What do you want Mr. Notebuyer?

Tax Liens & Mortgage Notes
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What do you want Mr. Notebuyer?

Alfred Bell
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?

Thank you in advance.

Alfred

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Dion DePaoliPro Member
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.

Good luck.

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    14y

    Alfred Bell, I found a servicer in WA state with offices in CA, Evergreen Servicing, they also have a conventional lending side, not endorsing them, but see what they can do. Looks like they do what I did here.....good luck

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  • Dion DePaoliPro Member
    Real Estate Broker · Northwest Indiana, IN · Member since 2011 · 2k+ posts · 2k+ votes
    14y

    Some of what they stated seems like a bit of a stretch. 4.0% is about 2.0% more than I would consider, plus or minus a couple a hundred for underwriting. It is romantic to think you can pass that fee on to the borrower in some fashion but even borrowers who need/want seller finance know what points are, would you sign up for 4% or 5%? And then say it will not effect the marketability of your deal is a bit silly. For those who do and know loans, one residential loan is not all that much work. IMO, I would be OK with $5k to $6k on this to originate.

    45% down payment? I will admit not out in CA marketing but that just seems like a stretch for seller finance. If you have that sort of down payment, you have a pretty good chance of getting an agency loan.

    So say this out loud, 55.0% LTV financing at 9.5% interest with 4.0% in fees. Does that make you wanna pick up the phone? Sure, if you are looking for hard money loans. Its hard for me to believe your door will be knocked on all that much let alone knocked down.

    Based on the servicers I know, the going rate for a performing loan servicing charge is at the $25 mark. The $45 is a bit high for a performing that is closer to charges on delinquent loans.

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  • Alfred Bell
    OP
    Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
    14y

    I found a licensed loan originator who will lightly qualify my buyer/borrower and correctly underwrite the seller carryback loan for me, do the disclosures, etc. He will do it for 2 points as the total cost.

    He's been doing private and hard money loans in this area for 20 years. He said that 20% is a very aggressive DP which will bring a lot of callers. He says that the normal loans are 40-45% DP and 8.5-9.5% interest. This is the second guy who is active in the area who told me this.

    He said he could only do this if this is a non-owner occupied (rental property or 2nd home or vacation home). Can't do it if condo will be buyer's primary residence. If it is owner occupied then he suggests I just do it through escrow and have an attorney qualify the buyer and draft the promissory note.

    He said I won't be able to sell the note very easily with a 20% DP. Said it would be better to offer at least a 30% DP with a 5 year term amortized for 40 years. Since the usual around here is 40-45% DP he believes I'll easily get calls on my ad.

    Ok, so I have both options to go with now depending on who my buyer is (escrow with licensed loan originator, escrow with attorney qualifying buyer and creating the note).

    "Condo, FSBO, Owner Will Carry, Easy Qualifying, Own Rather Than Rent"

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  • Loc R.
    Note Investor · Pasadena, CA · Member since 2009 · 849 posts · 544 votes
    14y
    Originally posted by Alfred Bell:
    He said I won't be able to sell the note very easily with a 20% DP. Said it would be better to offer at least a 30% DP with a 5 year term amortized for 40 years. Since the usual around here is 40-45% DP he believes I'll easily get calls on my ad.

    I'm sorry but a 40-year amortization with a 5-year call is a horrible loan, for both the borrower and the lender.

    In 5 years, the borrower will have paid next to NONE of the principal down, and the lender is realistically looking at a situation where he is going to have to extend the loan.

    If you take 20% down, you should be able to sell at a 14% yield pretty quickly. Depending on how you structure the note, that require as little as a 10% discount on your part.

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  • Alfred Bell
    OP
    Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
    14y

    Oops! That was a typo. Meant to write 5 year amortized at 30, not 40. All along on this thread we've been talking about structuring an 8 year term, amortized at 30. The idea I was just given is that 5 years is long enough for a borrower to get their act together to refi and wouldn't be considered preditory lending, 8 years is too long of a term if we want to sell the note in 2 years. Also the larger the DP the better for selling to a note investor (more equity).

