Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
I'm going to sell a condo down in Palm Desert California that I fully remodeled. I want to sell it with owner financing to facilitate a fast sale (lot of inventory in the desert and market time is VERY slow). Asking price will be around 300k (which is at or a bit above the FMV). Then I want to sell the note. Before doing so I'd like to know exactly what notebuyers are looking for so that I know how to structure the note.
This is what I'm considering: 20% down, carry the paper on 240k; 6% interest; principle/interest loan; 8 year term/amortized for 30 years with balloon payment at the end; 2 year prepayment penalty; will season note for 6 months.
Is this desireable? Acceptable? If not, please give me your feedback so that I can create the optimum note to facilitate a quick sale.
Also would a note like this be bought at par or is a discount expected? If discount expected what would be the approximate discount required?
Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
14y
We are buyers of performing, sub/re performing and non performing notes on a nationwide basis. Here is some insight from our wheel house.
It was only briefly mentioned and I want to put more of an emphasis. The collateral (real property) will be re-evaluated and a conservative value will be used. We and most of the pro's we work with use 30 day quick sale value from national BPO companies. No buyer is going to "push" the value up. The down payment on the loan is good and I would not lower it since this is a private loan.
The interest rate is pretty low for the loan being private. A common theme I see sometimes from REI folks is they think they have to compete with banks/lenders. Don't do it, your loan in its nature is riskier, you are not experienced at this and the borrower will be lesser grade more often then not. As I think Bill mentioned 9.0% is a nicer number, I would not go lower than 7.25%. You can write the loan with an interest only feature to it as well. A higher interest rate will reduce the new buyer discount in the event the borrower goes delinquent by missing a payment or two whether consecutive or in the life of your ownership.
Don't confuse yourself with a bank nor should you assume you should write a loan that looks conventional with its terms. Any borrower who can be approved for a conventional loan will just go get one. That should be fine with you, your paid in full and don't have to mess with a loan. This also provides an incentive for a borrower to look to refinance if rates persist over the next two or three years. As such, I would not put a pre-payment.
As far as credit goes. Everyone knows the better the credit the better. This also goes hand in hand with my point, a borrower with a higher credit score say 680+ should be talking to a bank/lender, not you. I would presume your borrower is more of a lower credit score. This could be "OK". We buy low FICOs all the time. Folks who recently came out of a foreclosure and need a new start or divorce or other life situations which given some time and rehabilitation should be able to get their score back up and go to a bank/lender. I would try to keep the minimum to 600+ but you never know if someone comes in and wants to put more money down or some other compensating factor. Be prepared to weigh all of the parameters.
The balloon is a tool that you need to use as safety net. I would set the balloon somewhere in the ballpark of 24 to 36 months. I think this ties back in with the borrower profile you will end up with. Help push them to get you refinanced out. This will also help keep some value in the loan if you sell later in the loan life. Some buyers will buy this for the chance of default by maturity and it should help you reduce the discount on UPB if he is performing. In example, if he is paying and you sell with 12 months left a 5.0% UPB discount on a 7.25% interest going to put a little less then 12.0% IRR on the table for an investor/buyer if he refinances out. The maturity time will attract some folks to jump in and see if he goes into default and take a gain on the foreclosure.
Regarding pricing. In general being a private loan you will most likely never see anything close to par or 100% of UPB. 6 months is probably close to 82% to 85% of UPB, 12 months plus you should be able to find 85% to 92% of UPB. (UPB = Unpaid Principal Balance) In the event he goes delinquent one or two times you can discount those numbers by an additional 5% to 10%. If he has more delinquencies or ends up in default you can expect to see a much deeper discounts. The good news is California non-performing bids tend to still be on the higher side of the rest of the nation because of the non-judicial foreclosure practice.
None of that is an offer to buy your loan or is meant to be any formal offer. It is meant to give you general market insight. As Bill mentioned, get some experienced folks on your side to help originate and not a bad idea to continue to find note investors to bounce the loan terms and structure off of as you move forward.
Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
14y
Alfred Bell What about the agent you talked to that is working with seller financed deals? Why not ask her who she uses for closings? Why would you talk to a hard money lender? They won't be able to help you. They make money on loans. I would not worry about the future laws-as long as your note is created to the letter of the law today.
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Marc: I asked that agent and just got an email back that she will send me the contact info shortly as she doesn't have it to hand (turns out its been awhile since she did these seller financed deals).
