All Forum Posts by: Dion DePaoli

It is legal for two investors to invest in the same asset under the same note. Banks do this often on commercial deals that are large loan amounts.

Two investors coming together to make a loan would not give the borrower money. They would each fund the title company where the loan documents would be executed by the borrower and the proceeds would pay for the transaction. So, as a borrower, you don't get the money to put in a bank account if it is a mortgage or deed of trust secured loan.

Lenders make loans and borrowers give collateral to receive the loan. There might be a little bit of an identity misconception in the OP.

All Notes are forms of security.

I do find it humorous that the point of the thread was asking about something being illegal and then asking how to get around it being illegal. If something IS illegal, then it is always illegal, there is no "getting around it".

Well, I wouldn't use that calculator any more.

Purchase Price = $22,900
Gross Payments (annual) = $3,516
Annual Servicing Fee = $180
Net Payments (annual) = $3,336
Payment Yield = (3,336/22,900) = 14.57%

Life Time Payments = $104,601
Life Time Service Fee = $5,355
Life Time Net Payment = $99,246

PV of $293 over 357 periods at 6.78% interest = $44,919. The difference is likely due to the Loan Amount and Rate being calculated based on your rounding. Periodic payments may not always pay to zero.

So, the payment of $293 at 6.78% pays the loan to zero (for the most part) in 357 periods. The loan will produce roughly $61,738 in interest based on that rate. So the total payments made are $107,738 gross or $103,343 net and the Net Profit is $73,844 which is 322% ROI.

Again, the difference in Life Time Payments (293 x 357) and Total Paid (Total Interest + Total Principal) are a little off from rounding.

The IRR of this deal:

P(0) (-22,900)
P(1) 3,336
P(2) 3,336
P(3) 3,336
...
P(29) 3,336

IRR = 14.26%

Now, how I arrived to 5%:
Initial investment: 22900
Sum of 357 payments of (293-15): 99246 ($15/mo is charged by FCI to service the note)

Annual interest rate: 1-((99246/22900)^(1/29.75)) = 0.0505 or 5.05%

The above is not correct. The annual rate would not be the lifetime divided into the investment and then raised to the number of years.

= (1 + (278 / 22,900)) ^ 12 - 1 = 15.58%

That will be less accurate than a full IRR over all periods since we are finding the period return (1.21%) and raising it to the loan term, so time discounting is not occurring.

As far as that web page goes, it simply is not correct. I would not use it any more. Try excel or a calculator.

I would focus less on the idea of creative finance and more on simply selling your property. Trying to put some alternative together is more of a distraction for you.

It will be difficult and take a fair amount of work for you to find a hard money lender or private lender who will participate in the loan with you. Within the note you share, the lender will likely want to be first out, so you are fist loss. Probably not what you are looking for, if you do find it.

Simply ensure the property is priced to sell and it will sell. Stay on your listing agent to promote and market the property find the buyer and simply sell it and be done. Let the borrower get qualified for bank finance or pay cash and leave the loan stuff alone, in this setting I am not sure it really does you any favors with the limiting criteria you already have.

I believe PPR offers a warrant on the performance of the note. That would be a plus in scheme of things. In that setting, PPR is offering a decent deal since a default would be purchased back by them and they would replace you with the 15% yield (or so I believe). That warrant would lower the risk to the investor.

That is one of the best features (that I know of) of the PPR offerings. I would still try for some more yield initially but I could also understand if PPR stands firm on the price.

Nick,

I don't follow your math. Restating:

PMT = $293 (month) / $3,516 (annual)
UPB = $46,000
Yield (49.7% UPB) = 15.09%
ITV = 90.4%
CLTV = 103.4%
Remaining Term = 357 periods (29.75 years)
Note Rate (+/-) = 6.78%

So, this will give off 15% not 5%. Provided all payments are made and on time. It looks like the note rate itself is at 6.78% based on the rounded numbers you gave. I don't understand where you fell into the 5% idea.

The remaining term suggests this loan was modified recently (like 3 months ago).

Is the note a good deal? Well, that is in the eyes of the beholder. Do you understand the risks involved?