    Seems like whatever I come up with on this thread, as far as a note structure goes, someone is going to disagree with it. This will go on forever. I attribute this to the facts that... each investor has their own parameters and ideas of what makes a strong note... each investor has been taught differently... and, no one knows what the going loan rates/terms are in the Coachella Valley where this condo is.

    Obviously it would be best for me to meet, or undercut a bit, what the current private lending structures are in this area.

    I need and want to sell this condo as soon as I can. if I'm going to make a sale happen... I will have to negotiate with my prospective buyer/borrower based on their circumstances and needs. I'll need to start somewhere with an ideal structure to negoitate down from.

    I'm going to start at 30% DP, 8 year term (amort @30), 9.5% interest rate, 2 year prepayment penalty term, and negotiate from there down until we have an agreement.

    I can use this licensed originator if I wind up with a non-owner occupied buyer. I'll have to use an attorney and escrow if I wind up with an owner occupied buyer.

    Soon as I get my attorney in place I'll be finally ready to go.

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  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    14y
    Originally posted by Alfred Bell:
    ...
    I need and want to sell this condo as soon as I can. ...

    Your first post in this thread is over a month ago ... Have you been marketing anything during that time?

    1Reply
  • Marc Faulkner
    Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
    14y

    @Alfred Bell- yes a 5 to 7 year balloon is what I have been talking about. I am not sure where the 8 years came from??? I am also not sure what you mean when you say, " 8 years is too long of a term if we want to sell the note in 2 years." As for the down payment-yes more is always better. At some point you are going to have to take what you can get. Most buyers with 30% cash down payments are going to have a lot of option. Again-I say that you are going to need to be creative and flexible.

    Also as for, "and, no one knows what the going loan rates/terms are in the Coachella Valley where this condo is." Who cares? The terms I suggested are as close to 9% as possible, fully amortized with a 5 to 7 year balloon. Anyone that says any different is nuts in my book!!! You are not competing with your local lenders for the business:) LMAO!!!! If you were-you would have already sold this unit. What do you care IF someone wants to pay your price and, get the loan elsewhere? What do you care what the local private lenders are lending at? Also-we already covered that a prepayment penalty was a dumb idea! Why wouldn't you want to get paid off early if the chance comes up? An early pay off will increase your yield! I am lost........

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  • Alfred Bell
    OP
    Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
    14y

    Marc you understand why the prepayment penalty (interest guarantee)! It is the key part of this strategy (owner carry is what is allowing us to reduce our asking price from 290k, the interest from the note allows us to recoup). We are going to lose money on this sale (asking 270k when we've already got 275k into it). A few years of payments will make my money partner whole again and THEN he can sell the note, or keep it if he chooses. (I already laid this out in detail in an earlier post how after 2 years my money partner would have gotten all his initial capital back plus a small profit... which he says would make him very happy. I know this thread has gotten pretty long... 10 pages now! and people are starting to forget the earlier posts.

    Not true. I've heard from two direct lenders in the area now that people are paying up to 40-45% DP. It's happening all the time. The main reason given is because they obviously doctor their tax returns to show low income and those returns wouldn't cut it with an institutional lender. I was told I'd have no problem with 20% down but I should go for 30-40 minimum. I'm going for 30%.

    5-7 year term is fine. To me, the longer the term = longer time for borrower to get their act together to refi = we weren't predatory in our loan structure.

    I've reached out for a RE attorney with some experience with lending to qualify and draft the note for me. Once I've got an attorney set up for this I'm ready to clean the condo and put an ad in the paper and in craig's list and start interviewing my buyer/borrower prospects. I'm almost there.

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  • Alfred Bell
    OP
    Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
    14y

    Spoke with a few attorneys today. An experienced RE attorney today told me that his qualifying of my buyer/borrower and creating the note will have no benefit to me in making the note "stronger, or more legitimate". He said no institutional buyer would ever buy this note anyway and that I should be prepared to hold it to maturity (5 years), but the possibility exists that I could sell it to an individual investor or retiree for a small to medium discount. He said there is nothing to worry about in that millions of people have done seller carry backs themselves with escrow handling all the paperwork. As long as I have a valid note, recorded first trust deed and a lender's policy, I'll be fine.