Reason I talked to HMLs was because I didn't know who else to call and had to start somewhere. I found the NMLS website and also called the Calif Dept of Corps (who oversee the licensing) but no one has a list of MLOs. I have to search them out myself. Hopefully this agent and the HML/note investor I spoke with today will give me some names. Meanwhile I plan to call all lenders in the Coachella Valley to see if I can find someone to underwrite this note. I'll keep you posted. The saga continues.
Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
14y
If the Hard Money Lender is licensed properly you certainly could use them. As at that juncture, they are licensed originators holding themselves out to the public to write loans. All lenders are in the business of making money on loans.
Not sure what sort of shop anyone thinks is ideal but a agency seller might shy away from this request since it is a one time deal and could be counter productive to their loan ratios.
Alfred, you can look on Scotsman Guide for a matrix of lenders to call through. Link here: http://www.scotsmanguide.com/
Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
14y
Find out what the agent has to say. Also-call on title companies and see if they offer doc prep, closings and recording of seller financed transactions or if they can put you on the right track.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
At the Cali Corporations site there is a link to NMLO and they are listed. But it appears you need the name to check on the license.
The Division of Finance regulates originators and you would have to call them and see if you could get a list of licensees in your area, I didn't see a listing on the site.
While you search for information you need to consider the source of the information you get. An escrow company is not a mortgage brokerag and they have no idea of how much you will get for a note in three years when saying you won't have a problem selling it and you can very well have a problem. That was a comment of an individual thinking way beyound their expertise.
Yes,"seller-carry backs" are not the same thing as a funded loan but they are treated the same except that a loan funded with cash may seek a deficiency judgment after foreclosure and an "Equity Loan" may not. Extending credit for the payment of an equity amount from a sale nullifies the arrangement and the return of collateral terminates the obligation. In all other respects they are treated the same.
If you look up the SAFE Act and read it, you'll find that seller financing is a small part of the Act and controlling seller financing has arisen from abuses not by lending institutions wanting to control financing that they would not normally lend on anyway, I don't buy that view until lenders drop lending requirements to take the bottom of the barrel so to speak usually served by seller financing. Note to, there is no restriction for an owner occupant selling their home and financing it under normal circumstances, it is targeting dealers, investors due to preditory practices.
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Bill Gulley: Just to ensure that I understand what you wrote... what you are saying is with a seller carry back, if the borrower defaults we can foreclose on the property (we DEFINITELY have that right) but we can't seek any further judgements or go after other assets... all we can do is get the collateral back (which is the condo secured by the 1st trust deed) unless of course the condo sells at the trustee sale for our opening bid or higher. The main thing that I want to clarify is that altho this is a "seller carry back"/"extension of credit" and not technically a loan... we still have the right to foreclose if the terms of the promissory note are not met by the borrower. Correct?
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Thanks for the data and the link Dion. Will check it out today as I am in search mode now for someone who will underwrite this seller carry back. Soon as I have this in place I can put an ad in the Desert Sun and start marketing the property again.
Ad will be something like this...
"Beautiful, fully remodeled condo for sale. Excellent location in South Palm Desert. $270,000 asking price. No bank qualifying. Owner will carry. Own rather than rent."
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
Yes, you can get the property back. But unlike a cash funded loan, where the property is taken back by a bank and then sold as REO and they accept less than what was outstanding, they can seek a judgement for the difference, you can not since you have been made whole, in the same position (or better) before the note was made.
Also, you can't charge points on equity financed or charge application fees or other loan costs that are not actually expensed.
Otherwise, you're in the same boat as any other lender. Your loan is like any other with resppect to discloures, notices, closing, servicing, accounting, adminstration, foreclosure etc.
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Ok Bill, got it.
I'm not having much luck today on my calls. No MLOs so far are willing to do this for me. It's either "we'd need to be a principle in the loan"... or "we'd have to assume liability for the loan and wouldn't do that"... "our company doesn't allow this, try and find a small mom and pop direct lender and maybe they'll do it".
I'll keep trying but if I can't get an MLO then I just have to assume it isn't feasible and I'll have to go the route of a standard owner carry back via escrow.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
LOL, That's what I said way up there, find a small MO who has the flexibility to do off the wall stuff, no corporate type will take the liability if it's not their loan. You should also look for a private loan servicer, they generally originate and service notes and buy them as well. Goggle private loan servicing, many of the offices will be out of state but they may be registered in CA.
