How can I guess the value of the note I am creating?

14 Replies

Hello all! This is my first experience creating a note on a sale. I have a $600k property in Austin, Texas that has a house on it that is used as a daycare. I want to offer a first lien for about $250k to an investor who will buy the property. What terms do I need to create to make sure I can sell this note immediately for at least $250k? What is the best market/website to sell it on? 

@Joshua Dorkin

I would love to put a bounty of some sort on this question. Maybe you can add that feature in the next few minutes? :) 

Is the buyer putting $350,000 down?

Why are they not obtaining a loan?

Hi Richard,

They are taking a second for 200k and putting cash on the rest. They are purchasing through a 1031 in their trust. They do not have time for conventional financing because of the 1031. 

It is also unclear what they would qualify for because they are small business owners and do not show a lot of income on tax returns. And it is in the trust's name. Not sure how that affects things. 

The property easily carries itself with the existing NNN lease. So, payment should never be an issue.

Even if the LTV is as stated, I think you will have a hard time marketing the note for the UPB or face without a qualifying buyer on the first. But that is outside my realm. What rate are you writing it at and make sure you don't compromise your first position. (Don't Subordinate)

@Bob E.

I was just speaking with http://texasnoteco.com/ and he was saying that it was best to do:

10-10-10
10% down
10% interest
10 year amortization
600+ credit

I agree with Richard Dunlop regarding the sale of the unseasoned Note at 100% of UPB. The value of the Note on the open market is a function of several factors not just the Note Rate.  The type of collateral, the status of the local real estate market, the strength of the borrower, the terms of the Note (rate, term, payment amount & frequency, balloon, subordination, etc), the payment history of the borrower (seasoning), compliance with origination regulations, with or without recourse.  These and other factors will influence the price you receive for the Note.

Perhaps you should consider selling a partial.  This helps mitigate the risk for the Note Buyer & if the Note performs well, you will have a more valuable instrument when you get it back.  I don't know the term of the Note but a balloon payment will often give a bump to the value of the Note.

No idea of who texasnoteco is, might be Joe Gore from the sound of that advice! 

10% down, LOL!!! You'd really take a haircut on selling that note!

And, you don't have time for the idiot to be born who would pay you 100% on a newly created note, on a business, with slow credit and weak income regardless of how well the NNN was paying.

You aren't really the lender, you're originating the note, anyone who funds at the table or is to purchase a new note that is not seasoned will be considered the "lender", they might as well provide the loan. 

I'd say your best bet is to look for a private lender to provide the loan. 

You can sweeten the note by a note purchase agreement in the event of default, you buy the note back and then you deal with the default, it was your property, so you know the collateral. 

That NNN lease needs to be pledge with a UCC filing, in a default, lease payments go to the note holder.

You can also pledge lease payment to obtain your funds to buy the note back.....or, you could take the note with a financed purchase arrangement. Don't try this yourself, go to an attorney and put my words in their ear. This is getting into advanced stuff!

Good luck! :)

You may want to see if they can find private money on their own if you do not desire to hold the loan for at least a short term.  The whole "sell this note immediately" statement is a little concerning.  You could have some time on your hands as you try and market the loan.  I would plan at best to hold the loan for 6 months while you market.  Could be a longer.  If that doesn't work for you, then find a different option.  

One of the ideas you will have to overcome is underwriting this loan based on what you know instead of what you collect.  The loan's strength depends on a couple ideas:  (1) the strength of the underlying tenant and terms of the agreement (2) the financial depth of the trust to capitalize debt service in the event the tenant goes delinquent or defaults (3) the capital capacity of the trust to turn the use over to a new tenant in the event the current tenant vacates for whatever reason.  

It is not comforting hearing that the owners of the trust do not themselves have strong financials.  They do not show strong income because they in fact do not have strong income I suspect, which is not a bi-product of owning a small business per se, it is a bi-product of not having consistent and ample income.  

I will say this, you are not the first and will not be the last person to sort of not get what this is all about.  This notion has emerged that a loan is simply all about rate, term and website to sell.  

....not so much.  

The borrower matters.  The collateral matters.  The credit risk matters.  The security instruments matters.  The tenant matters.  

This is not an entry level loan (if there is such a thing) as far as origination goes.  You have multiple parties and instruments that need attending to.  You could have barriers to collection by way of the trust's presence.  (probably need personal guarantees)

So to be clear, you need more than someone on a internet forum telling you to put a 10% rate on a 10 year term and list it on www.xyz.com.  There is no way to actually address your inquiry properly without digging into the potential file itself in more detail than is provided here (or could/should be provided here).  

So for those reasons, which I think are fairly sizable, I suggest you see if you can have them go find a private lender themselves and get it out of your hair.  If for some reason that is completely out of the picture then you need to get help with someone who actually knows about loans and the secondary market to help you underwrite and setup this loan.  A DIY here probably leads to defects which leads to discounts which means you are holding this loan longer than what you seemingly desire currently.

Originally posted by @Will R. :

I was just speaking with http://texasnoteco.com/ and he was saying that it was best to do:

10-10-10
10% down
10% interest
10 year amortization
600+ credit

 That is a horrible loan scenario.  

Call him back and ask them if they will originate and fund it themselves.  Or are they just trying to broker the loan if/when you make it?  (I am betting it's the latter because that is a horrible loan to make)

Stick to what Bill and I just both told you.  Trust me.

As an aside, making a bad loan or a 'weak' loan and then trying to offset that risk by selling partials is silly.  If the loan is not strong to begin with, it is by definition "not strong" or is a credit risk.  

The point here, partials are not even remotely the answer here.  

@Dion DePaoli and @Bill Gulley - Really appreciate the thought you have put in here. You guys are fantastic. I would obviously never do a 10% down loan :). This would be under 50% LTV. The tenant is currently mine and always pays on time.

What would you say is the best way to find a competent underwriter in Austin? My mortgage broker? 

Sorry, Will, Dion may know someone in your area but I don't. An underwriter or financial consultation is not something that is really restricted to a local area. Much of the secondary market loan underwriting is accomplished off site or through a system where the originator submits the loan request for underwriting. 

In your case, assuming this is a commercial sale and note, there are fewer restrictions on the lender and, to my knowledge, anyone who can demonstrate professional competence may advise a commercial lender........such as; an attorney, CPA or accountant, an investor contemplating the purchase of the note, or anyone with professional experience. This cannot involve origination aspects, but can involve structure, compliance, risk analysis, administration and management aspects for the lender. I believe Dion's firm provides similar services. :)

@Dion DePaoli   

I think given the complexity and rush of this deal, I am going to back away or find a different route. Seems too risky to go in on this without more time for research. Thanks a ton for your feedback. These kinds of responses are what make BP so helpful. 

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