    I'm going over this once more with my money partner to apprise him of all the risks and that he might have to hold to maturity. He can also consider holding and renting it or doing a lease option.

    If he wants to do the seller carry option I'm just going to do it myself through escrow. This is the way I'm going with this. If I get tied up in any more advice or debate I'll never get this condo sold.

    Well, this was a long journey and I've sure learned a lot. Thanks to all concerned. I'll let you know when the condo is sold and how it all turned out.

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  • Marc Faulkner
    Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
    14y

    Good luck with your venture Alfred Bell. I hope this works out for all involved.

    0Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    14y

    Good luck with it Alfred.

    What your last post tells me is that I should be doing classes for attorneys!

    Must be a bunch of RE attorneys out there doing title searches, purchase agreements and closings that have been too busy to look beyond the daily grind and they don't have a clue. They now have a great business opportunity with just a little more effort, or research...

    0Reply
  • Alfred Bell
    OP
    Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
    14y

    I'm in motion now. Property is being marketed as "FSBO/No agents please" to avoid commissions. Already have interested buyers and appointments for showing. I've created my ideal note structure and terms from which to negotiate from to fit the specific buyer. If no buyer in the next week or two, I will then put it on the MLS for maximum exposure and take the hit of paying a 3% commission in order to get a sale.

    I'll post the outcome and details on this thread once this is over.

    Thanks again everyone for your help.
    I

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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    14y

    Great to hear that! Good luck....

    Let me know who that attorney was, I guess I would stoop to putting on an 8 hour all day seminar for 20 attorneys at 5K a pop.....LOL

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  • Marc Faulkner
    Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
    14y

    I am excited to hear how your appointments and, talks with potential buyers go Alfred Bell!

    0Reply
  • Alfred Bell
    OP
    Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
    14y

    Hey guys. Hoping for a rapid response from you on this.
    Update: I had a few potential buyers (unrepresented buyers) on the line for this condo. Held out on putting it on the MLS to save the expense and hopefully benefit from not having to pay a commission. There were delays and negotiations dragged on and there were some ups and down but in the end the potential buyers didn't work out. (I thought I had it sold for certain but the buyer had to drop out due to a family crisis... brother hospitalized with cancer... and he had to drop out because he needed to return to Chicago to deal with this unfortunate event). So I finally put the condo on the MLS last Friday. An offer just came in and there are a few other interested prospects that will be looking at condo in the next day or so that might make an offer.

    Question that I need answered:

    I was told on this thread that "interest only" is an unacceptable term to have in my note. I don't understand the reasons for this. Please explain.

    Reason I ask... this offer that just came in is willing to have a 2 year interest guarantee/prepayment penalty, but is requesting the term is changed from 8 to 10 years, has an option for extension, and is "interest only". They want a lower DP and lower monthly payment (the reason for this is because they are an investment group that wants to acquire the condo as an investment/rental property).

    So what's wrong with interest only.

    Rapid response would be much appreciated.

    Thanks, Alfred

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  • Marc Faulkner
    Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
    14y

    Interest only is bad because it takes more of a discount for an investor to make any real yield and, it does not build any more equity for the borrower. Another reason is that you would just be collecting lower monthly payments. I suggested looking for folks that want to live in /owner occupy the property. These guys are an investment company looking for terms that would be most favorable to them. This note potential note would be discounted more than normal because it is non owner occupied as well. I would require investors to put more down-just like the banks do! These guys are looking to put less down and, I think you would be better off to find someone that will occupy the property because they are less likely to split, if this is their home. They will also be less likely to balk at your generous terms!!!

    0Reply
  • Alfred Bell
    OP
    Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
    14y

    Marc:
    You responded with... "Interest only is bad because it takes more of a discount for an investor to make any real yield and, it does not build any more equity for the borrower."

