All Forum Posts by: Dion DePaoli

Felt the need to help with some Cliff Notes.

Student loan debt do not carry the impact as implied above. Further, not all student loans are owned by Sallie Mae, some are privately owned. There is another example of opinions which may be misguided.

If you have a defaulted student loan, the Mortgagee will demand the account either be cured in full or brought current. Student loans in deferment can be removed from DTI calculations manually.

If the student loan creditor agrees to take less than the balance due, this may affect your score but will not affect a view in underwriting aside from your score.

I really wouldn't spend another second worry about it.

Sure. It is presumed that "Multifamily" housing will have multiple families inside. (opposed to Single Family)

The idea that a balance write off from a creditor may become a taxable event according to the IRS for the borrower is not new. During the mortgage crisis the threshold was raised for mortgages, but now it is back to what it use to be.

In order to have positive affects on your FICO (or any of the credit models) you will need to have positive trade lines. A "positive" trade line is one where you owe a debt and pay as agreed. In general, those types of trade lines will have more influence on your score the better they sit on your credit. So accounts where you carry the max balance (but pay on time as agreed) will have positive but lesser affects than that of an account with half of the total credit extended being used (or have been paid back). You never want to close these trade lines. Having positive credit helps your score. The general ideal balance is at or below 50% of available credit. If you close the line, you remove the positive affects since the line is not there to add them.

When you settle any debt for less than what is owed two things happen. You are simultaneously doing two things. Creating a positive attribute, by removing the total debt owed and settling the account for less than what is due. Settling for less than what is due is a negative attribute, since the creditor didn't get all the money back.

The way those (or any feature) actually weight into the calculation to produce a score are not known as they are proprietary. For that matter, the exact equations and metrics are closely guarded secrets, don't let anyone tell you different; nobody knows EXACTLY, any of the metrics. This also creates different affects on different folks, so what made John's score rise, may not make your score rise in the same way or the same amount. Same in terms of negative affects.

Time is the most effect metric in reducing the affects of negative trade lines. Since most of the time negative items are not updated on an on-going basis by the creditor. If you have a charge off from the past, the affects are minimized the further into the future you go from the date of the last reporting to the agency. So a derogatory line from 10 years ago (according to the date reported to the agency) has less of a negative affect than one from 2 years ago. The same is true with positive lines.

When it comes to derogatory lines, often times when you update that account by paying it off, regardless of paying less than what is owed, it will have a negative affect on your score. This is because the reporting of the event is brought current in time. A similar thing happens sometimes when folks attempt to correspond with derogatory creditors, challenging the line or alike. If the creditor responds they may update the account which has not been reported for a long period of time and then the current update will carry more weight than it did when the date was in the past. This will push the score down.

That is not to say that clearing up derogatory trade lines is a bad idea. It is not, it is a good thing. Even settling for less than due is better than not settling. However, if this is something you wish to do, you would be wise to give yourself a couple of months to allow the records to update and season to find the score equilibrium. Many times folks go mess with their credit right before a credit even and that can have dyer consequences even though the intentions are good.

Keep in mind, not all creditors report to the agencies. (There are 3 - Equifax, Trans Union and Experience) Not all report every month. Not all report to all three. There is nothing you can do about this, it is their decision. In converse, not all creditors pull all three agencies to extend credit. Major credit like auto and home loans do review all three.

This is one of those topics where everyone has an opinion and usually there opinion is based on their dealings with the same. THOSE RESULTS MAY NOT BE YOURS. So, for instance, not picking on anyone, the trade line paid which caused 5 years of negative affects is unique to that person and the creditor. The particular line and other lines (good and bad) on the credit are not disclosed so it really can't give you any bearing of meaning.

Many times when you pay a line off, the creditor will no longer report so the impact on your score fades with time. Some will still report on an on-going basis in some interval. Like perhaps an auto lender. Every month they include your account in the batch that goes to the agency. Even though you may have settled, let's say for less than what is due, since they report each month the impact is updated each month. It is because of that type of idea that everyone's credit will to some degree respond differently to events. The same applies to positive lines. Maybe your auto loan is at 30% of the original balance but they do not report each and every month. So months with the most recent reporting will carry better impact. So if you have a positive which reports bi-monthly and a negative which reports monthly you will see variances through a series of months.

It is not possible to carve out all the in's and out's of the scoring models. They do that on purpose. If the public actually knew how it all worked, it would not do much good for creditors since the public would manipulate it.

Some of the credit agencies offer programs for a fee where you can get an idea of what would happen if you paid down or off or closed various trade lines. Those reports come from national credit vendors.

Not all credit is simply score driven. Mortgages which qualify for Fannie or Freddie placement use a credit score to establish a guideline parameters but a loan ran through DU will analyse the credit line history, not just the score. The obvious example of this would be someone who obtains new credit but retains a high score. If Discover gives you a $50k credit line and then you want a mortgage, you may get a lesser approval since even though credit was just established, the perceived risk is high since you have not used or maintain the credit.