You are 90% Investment to Value. If the borrower makes payments you will do nicely with 15% return. If the borrower defaults there is a 10% cushion or about $18k which can be advanced and possibly recovered which provides 'some' working room. I am not a huge fan of second liens but I would be curious what happened with the first lien here as well as the second. If the first lien filed for FCL or was modified as well, I would want to take that into consideration. If you as a 2nd lien holder are defaulted on, you may be able to squeak by and not loose money if the borrower maintains the first. In contrast, if they default on both of you, advances on the account will quickly erode the cushion in equity and start eating away at your capital investment.

Figure you have to be invested in this for about 7 years in order to have been paid back your initial investment through borrower payments. Any early stage refinance will boost your return. That said, a modification 3 months ago and a property with no equity doesn't warrant a refinance anytime soon. BTW, as far as the 10 year return, I come up with about 18.34% as $6,736k +/- will be paid down in principal.

Again, being a first lien type of guy, I am not sure I would bite on this one. It does have it's attractiveness though. My knee jerk reaction is the discount is not enough. I think I would want a price around $18k to $15k depending on some specifics of asset information. That would put the return around 23% and give an additional $4k+ in equity cushion which might feel a little more comfortable for the risk vs return ratio to me.

Foreclosure time does not spook me. The asset should be priced correctly to accommodate this feature. Long investment term does effect time value of money, but the bigger elephant most of the time is the added expenses due to time. With proper equity cushion that can be mitigated and even in a FCL a decent return can be achieved.

@Jaxi West

I have read your follow up posts. STOP!

The idea that your DOT has Note function within it's pages is cause for DIY concern. A DIY Note and Security Instrument may not be enforceable if a bunch of edits are being made by those who are not so familiar with what they are editing. This guy set these up and either he is ignorant to proper setup or he has another agenda.

The two documents do two different things. While you can have a DOT which includes some note ideas, they are recognized as two distinct and separate documents in purpose and function. A Note may be recorded behind a DOT but it is not required.

In the above post about the DOT you mention the borrower has himself as the Trustee. That is a big NO. The Trustee is the independent third party who holds in care the documents and who acts on the power of sale vested in them by way of the security instrument. The Trustee is not to have any affiliation to either the Lender (Beneficiary) or Borrower (Trustor), they are a disinterested third party. They are certainly not the Borrower who is supposed to pay the money back.

Honestly, this really sounds like a horrible idea and in my opinion you need to walk away from this entirely. You are not ready to be a Lender, I don't think you understand enough about what it means nor how to fulfill your obligations. On top of all that, this DIY activity by both parties is pointing this thing in the wrong direction. It sounds like a train wreck waiting to happen.

Rights of survivorship to the company may not be some safety-net on collecting the monies due. He has set up the loan to be to his company not his person. Do you understand what that really means in terms of enforcement and collect-ability? (I am guessing NO).

Will you have Due On Sale or Alienation? His wife and daughter (unknown age) are members of the company? So, you didn't look at the Articles of Incorporation to verify this? How do you know title to the real property is or will be clear and you get first position? Who is going to review the Title Commitment for you or will you simply take his word for it? Does the borrower need to maintain insurance? What happens if he doesn't? What about taxes? How many payments can he miss before you start foreclosure? What about bankruptcy risk, have you looked into his capacity to file BK and create havoc to your collections? I could literally ask a hundred more questions, they are all intended to be little glimmers of ideas that I know are foreign to the OP on purpose. You don't know what you don't know and that can be dangerous.

This idea of filing for a re-conveyance once the work is done makes zero sense. There is nothing to re-convey, as I already stated. So again, either he is ignorant to how this all works or he has ulterior motives. Either way, the fact this idea came back up and is being pushed is further evidence OP is not ready for this and this transaction setup looks like a train about to fall off the rails.

If the documents were from LawDepot an attorney likely didn't do much of anything. The website has some template form which plugs information into it from the web user. It is more likely the Borrower did this and told you an attorney drafted it because it is from LawDepot.com - which is not an Texas attorney website, it's a self help document website. So, that just sounds like a bunch of hogwash. If an attorney did list the Borrower as the Trustee, that attorney should be fired and a new one who knows what they are doing should be sought out.

I don't want to spend too much more time on this post. In my opinion, as I have stated, walk away. The Subject Property, the Borrower are in a different state than you. You don't understand title to real property, you don't understand the documents and you don't really understand some other pretty basic ideas about being a Mortgagee/Lender. It's not even really clear how you came into this deal. This just sounds like an incident waiting to happen which likely will not be worth the risk. That is just reckless and silly investing.

