All Forum Posts by: Dion DePaoli

Yea, the idea is flawed. Who buys a $50k property for $100k? (nobody) In the idea you have with retaining mortgage reserves, why would an investor allow you to do that? You are the PM, collect rents, keep your fee and remit the rest, you are not in charge of the investors's rent money, you are an agent of the investors. You are trying to drive the car by not sitting in the seat there. The guarantee idea there is still messed up. Paying the debt service from the rents collected is not guaranteeing anything, it is simply paying the mortgage from the rent. In this scenario, there is no justification to pay over the value of the collateral for the note, so the note trade exit is flawed too.

No harm in asking to sort it out in your head. As stated, stick to the ordinary before turning to the extraordinary.

Bill that makes me thing somewhere out there is likely a funny chicken and a mortgage joke for some reason.

A loan that trades for a discount has a discount for a reason. The discount sets off some characteristic of the loan such as paperwork defects or borrower performance defects or underlying collateral defects.

If the loan you want to target has a current LTV of 60% a performing loan may not have much to discount for. The equity already affords a mortgagee the ability to enforce the mortgage and collect what is owed. There are caveats to that but we will set that aside.

If your yield requirement is your driving force at 12%, you could be fine simply finding a loan written for 12% that has a current LTV of 60%. No discount needed. In a situation like that, there should be minimal defects.

A loan written at 12% has some inherent risks in it already though. Since the prevailing market rate is closer to 5%. So the borrower agreed to take on 12% instead of getting a better rate. That could be a Seller financed deal. Equity may not be as much in such a situation, where the borrower puts down very little unless the loan is seasoned for a long time.

Some hard money or private money lenders will achieve that type of rate and obtain equity close to what you are looking for. In some of those cases, the loan is based more heavily on the underlying collateral and less on the borrower. They also tend to be shorter term loans.

Trying to find more of a conventional loan can be done but the defects will be present and you will have to deal with them. A seller of a loan has no duty to sell you nor take a haircut. The deeper that discount is the more of a defect. What you end up with here is really the reality check of the idea of return that the investor wants. Just because you want a 12% return doesn't mean you will get into a trade since someone else is happier with 8%. Now, put that idea in contrast with where prime conventional loans trade which is around 4.5% in today's market. I know many guru teachers like to say you can just pick your yield and viola, but that is not reality. Competition in the market place, just like in real property puts downward presumes on those return ideas.

So can you get a 12% return? Sure. But you have to reconcile how active you want to be and how much risk you want to take. Neither of those are meant to push you into super high risk investments but there is a relatioship that must be recognized.

It's OK to run a hypothetical situation but make it realistic with details. Along with what Bill points to, you have created a scheme where you are proposing to sell a property from you to another party with a mortgage already encumbering title, not to mention, said mortgage is for more than the property. Who would buy a property like that? You can't give clear title in your example.

The payment guarantee idea is not sound. The guarantee is meaningless. The Mortgagee has a superior interest in the rents already. If the borrower defaults, a Mortgagee can look to the rents through the instrument and courts. If the guarantee was proper, you could not simply walk away that is the whole point of getting a guarantee. To condition the idea, is not to give a guarantee in the first place.

It seems, the end game here was simply to get a property management deal. In the process you are looking past simple real estate ideas and you are not taking into consideration the roles and rights of the parties involved. If that is not the end game, then you will have to not be so secretive in what you are trying to work with. Trust me, you will struggle to find something new in the game. All the next big ideas in real estate and RE finance have been around for many moons.

So it does not get confused. The act of no license if residential in nature requires license and non adherence is criminal offense. A contract can not call for retained funds in any manner. Not having a contract is a violation and acting with no license is criminal. The act in commercial transactions falls more to ethics but certain states still have requirements of contract to collect fees, it is just that the contract prevails. There is no protective regulatory standard like in residential. Often times the say no guarantee loan delivery. If executed, it will be tough to prove wrong doing for that reason since performance is not a condition of payment. The act of collecting the money will be civil in nature unless the person is pursued by regulators and found guilty in courts and restitution is awarded. Civil liabilities can still be pursued in some situations.

Bill Gulley Chime in here too

Did you have any type of written agreement? If so, what does it say? If he is a licensed broker, he has to follow the rules. If he is not licensed, he may be guilty of acting without a license. Contact the state verbally and explain and see what they say. They will not cross lines of being legal council but they will give you some regulatory background on the matter and may take a complaint from you on him. The collection of the will fall under civil law. You will need an attorney to file and get a judgement which will help you collect. Whether he has anything to collect from is a whole other story.

What is the instrument that binds you,such as your operating agreement or partnership agreement or subscription documents say about redemption? You may not have to take any discount and/or you may be stuck in until they can take you out. It should be in your agreement. If it is not, get an attorney.

Any interest or fees on another loan arrangement likely do not fall under damages. But you can ask an attorney or the state.

The broker is in violation of Safe Act. He needed to have a Mortgage Broker Contract where the fee is only payable upon the delivery of a bona fide mortgage loan. The contract must state the same. Recourse can start with submitting a letter (certified) reciting the act from the state and demand the refund. You need to give a reasonable time such as 7 days to cure the issue. If he does not comply, contact the state department of finance which handles mortgage broker and ask them for further direction. That is not meant to be a legal opinion, you can run it by your attorney to expedite things. You may have issues that we don't understand based on the limitations of information in the post. However, bottom line is a licensed broker must issue a fee contract and it must be signed. Fees can not be collected or retained outside delivery of a loan but they can redeem costs to some degree.

Joe,

I can only assume you directed that question back at me based on my post. Perhaps your method of metrics makes sense to you but frankly it seems to defy conventional wisdom. Logic would have us believe the following two ideas are not the same:

Asset 1
UPB: $100
BPO: $50
Price: $25 (25% UPB / 50% BPO)

Asset 2
UPB: $50
BPO: $100
Price: $12.5 (25% UPB / 12.5% BPO)

Asset 2 sale likely never happens at that level. It is way, way, way,....too low. That loan trades well above 60%, all things being considered, since the Mortgagee stands to recover interest arrears, advances and fees from the equity of the property.

Even further, if I throw a third asset in, you claim still breaks down:

Asset 3
UPB: $200
BPO: $50
Price: $50 (25% UPB/ 100% BPO)

None of those scenarios are uncommon. Your 25% of UPB rule simply breaks two thirds of the time. Conventional wisdom values NPN's against the collateral value, since that is the whole point of having collateral, to use it to recover your funds.

In regards to my REO statement. I actually did not say a person can purchase an REO at the same discount as an NPN. What I did say was there are folks who have attempted to highlight NPN sales as a method to get into real property cheaper than the REO price might be. To that idea, I said it can be misleading and false.

Simply illustrated, you as an REO buyer do not carry the disposition liabilities that are contained within the note. Nor can the REO Seller pass those liabilities onto you since the value of the property is the value of the property. So if you purchase an NPN for $50 and put $50 in disposition costs into it and the REO only sells for $100, you actually lost money. It then follows, do not assume that everything purchased at a discount makes a profit all the time, they are not the same thing.

As far as hype goes, I agree, hype and misinformation should have no real home in whole loan investing. Mortgages are not magic.