Much of what you will hear about credit inquires impacting your score will not be accurate. The agencies expect consumers to shop around. As such, there are grace periods where similar inquires do not impact. Such as shopping for a mortgage. To properly shop, many different lenders will need to pull your credit report. This is permissible without impact. There is also a timeline for a one time update to the score, which is a typical underwriting event.

The main idea, there really is, use your capacity to get free copies of your report. You get one each year. To see where you stand. Plan ahead if you can to deal with positive and negative trade lines. Do not overly "fiddle" with your report. Making multiple inquires. Be cautious when dealing with a trade line that is dated (in the past) as it may bring itself current and negatively affect you. In order to be credit worthy, you must carry credit. Do not close out lines of credit, especially the "good" ones, with lower balance ratios to credit extended for the sake of trying to improve anything. Do not shop for major credit items at the same time. So, either get a house or a car at different times not the same.

Remember, qualifying for a mortgage is not just about credit score. Income and assets also play into the game.

The answer is Yes, you can. That said, you will need to make sure the property meets the definition of rural first.

For instance, and in brief only using one concept (not meant to be the full list of criteria), a rural property has a population restrictions and proximity to Metropolitan Service Areas ("MSA" - think big city area) as some restrictions. As such, it may be harder to find multi-unit housing in those areas to begin with. But if you can find the property which can qualify as rural, then you can finance.

As an example, farm labor housing is multifamily and there are specific programs inside the USDA portfolio which target those types of properties. (Just giving an example of MF in a rural idea setting, not all programs require all tenants to work on a farm). They also have rental supplement programs which can work with programs like Section 8. Again, the idea there is farmhands [in general and past] tend to not make lots of money.

There is no shortcut to working at some point on an asset level basis. All assets would go through the same process that you would do as if they were one off transactions. So they all get title reports, RE valuations and other typical types of vendor services (on a per asset basis) as needed. In some operations this will look like cause and effect type systems. For instance, if a property comes back from a BPO/Appraisal data round, and shows it is fractured construction, you will need to apply construction diligence ideas to it. Some of the 'features' (for no better word) which create these iterations are know upfront and sometimes they are not. That depends on the data set you are working with and the Seller or their agents efforts in the same.

If the populations you are working from need be trimmed down then you would apply filters based on your own internal criteria from whatever data points (those given or those revealed as a function of diligence) you have. A simple idea, if the pool has a national footprint and you only want assets in Iowa, then you would apply a filter to the population to delimit to Iowa. That type of population reduction can be applied pretty easily to field even those expressly given, revealed or calculated.

The financial modeling side of the work is a little more work to setup the proper evaluation models. Many times those are applied as iterations over the top of the pool regardless of the asset's relation to such an analysis and then the results in conjunction with some other field are used as a delimiter. For instance, if you run a rental analysis on all assets you will want to filter out assets within the population that can not be rented for what ever reason. If you were open to purchasing assets that do not have rental capacity, then the Universe (in terms of population of assets) that you are working with would include those types of assets which you could pull out the assets suited for the analysis or run the analysis on all and pull out the meaningful results. These types of things may be pretty upfront, like remove all vacant lots from rental analysis then run it or run analysis on the entire population using a zero for rents on vacant lots. Etc, etc.

I have never ran any analysis on the current property manager. Just the assets, which function sort of like a report card for the manager anyway. Most portfolios are sold with the Buyer's ability to move management as they see fit.
Since most natural persons do not have millions to throw at portfolios. Some of the filters applied are pretty simplistic in nature and might even seem unscientific. For instance, if you see a pool of 200 assets and just do not like a specific geography, then you would filter that out simply because you do not like it or are not interested in it.

In regards to the equations in the financial modeling. This will be at the hands of the user. Folks with higher levels of financial modeling understanding will apply those concepts. NPV, IRR perhaps PV calculations. (those are your TVM calcs). Certainly applying any CAPM is going to give you bearings on a comparison basis to other suitable investments as a benchmark to pursuing the asset or pursuing the asset at the input or output values. There is no real magic there, just math and an understanding of the inputs and outputs and how you want to work the them. Folks with lesser knowledge of those equations and models might have their own, perhaps even simplistic metrics to apply. There an infinite amount of those in the world. For instance, start at 65% of value and deduct for X feature or X dollars or X percent, etc, etc.

I am not aware of any books on the topic as it relates to RE. There are some books and articles out there on working with portfolio of assets which tend to be more securities driven. Some of those ideas, if you can survive making the link in relations between the asset they use in example to the asset you wish to apply, then those may help. They could also be pretty confusing if it is not your cup of tea. There is nothing written specific to a real property portfolio trade that I know, but I also do not know of all books published.

