position as well.

I'd rather see a longer amortization, 15/20/30 years, perhaps a tad lower rate with a balloon if I were the lender considering refinancing this in 5 years. And, most forget that if there is some issue as to the obligation being paid in 5 years, the borrower needs to begin efforts in 4 years 6 or 9 months to close at 5 years. Starting later in the refi process may mean they are not sufficiently past some credit issue or in the end they are attempting to refi a note in default which becomes even harder to do.

I suggest that #4 sees the bank, understands where they need to be to qualify, what principal reduction would be required, if any.

Can't go much further without specifics, but that should point you in a direction to begin with.  :)

Rick H. · Answer

Also, consider how you structure the carry-back.

For example, if you break down into two notes, a 1st and 2nd, make the first more marketable by keeping the principal balance under 50% LTV. It's a lot easier to sell a note with a safe, low LTV and your likely to take less of a discount hit to re-sell the note.

You'll want to find a loan servicer that accepts private party notes in your state. I have no idea what states other than CA my servicers work in, however I use FCI, Del Toro and new guys Harmony Loan Services.  Servicing is a very specialized and requires licensing.

Michael Lauther · Answer

Rick H.  Thanks for that strategy. It makes sense this may allow us to be able to get cash to those who need sooner than later by selling the first position note. .

Michael Lauther · Answer

Bill Gulley

thanks for your usual thorough response. this allows me to present options to all concerned.

Michael Lauther · Answer

Forgot to mention, this is a New York State property. I read several posts from Bill Gulley regarding safe act and balloons. the objective is to allow the 4th sibling to remain in the home and have a reasonable  chance of refinancing out of a note to pay off siblings or to sell a note structured properly so an investor would consider it.

Five years seems to be the longest time siblings want to wait for their money. Only other option is to sell now and split proceeds. That is cleanest and most practical but hard to accomplish.

thanks for any insight. still dealing with this 7 months later.