    I understand the fact that I/O doesn't build any equity for the borrower and that it would strengthen the note if the borrower was building equity and happy with the terms. BUT, so that I may wrap my wits around this, could you further explain or give an example regarding your statement... "Interest only is bad because it takes more of a discount for an investor to make any real yield" ?

    Thanks for the speedy response.

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  • Marc Faulkner
    Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
    14y

    The payments will simply be a lower amount for an I/Only note than they will be for a P&I payment. Since there is no interest built into the payment - the payments have to be discounted more in order to suck out any juice!

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  • Marc Faulkner
    Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
    14y

    Also-don't forget that you are considering working with a non owner occupied borrower/buyer. If the market and or rents go down they don't have much to lose by walking away. The banks would want more down from an investor and so should you.

    0Reply
  • Alfred Bell
    OP
    Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
    14y

    Damn. Hate to be thick about this Marc, but I still don't get it. Something I'm missing here.

    "The payments will simply be a lower amount for an I/Only note than they will be for a P&I payment. Since there is no interest built into the payment - the payments have to be discounted more in order to suck out any juice!"

    The first sentence I understand. The second sentence...

    1) no interest built into the payment? But the payment is pure interest. Please explain more fully.
    2) If it is 6% I/O and the note is sold at let's say a 10% discount, doesn't that effectively raise the interest? Isn't that juice?
    3) Personally I would think I/O would be the best. You get all this interest and your original loan amount never decreases... you get all of your principal back. What am I missing?
    4) I still seem to be missing the point on how I/O lessens the strength or value of a note that you want to sell at a later date. Could you somehow set me straight on this point?

    Thanks.

    0Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    14y

    The reasons not to do an I/O note will take alot of typing, just don't do do it. When I,m in the mood to write a book, I'll say more, but it seems like advice falls` short and everything has to be explained. And not understood, might be my fault,,,,,,,,Later...

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  • Marc Faulkner
    Investor · Kalamazoo, MI · Member since 2009 · 1k+ posts · 495 votes
    14y

    I misspoke-there is no principle reduction built into the payment-sorry. The bottom line is you will be selling a payment stream that is a lesser amount coming in each month. This means you will have less to sell and, thus get less.

    Let me put it this way-if you or your investor were just collecting the payments on this each month - wouldn't you rather collect larger monthly payments? Also-you are assuming that they will eventually be able to come up with the money to pay the note off. I am not sure what would make anyone, make this assumption in this market.

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  • Alfred Bell
    OP
    Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
    14y

    Oh ok. You threw me off with the error. BTW I can't just accept advice: I have to understand the theory behind the advice and have to agree or I can't move forward. Only can act with understanding.

    Yes, would rather collect bigger payments. And yes would like a larger DP. When they asked for my terms I told them 30% DP, $1500-1600 monthly payment, 8 years amortized at 30 years, etc. etc. (as I laid out earlier in this thread).

    Not many would be interested in purchasing a 6% note.

    It will be interesting to see how far I can get them to come up on the DP and monthly payment. Probably won't reach a mutual understanding with them since they want this as an investment property and have their parameters. But at least offers are starting to come in.

    I'll keep you posted on any interesting developments and the outcome on this condo.

    1Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    14y

    Sorry Alfred, It was late for me.

    The yield to an investor comes from the discount of principal as well as interest at the note rate. If the principal is not being paid or reduced the amount is not received and remains as an equity in the note. If the note is not is not paid off, that discount is never received until the property is sold from a foreclosure which eats away at the discount. An I/O note on a one-off property has a greater risk of never closing or being paid off as the borrower will need equity for the refinance and you can't rely on the market to provide that equity. 25% down may still not cut it on a condo for the future equity required if principal is not further reduced. To compensate, a deeper discount is required. Good luck

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  • Alfred Bell
    OP
    Investor · Clearwater, FL · Member since 2009 · 181 posts · 14 votes
    14y

    Ah ha. Thanks Bill. Now I finally understand the reason why I/O is not good for a note that you would want to sell at a later date. That was the insight that I was looking for.

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