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
I've pretty much reached the conclusion that this isn't feasible. I've called direct lenders, loan servicing companies, brokers, etc. and they've given me contacts to call and I've followed up on those as well. (There are a few people who haven't called back yet and a few that are reaching out to have others call me, so there is still a chance that something might happen but from all of my conversations and what I've learned it doesn't seem realistic.) No one is going to underwrite this note for me. The basic reason is NO PROFIT/TOO MUCH RISK. The only thing that makes sense to them is that they would either have to be making the loan, or be a principal in the transaction, or make the loan and then sell the note to me... and none of them would even do that. And, none of that works for me.
I just talked to another guy who owns a private lending company and has 35 years in the business and is also well versed in buying and selling notes. He told me that if I do this through escrow and document everything, have an exper RE attorney draw up and bless the note, and have a service company service the loan and keep records for two years, that the note would be just as valid as if it was originated by a MLO.
He said that the precedent is a 1981 Calif Supreme Court finding that a seller carry back is an extension of the price of the property and is not a loan. As I learned earlier, technically, it isn't a loan it is an extension of credit. And Article 14 of Dodd/Frank, the SAFE Act, etc. will not have any bearing on this or cancel the validity of this note. A seller carryback note, written by attorney, recorded standard trust deed, lender policy and a decent loan file, seasoned for 2 years through a loan servicing company will hold its own and can be sold at a later date.
I really appreciate all the help and input from everyone but I think it has become pretty clear as to what path I need to take. I believe I'm being advised to do something that no one has actually done before. Can't waste any more time on this, I've got to go into motion.
I'll wait a day or two to hear back from the people I'm waiting on but after that, if nothing changes on this, I'm going the route of the escrow with RE attorney to put this seller carry back together.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
I gotta say, I get rubbed when this stuff happens, your 81 court finding doesn't contrdict anything I said and I explained equity vs cash. Your 35 years in the business guy has read the dang Act, obviously he thinks he knows. There is absolutely no servicing period that validates any extension of credit in any way shape or form and that was a stupid statement, sounds like he has been a note dealers, wheeler dealer type as anyone with a higher degree of financing experience would never say something like that.
Again, find an attorney or a mortage servicer who does private notes. And yes this is a note and it is treated as a loan, I already explained the difference, but we all referr to them as loans in financing terminology, again, I explained the difference, don't get caught up with the extention of credit issues as that only plays when you get to court and forecliosure.
The SAFE Act specifically describes seller financed transactions of non-owner occupied residential properties and LOANS made by a seller to finance any installment purchase arrangement, ask all these experts out there if they have read it, might find out too if they are capable of reading statutes.
Alfred, you're behind the 8 ball as you don't know who you are talking to or who to believe, get to an attorney. Most RE attorneys believe they are capable of writing a note, just makes sure they put their bar number on the note and sign it as the originator. Maybe they will do an afidavit stating that the subject note is the only one taken by your company in that year, that might do it.
When (if) you sell the note, you can guarantee the note, kiss the note and be responsible for compliance, that should increase the value as I stated long ago here.
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
I suggest you lease it for five years and then try to dump it, by then, this seller financing issue should have a track record and have solid knowns instead of unknown-unknowns. good luck...
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Lease it for 5 years? No way. This was discussed earlier. Not with the high chance of property values continuing to drop, either in quick spurts or slowly over the next few years. A 10-20% drop is pretty much a given with all of the foreclosures that will still be coming and a terrible outlook for the US economy over the next decade (unemployment continuing to rise, low to no growth, etc.) We need to get out while the getting is good.
There is no licensed entity that will underwrite this owner carry note for me. Enough research and attempts have told me that.
I'll find a proven, experienced RE attorney to check the creditworthiness of the buyer/borrower and write the note (and create a loan file), and the transaction will go through escrow like every other seller carry back that has been done. And I'll document it all as well as possible.
The only other question I have is whether a seller carryback note can have a prepayment penalty on it. The RE attorney will know or find out. Other than that it will just be going through the motions and handling whatever details arise in order to get to the end result. A good attorney and escrow officer will get me through this.
Finding a qualified buyer/borrower with out agent involvement (or with agent involvement if that is my only option) is my main and only real challenge as regards this project. If can't do that we'll be forced to make it a rental.