My final thoughts for you on the matter, it is pretty important to approach any portfolio in a manner which allows you to work with given data and yet be flexible to allow that data to be updated. A property occupied last month may not be this month. The Seller's data may be dated in that regards. A usual method, is assume Seller data to be True until updated data changes it to be False. (or similar logic depending on field) I would also suggest you understand how you are evaluating assets and look to normalize the process. Using tenancy as an example, all assets go through rental analysis but not all assets will be rented and some assets are currently rented, those in turn maybe at, above, or below market value. So you will want systematic ways to deal these ideas. That said, to some degree when you actually dig in on an asset by asset basis, it is hard to not have meaningful results on that level. Then it is simply a matter of aggregating the data to produce the portfolio metrics.

There are other ideas in that we have asset level data and portfolio level data and each level has inputs and outputs which can be meaningful however, portfolio dynamic discussions attached to this already long thread likely have you retiring before you finished reading.

Oh Joe, I enjoy your brash commentary.

Seems like a broad and unquantifiable statement for the most part. The burden of complete paperwork is not on FCI, it is on the Seller (and the Buyer), since they are the owner of the asset and the contract is entered into by the owner of the asset and the buyer of the asset. FCI does not take on the reps and warrants of a Seller or a Buyer in a trade that I know of, they merely collect a fee for using their website.

It seems logical that some Sellers will always ask for more than the market will bare regardless of whether the asset is found on FCI or some other location.

Comical, folks some of this stuff really can't be made up!

Escrows in note trades have issues since often times the contracts used do not properly address the concept of an escrow. Many folks who have tried to get in the game have attempted to use escrows and in my experience not for above board reasons. Since many loan sales are bid subject to due diligence or simply a final bid, escrows are at best, awkward to work with.

If a newbie comes across a request for escrow monies my simple suggestion is move on to another trade. Loans are not like properties. Due diligence on property is really available during the entire term of the contract. That is, the Buyer has an opportunity to inspect, review and analyse the asset for the most part at will. In a note trade, your capacity to do the same is dependent upon the Seller or their agent providing the proper items to do the same inspection, review and analysis. A poorly written escrow agreement or clause could mean a Seller provides 90% of the documents, which prevents full due diligence and the escrow could be challenged if the Buyer fails to close on time since they did not finish due diligence. It really just makes a mess of something that is fairly straight forward.

In my opinion, it takes away from the point of the whole engagement which is to trade the loan. You will end up, more than likely, spending more time hashing out terms of escrow rather than terms of sale and reviewing the asset. Most seasoned and institutional buyers do not ask for escrows nor will they ever participate in one. For instance, I have never entered into one and will likely never think twice about the same.

A loan is a loan, if by any other name. (that was my Shakespeare reference for the day)

A secured real estate loan is where you grant an interest in the real property by giving a mortgage to the a lender. The lender in term gives you money. The money and terms of repayment are evidenced by the promissory note which is held by the lender.

The terms used to describe lenders have general meanings in conversation but they can, within their own ranks vary. For instance, private money and hard money lenders. Private has grown to imply the funds are from private investors seeking to put their own money to work for a rate of return. That is not to say hard money is really any different. All money comes from the same place, an investor.

A hard money lender can charge more or less or the same as a private money lender per their own described designation. The idea of private money grew out of single investors who placed their own capital at risk in the market place opposed to using a hard money lender to get their money out. Thus, the idea and term "private". Where a hard money lender tends to be more along the lines of "public". The hard money lender is "open for business" as a lender. A private money lender may make a loan this week and not do another one for 10 years. Since a hard money lender tends to be in the business, they need to have capital to work with on an on-going basis, otherwise there is no point of being open for business since without the money no business takes place.

As far as legal definitions between these ideas, there is a legal difference between you privately using your funds and someone else using your funds. We will leave that idea at that for this thread.

Much of the distinctions between the two are simply window dressing. As Jon points out, due to the nature of the how the money is put to work, additional fees stack on top of the money. If you give me your money to put to work, I will charge a fee to do so which may make the loan cost more to the borrower. The opposite happens (well, is supposed) where if I privately place my money in the market, the fees are my own. So if I only need 10%, I charge 10%. If I use a lender to put my money out, they will want say 2%, so now we have a loan for 12%. That said, it can certainly go any which way depending on the parties who particpate.

In regards to different loan terms. There are many. Any lender can offer any terms (subject to license and usury and other laws). So just because we say Private Lender does not mean the rate, for example, will be 10%. Maybe they only want 5%. (buy that guy lunch!) The possible varience is usually greater in Private Lending settings opposed to Hard Money settings since often times hard money has a capital structure behind it. There is a fund somewhere that investor puts his money into, controlled by the hard money lender which is used. When the investor invests, there is a structure to how it will all fall into place. Again, investor wants 10% return, lender wants 2% so we do not have much wiggle room for less than 12%. However, we have possibilities above that floor. So the hard money lender needs to earn 12% but that doesn't stop him from trying to earn 15%, which makes his investors happy by making everyone more money which also attracts other investors.

When it comes to loan terms, they are pretty straight forward on their own merit. I would suggest you begin to simply learn those so you can understand how each idea affects a loan. This includes but is not limited to interest rate, loan term, amortization term and points and fees. That will start to lead you into some of the tangent ideas that go with each.