What is this note worth and how to sell it?

Rental Property Investor · New York, NY · Member since 2013 · 136 posts · 101 votes

Hi All,

I am in the process of selling a property where I will be holding the note for 280k (15yr term, 10%, 5yr balloon). The property is worth 380k and I am getting 100k down from buyer. 10% return is nice on the 280k but I'd like to have a way to liquidate that note for another purchase if needed.

What would this note be worth? How to go about selling it?

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Logan Hassinger

Specialist · Fort Worth, TX · Member since 2014 · 528 posts · 226 votes

@Ahmad H.

You will be looking at a value at 90% to Par based on the Unpaid Principle Balance.

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Mark Sewell
Investor · Houston, TX · Member since 2017 · 1k+ posts · 871 votes
7y
Did you use an RMLO to create the mortgage note with the owner occupant buyer? In other words, will be considered a Qualified Mortgage?
Is the note performing? How long have they been making payments?
Just throwing out some questions that I suspect a note buyer will likely want to ask.
I know really very little about this except for I am researching the idea of doing exactly what you have done here.
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Ahmad H.
OP
Rental Property Investor · New York, NY · Member since 2013 · 136 posts · 101 votes
7y
@Mark Sewell This is a commercial property, so the owner will not be living there. He will be starting a business.
The deal hasn't closed yet, but assuming the note performs, how much of performing history would be needed before attempting to sell?
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Dan Wallace
Golden, CO · Member since 2016 · 145 posts · 61 votes
7y
I think you can sell the note at any time. A history of payments would obviously get you a better return but be prepared for a note buyer to basically want to underwrite the entire deal. Is this a start-up business or expansion? Is there a personal guaranty? What did the property appraise for?
I know of buyers of notes and these are some of the questions they will ask.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
7y
get close with your real estate calculator and the PV function.
NOte investors are like every other investor.. they try to get the best deal possible for themselves..
professional buyers in the business will offer you the least.. someone who is semi passive and maybe buying it in their IRA could offer you the most.
keep in mind investors are generally looking for a 10 to 30% apr return.. so play with the PV values to determine what an investor will pay for that note.. its a pretty strong note based on what you posted.
if its a great area you might be able to sell it for par.. but some investors wont pay par for any note ever.
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Logan Hassinger
Specialist · Fort Worth, TX · Member since 2014 · 528 posts · 226 votes
7y
@Ahmad H.
You will be looking at a value at 90% to Par based on the Unpaid Principle Balance.
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Ahmad H.
OP
Rental Property Investor · New York, NY · Member since 2013 · 136 posts · 101 votes
7y
@Dan Wallace Thanks for the perspective.
This will be a start-up business but the buyer operated something very similar before and was successful. The buyer will be personally guaranteeing the loan. Appraisal is coming up but I don't have any doubts it will appraise for 380k.
The location is excellent and most of the value is in the land.
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Ahmad H.
OP
Rental Property Investor · New York, NY · Member since 2013 · 136 posts · 101 votes
7y
@Jay Hinrichs Thanks for a shot of reality. Here I am thinking I could get above 280k for it since it's a high interest note with plenty of equity as a safety cushion.
Where can I find 1st position notes at 15 or 20% apr? :P Sounds better than buying rentals!
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
7y
Originally posted by @Ahmad H.:

@Jay Hinrichs Thanks for a shot of reality. Here I am thinking I could get above 280k for it since it's a high interest note with plenty of equity as a safety cushion.
Where can I find 1st position notes at 15 or 20% apr? :P Sounds better than buying rentals!
just do short term fix and flip loans 3 points 12% one year.. there you go. there is a reason I have been in HML for 30 years and own no rentals LOL although at one time I had 350 houses.. but no more.. notes are great for when you don't want to deal with renters. at least with fix and flippers they usually have some money and ambition. and they don't get paid until you get paid.
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Ahmad H.
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Rental Property Investor · New York, NY · Member since 2013 · 136 posts · 101 votes
7y
@Logan Hassinger Thanks for the response. How did you come up with the 90%?
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
7y
Originally posted by @Ahmad H.:

@Jay Hinrichs Thanks for a shot of reality. Here I am thinking I could get above 280k for it since it's a high interest note with plenty of equity as a safety cushion.
Where can I find 1st position notes at 15 or 20% apr? :P Sounds better than buying rentals!
note buyers wont pay over par. unless they are trying to acquire the asset. which in this case would be quite doubtful
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
7y
Originally posted by @Ahmad H.:

@Dan Wallace Thanks for the perspective.
This will be a start-up business but the buyer operated something very similar before and was successful. The buyer will be personally guaranteeing the loan. Appraisal is coming up but I don't have any doubts it will appraise for 380k.
The location is excellent and most of the value is in the land.
plus this is a New York note.. those dont sell for as much as others in most instances since foreclosure time lines are measured in years not days.
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Ahmad H.
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Rental Property Investor · New York, NY · Member since 2013 · 136 posts · 101 votes
7y
Makes sense since the borrower can pay off the note the next day, leaving you with a loss if you paid over UPB. I had the same concerns, so I added a prepayment penalty of 10% if note paid off within first year, 9% within 2nd year, ... 6% within 5th year. An important detail I forgot to mention in the my initial post.
Any idea of how much of a discount notes get for being in NY vs let's say FL?
HML 3% points and 12% for fix-n-flips are short-term. Don't you end up with gaps where your money is sitting around waiting for the next deal, lowering your net?
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Kevin Vandenboss
Real Estate Broker · Lansing, MI · Member since 2015 · 90 posts · 53 votes
7y
@Ahmad H.
Based on the equity and the rate, you may want to look up First National Acceptance Company. They're pretty aggressive note buyers. I know they primarily purchase residential notes, but I'm pretty sure I've seen them do commercial deals as well. Might be worth looking into.
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Ahmad H.
OP
Rental Property Investor · New York, NY · Member since 2013 · 136 posts · 101 votes
7y
@Kevin Vandenboss Thanks for the tip! I'll check them out.
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Chad U.
Investor · Boca Raton, FL · Member since 2012 · 1k+ posts · 1k+ votes
7y
@Ahmad H. you may want list this on a few note exchanges like @Brett Burky's Paperstac to garner interest and price expectations.
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Richard Allen
Specialist · Orlando, FL · Member since 2015 · 117 posts · 89 votes
7y
@Chad U. Thanks for mentioning Paperstac. We are happy to have you as a champion for the platform.
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Chris SeveneyBusiness Member
Moderator
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
7y
@Ahmad H. - Is the note in his personal name or his business? If its in his name it still may be considered a residential note unless the note specifically states its a commercial note.
Reason I ask is in NY the cost to foreclose and the time it takes on a residential property can be years if the borrower fights it (and cost a hell of a lot of $).
New York is probably considered the worst state to do a foreclosure in and many investors will not even buy in New York. That will limit who you can sell it too as well.
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Ahmad H.
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Rental Property Investor · New York, NY · Member since 2013 · 136 posts · 101 votes
7y
@Chris Seveney The deal hasn't closed yet but note will be in buyer's personal name. I will have to check with my attorney if there's a way to mark it as a commercial vs residential note.

As you can tell, I am pretty inexperienced with notes, so this might be a silly question:
Would the foreclosure timeline still be a concern if buyer signs deed in lieu of foreclosure? If not, I wonder why banks don't make borrowers sign that as well to avoid a lengthy and costly foreclosure. I must be missing something.
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Chris SeveneyBusiness Member
Moderator
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
7y
@Ahmad H. according to two of my attorneys you cannot have a condition of a loan be the borrower must sign a deed in lieu (whether pre-signing or part of the agreement).
if you had a borrower sign one at closing and they contested it there is case history showing it will not be considered valid.
The other questions are for your attorney to answer / ask.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
7y
Originally posted by @Chris Seveney:

@Ahmad H. according to two of my attorneys you cannot have a condition of a loan be the borrower must sign a deed in lieu (whether pre-signing or part of the agreement).
if you had a borrower sign one at closing and they contested it there is case history showing it will not be considered valid.
The other questions are for your attorney to answer / ask.
Pre sign deeds in Lieu are not legal. although some HML do this and private lenders.
other wise your right every lender on the planet would get one signed.
one main reason is the second you sign and notarize that document It does not have to be recorded to be legal and in force. so in essence you have already taken the property back on the day you closed it.
this is an old one and simply wont hold up.. and if the buyer of your property is living in it.. its residential.. most HML that do commercial purpose loans will have the borrower sign a document and get it notarized that its a commercial loan and the borrower is not going to live in the home.. this is SOP for HML of any size.
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Ahmad H.
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Rental Property Investor · New York, NY · Member since 2013 · 136 posts · 101 votes
7y
@Chris Seveney Is the deed in lieu moot in all states or only in VA (probably worse in NY)?
I had suspicions about the effectiveness of deed in lieu although I've read many BP posts about HML and having that be part of the agreement.

Thanks for the input! Much appreciated. I'll be having a conversation with my attorney.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
7y
Originally posted by @Ahmad H.:

@Chris Seveney Is the deed in lieu moot in all states or only in VA (probably worse in NY)?
I had suspicions about the effectiveness of deed in lieu although I've read many BP posts about HML and having that be part of the agreement.

Thanks for the input! Much appreciated. I'll be having a conversation with my attorney.
its no good every were.. just because HML does it does not make it right.. many times their target borrowers just wont fight it.. they are flippers.. you use this for owner occ and or with that huge down payment not going to fly
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Ahmad H.
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Rental Property Investor · New York, NY · Member since 2013 · 136 posts · 101 votes
7y
@Jay Hinrichs
Nice explanation of the technicality of why deeds in lieu don't work. That answers my follow-up question to Chris.

The property is zoned commercial and was last used as a bar. It's very obvious that it can never be used as a residence. Nonetheless, having the buyer sign a document restricting it to commercial use & loan wouldn't hurt.
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Jay HinrichsBusiness Member
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
7y
Originally posted by @Ahmad H.:

@Jay Hinrichs
Nice explanation of the technicality of why deeds in lieu don't work. That answers my follow-up question to Chris.

The property is zoned commercial and was last used as a bar. It's very obvious that it can never be used as a residence. Nonetheless, having the buyer sign a document restricting it to commercial use & loan wouldn't hurt.
if its clearly a commercial property then you just need the note to say commercial note.. and does not hurt to have them sign the other disclosure.. I mean I have to sign those on construction loans. when I am building specs and the bank knows full well I am not going to move into 20 homes I am building all simultaneously. LOL
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Ahmad H.
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Rental Property Investor · New York, NY · Member since 2013 · 136 posts · 101 votes
7y
@Jay Hinrichs Lol. You're operating on a whole different level, my friend.
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