Thanks to everyone for all of your input. You've been a big help as far as giving me a starting point for how to structure the note.
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Note: I'm done with doing rehab/resells and dealing with properties. Too much hassle, effort and risk.
I want to "be the bank"... the guy that doesn't have to do all the work and take all the risks, but is the one who always gets paid first (as long as he remains conservative and follows the proper guidelines). I'm in the process of studying about private lending and liquidating some assets so that I have capital to lend (1st trust deed investing) through proven experienced hard money brokers.
Good nite and everybody have a fun weekend. Alfred
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
LOL, Alfred, welcome to the club! Make you broker guantee your loan personally! Make them kiss the note and you'll slepp well and you'll make money without banging your thumb with a hammer! Good idea.
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Hey thanks for the support guys. Per your responses you make me feel like I'm making the right decision. Has anyone heard of George Antone? He wrote two books "The Wealthy Code" and "The Bankers Code". He runs classes to teach private lending and has a lot of techniques that bring high returns. I'm studying his materials now.
Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
14y
I always say the best place to find the best notes is to create them yourself! I like buying paper at a discount or creating paper from discounted properties. I think the returns are way better doing this than just making loans.......
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
There is nothing like buying a note with a 30% discount and 6 months later refinancing it! Like shooting fish in a barrel! No way bricks and mortar can do that while you sit at a desk and use the phone as your main tool!
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
Ok, back to the original subject of this thread...
I just got a call from a direct lender located in Palm Desert. They are totally willing to qualify my buyer/borrower, underwrite the loan, also advise me on the loan structure for my maximum benefit, process the whole deal (they offer loan servicing as well), put it through the local crackerjack escrow company that they always use, etc.
BUT... they won't do the qualifying, underwriting, etc. and stamp their license on it for just a few hundred dollars fee. They said that I'd never be able to find someone to do this because they don't exist. They want $1,300 in lenders fees (underwriting, processing, etc.) and 4 points for origination fee. All this would be charged to my buyer/borrower.
They said it a MUST that I do this (have an NMLS licensed originator stamping his license all over my documents) if I want to be able to foreclose or sell the note down the road without any problems.
This changes the dynamics a bit, and gave me pause. I queried them as to whether charging the buyer/borrower that much would kill any chance of a deal. They said that it wouldn't and buyers are willing to pay this in order to avoid the heavy screening and all of the requirements and needed documentation that an institutional lender would require. They said there are so many people out there with money and high income that are self-employed and don't show their income on their tax returns and THAT guy is my target buyer/borrower.
They said that they do this all the time and work with lots of investors on these sort of deals. They know the types of loans that are being originated locally and said that I should be asking 9.5% and 40-45% down payment. They said if I advertise in the Desert Sun and Craig's List "owner financing with only 20% DP" that buyers will be kicking in my door to get to me.
I'm going to look into this further and try to wrap my wits around this.
Any feedback on this would be appreciated. Marc? Bill? Dion?
Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
14y
My gut feeling is that it sounds like a shark. How long have they been in business? You can't charge "points" on a seller financed- equity funded loan. They must be charging the 4% as something else and calling it points so people understand they want 4% of the dollar amount. Didn't you say CA had a usury limit? I can understand the $1,300, not the points and I doubt their marketing hipe about people knocking your door down is going to be the case. But I'm not out there, $11,300 is not high, it's ridiculously high tothe point of plain silly. Is servicing extra? Maybe if they find the buyer it would be a deal so you won't have RE commissions.... you can always negoiate with them and keep looking for the guy they say doesn't exist.
Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
14y
They said $1,300 lender fee and 4 points for origination fee (and said that others are charging 5-10 pts typically). Yes, the servicing would be extra at $45/month but I can go with Del Toro for $25/month who is a very reputable company here in SoCal. Don't know how long they've been in biz but I'll find out when we talk again.
These are the guys and the companies.
Jeff Mote: Broker and servicer
http://www.arenacapitallending.com/
Jarrod Leitch and Rick Remirez: Loan Originator
http://www.franklinloancenter.com/Default.aspx
Not yet. But I'll be reaching out and checking with my connections to find a proven, reputable RE attorney to do this once I'm totally clear that this is the way to go. I want to see what the end results are with these Arena Capital guys once I've explained my situation and clarified everything with them.