"Institutional Crowdfunding" is buzz term that is emerging from folks trying to push crowd funding. The SEC does not recognize this term nor does this term really mean anything away from who ever is trying to use it.

Crowdfunding is the process of raising less than $1.0 Million within a 12 month time frame for new start ups. All securities, which is what this is, are required to register unless exempt. The Crowdfunding exemption was created to allow for smaller amounts of capital to be raised exempt from registration as the registration and compliance for raising money can be costly and for small capital raises can quickly become more costly than the funding target.

The rule allows folks with less than $100k in net worth to give up to 5% to a capital raise or up to 10% if more than $100k in net worth. Since there is no rule around accredited investors for Crowdfunding, which has an SEC definition, using the term "Institutional" does not really mean anything.

Crowdfunding is not method of capitalization for banks. Crowdfunding for Investment Funds which are exempt from registration under Regulation D are also not likely all that great of a way to raise capital either. The CF rule only allows $1.0 Million in a 12 month period. Frankly, institutional investors raise more money than that in a month and depending on the institutional many times a week or day.

In general, institutions which are already subject to security reporting requirements do not get a free pass with Crowdfunding in most cases they can't realize the exemption at all. They still have their reporting requirement which must be adhered to. Specifically, Section 3(c) of the Investment Company Act already address exemptions for Hedge Funds and the new rule is not a rule to allow these types of institutions to pursue Crowdfunding as a manner to raise capital.

Moral of the story, I don't agree with your inference. Crowdfunding is not here to replace the other reliable forms of raising capital. It is here to serve the purpose of funding for low tier start up capital investments. We will not see JP Morgan roll out some major Crowdfunding division to do much of anything.

I don't understand what you mean about the REO.

Andrea,

The property owner can speculate on how the mortgagee will handle a short sale or DIL but really she should simply contact the servicer and inquire about either the short sale or DIL. March is still two months away and it doesn't sound like she has overly communicated her intentions nor aligned her intentions with those of the mortgagee.

There is no duty for the mortgagee to accept less than the total amount owed under the note regardless of the intentions of the borrower. A lender may not want to take a DIL for various reasons. It sounds like the borrower made her plan and wants it to go according to her desires but when she failed to maintain the debt service and now can't sell the property to pay for the loan, she doesn't really sit in the driver seat of this situation. As such, she can make decisions on her own plans but those might be made in a bubble. She needs to get the servicer and mortgagee involved in the resolution.

There are a couple of not so great implications here.

The home is still priced too high otherwise it would sell. Pretty straight forward there.

I am not sure how you had your home listed for sale and also took out a refinance loan. That is usually not allowed. A Lender needs payments over time to recoup the cost of origination. Typically the home must be removed from MLS for 30 days prior to allowing a refinance in almost all conventional loan settings.

The approach here is admirable. Sell the home over the total amount due to pay the loan off. It seems like that may not be all that actionable since it has yet to sell. A short sale might be needed.

I would find a little better real estate agent as if they have had this listing for more than 8 months and it has not sold, you may want an experienced agent to help you reposition the home in the market. Sometimes homes with long Days On Market are skipped by other agents showing homes for a variety of reasons. One of the more simple ones is, the agents with buyers might only run searches in MLS for recently listed homes. So longer listings are not seen as much. Again an experienced agent should know this stuff.

Putting a renter in the home will limit the potential buyer pool. This home sounds more of a primary or second home for a buyer and not so much of a rental property. Not sure renting the home is a great idea. That said, we can understand the trouble that goes with this situation and the cash demands it creates.

I would get tough with the expectations of the agents. I would terminate the listing with the current agent and pull the property off MLS for a month or so and then re-list at a marketable price. If that price will create shortage to pay off the loan, perhaps seek approval to short the lender. Again, an experienced agent who works with short sales should be able to help you with this. Find that agent and use them.

One more note since it is mentioned in here twice and it is not entirely true.

A Mortgagee (a Lender) can be found liable for the condition of the real property. It is actually not all that uncommon in today's real estate climate.

In a case where a property is subject to renovation and through the renovation becomes uninhabitable and due to failure to finish the project then becomes dilapidated the municipality can pursue the lender for damages and clean up costs.

So, YES, they actually do go after lenders when the property owner screws up depending on the screw up, which is an elevated risk in construction lending frankly.