Is there any resale value in 0% interest notes?

21 Replies

I came across a Performing note that has a 0% interest rate and -255.06 payment.  I am working on the assumption that the -255.06 payment is just interest and it does not pay down principle.  When I arrive at a Yield for this note, I get a negative number.  The original terms are as follows:

Original Loan: $140,000

Interest: 0%

Term: 360

Payment: -255.06


When I plug the numbers above in the financial calculator, I get a negative yield of -2.63%.  Why would anyone offer

a loan that returns a negative Yield?  Are they banking on appreciation of the underlying asset?  What is the resale of such a note?

It seems that I would need to take a serious haircut to entice someone to buy this note.  Thoughts?

@Ray Trounday

If

It is 0% interest then the payment is principal only. They are not paying interest and the term seems very very long

Either case a payment that low the note is worth 10 cents on the dollar.

you just run PV values  as stated above the term is so long that the PV is only 25k today.. but that results in 12% return.

so you pay 25k for a 140k.. and they prey real hard they pay you off early :)

I have personally written many 0% notes they are great notes but never more than 5 years


As @Chris Seveney said, with 0% interest that means no (zero) interest is included in the payment. The whole payment is principal. A loan where the payments do not reduce the principal at all is an interest-only loan.

So, with this loan, at maturity (if all payments have been made), there is no principal balance remaining. Whoever originated the loan likely made their profit already, I would guess. 

@Jamie Bateman

@Chris Seveney

So, if the payment is only paying down the principal.  If I go back to the original terms,

Loan: 140,0000

Payment: $255

Term: 360


After, 360 payments the borrower would not pay off the loan (255x360) = 91800 which leaves a balance of 48,200 so I am assuming and would need to review the note in detail. His payment due at maturity would be $48,200.  With the time value of money, I am not sure how the note holder ever intende to make money on this deal.  Something does not seem right or am I overanalyzing?

Ah, okay. I didn't spend enough time on the math. Looks like their would be a sizable balloon then that would need to be paid off (typically with a refinance). So, to me, there is a bit more value in the resale of the note than without the balloon. If performing notes are selling at 80-95% of UPB, maybe this one sells for 50-70%? (Just making those #s up, really.) Your run-of-the-mill yield calculator may not analyze a loan with these terms correctly.

A lot of times (especially more on the commercial side), the loan is amortized over 20 or 30 years but the balloon is due after only 5 years. Not sure if this is the case here.

So, the originator may have made money through fees up front and with a higher property value (than through traditional financing) if they sold and seller financed the property. 

@Ray Trounday

This is interesting, I am actually creating a 0% note myself on a property I bought in Alabama off ebay like 5 years ago. I am selling it 2k down 350 a month for a total of 19k. Now I only paid 4k for the property and like 23$ a year in taxes . This is a great deal for me giving in 6 months I'll be free rolling. If I wanted to sell this 17k note I would assume I'd get 5k for it. Still would be a good profit and almost 100% roi. Problem is the house is probably only worth 5k right now. I'm hoping the buyer gets in there and starts to improve the house asap. Then I'd really be free rolling even if I had to foreclose!

@Ray Trounday To get IRR, use the XIRR function in excel. All you need are your purchase price, projected payments less servicing costs, liquidation price, and projected dates for each of the previously listed events.

@Dustin Mathenia

To summarize:

Loan: 17k

Payment 350

Term: ?  (I am assuming it is for 5 years)

So, you paid 4k and paid $115 to date in taxes.  So you are all in at $4115 barring any other expenses you had over the last 5 years (fire insurance, utilities etc).  You collect 2k which reduces your cash in the deal to $2115.  So, if you do sell the note for 5k, you would have made 3k.  Or, as you said have someone get in there and fix the house so you build up the market value should he decide to default, you indeed be rolling.  I like it.  Thanks for sharing!!!

@Ray Trounday

It's not on a set year just until that 17k is paid off, something like 48.5 months. I think I will have a 3rd party handle the payment collection. I would never actually sell the note I'll take my cashflow :).

@Dustin Mathenia

I like it!  You provide the borrower an opportunity to get into a home at or below market rent for the area and he can build in sweat equity to the property and potentially he can refinance you out of the deal.  It is not clear whether a bank borrows on a property that is worth 25k.  

Originally posted by @Dustin Mathenia :

@Ray Trounday

It's not on a set year just until that 17k is paid off, something like 48.5 months. I think I will have a 3rd party handle the payment collection. I would never actually sell the note I'll take my cashflow :).

this is exactly how i sold my OREO's over the years.. these are GREAT notes they never default and if they do given your scenario you just do it again.. foreclosure costs have to be taken into account.. but with me I have NEVER once foreclosed on a short term 0% note.. when the borrower realizes how much equity they are gaining so quickly they just hang in there..  Now I dont create these notes for 4X of what i am in the property but i do get a premium over basis..   And of course you will and I do have to pay imputed tax to IRS for these.

 

Originally posted by @Dustin Mathenia :

@Ray Trounday

It's not on a set year just until that 17k is paid off, something like 48.5 months. I think I will have a 3rd party handle the payment collection. I would never actually sell the note I'll take my cashflow :).

Very early in my sales career about 1980 ish.. and thereabouts when rates sky rocketed to 15 to 20% interest.. we were in the land business. so we owner financed all our parcels.. we routinely wrote 15 to 18% interest rates on seller carry backs.. And then we sold notes to investors to get our profit out and cash back so we could continue to buy inventory. Our family business would routinely sell about 250 to 300 parcels a year like this.. We had salesmen in LA and the bay area.. Even did fly buy programs out of LA.. this is all pre turnkey rental stuff of course.  So i was very aware of PV function its how we based all our sales prices and terms.

So what led us to the Zero interest notes way back then was two things..  One I had some Saudi clients who could not pay interest for religious reasons.. So I toyed around with how the notes would have to be structured to get the same dollar amount out of them as a 7 year 15% fully amortized note which was our go to terms.. its turned out that 30 months Zero interest had the exact same PV value as a 7 year 15%.. so my Saudi's went for it and I sold a bunch of those to them and their relatives and other friends of theirs that i got referrals to.. Mostly all small business owners in SF.

So about the same time I believe it was Datsun ( before they rebranded to Nissan) that came out with the first 0% auto loans so they were advertising those as well so 0% was going main stream.. and you see the auto industry never let that die out totally. You can see those terms today.

So we really hammered on the 0% for those that could afford the larger  monthlies and understood that getting the property paid for ASAP was to their benefit..  So over the years I will always pull that arrow out of my quiver when I want to move a ugly duckling house and not have to worry about it defaulting again.

For all of those that follow the land geek and others who promote buying cheap tax sale desert dirt or FLA cheapo lots this is an excellent way to exit those properties at a premium price even today.  Just like you did with your 17k house there in Alabama.

 

@Jay Hinrichs

Absolutely! When you're the bank and you don't have to sell the note after you make it. The house is worth whatever someone is willing to pay for it! No comps no appraisals and as long as you keep their payments with P/I taxes and insurance being less or at what it would rent for, someone will be willing to pay for it. So sometimes you can sell the property for 4x what it's worth lol.

@Dustin Mathenia

If it is owner occupied you cannot sell it for whatever you want - you should follow Dodd frank and have it appraised and use a 3rd party servicer. Otherwise you need to collect escrow and send monthly statements

Non owner occupied completely different game than owner occupied

Originally posted by @Chris Seveney :

@Dustin Mathenia

If it is owner occupied you cannot sell it for whatever you want - you should follow Dodd frank and have it appraised and use a 3rd party servicer. Otherwise you need to collect escrow and send monthly statements

Non owner occupied completely different game than owner occupied

good point Chris all my sales are to investors. Non owner occ or bare land. 

 

@Chris Seveney

I will be using a third party to collect the payments and the escrow.

The house is in no shape to be lived in . Does it come down to they intend on living there eventually?

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