All Forum Posts by: Dion DePaoli

I am not sure your calculations mean anything. Many buried assumptions and it is unclear how you got to some of the numbers.

How you are coming up with a PV number that is even related to this deal is unknown. You do not know what rate of return the Seller wants on their money and you seem to assume it will fit nicely into your 5% interest. What if the Seller needs 12%? And on what basis?

You have no loan amount listed in your example. So, this makes it hard to guess what you are thinking. 100% LTV? 10% LTV?

You seem to only want to pay $100k for the investment. How did you come to that number?

Let's assume that it is simply becomes the number based on the cash flow from the investment which you desire and thus hits your return target. So then, offering Seller financing will only serve to leverage you up, so far as the cost of financing is less than your cost of equity. A Buyer wants to make 15% return and a Seller will finance for 12%. There is a little arbitrage (3%) there so you can increase your total return in tandem with how much debt at 12% is used. Since your money needs to earn 15%, using less of your money and more of the debt money will give you a boost in return. If it is the opposite, then using Seller financing can erode your return instead of boost it. The erosion takes place over time. Certainly, short term deals can be worked into high Seller debt but long term deals will suffer loss of return which ends up being an exchange for capital demands.

Your offer with Seller financing included starts with your return target since that is the only one you actually know. And it can scale with the amount of debt and equity injected into the deal.

If the Seller needs $50k to pay off their own debt, then offering a $50k down payment and financing the rest will boil down to the free cash flow to you hitting your desired return. To make a 10% return on the $163k, you will need $16.3k annually. To make a 10% on $50k, you will need $5k annually. Under this logic, you can reverse engineer the number based on the free cash flow you can receive under different scenarios.

These numbers are only relative if the cash flow from which the payments will be made are understood. In your post, there is no statement to how much cash flow comes from the property. If the property does not gross over $20,746 per year, the property will not even cover the debt service at $163k. If the property makes exactly that number, then making a down payment will start to 'fit' you into the metrics of the deal, like above.

While some may have a method, it is not a science to figure out what to offer to a Seller. A Seller will accept what they want to accept based on their needs. You as a Buyer/Bidder can make offers only based on facts from the property and facts based on your desires. The key is to start to conversation and understand your own metrics to carve out what both parties will accept.

We have done some of these types of deals. Specifically, Rehabber buys property, rehabs and rents out and then provides Seller financing with very favorable lending terms. Large down payment and the property was sold from Rehab guy to Financed guy under market value.

As Bill mentioned, there is not going to be a clear answer to putting a price on them, each note would be evaluated and a look back to the Seller who financed will be conducted. Simply stated, the more equity and payment seasoning, the higher the bid will be on that note.

Always remember, mortgage notes are not homogeneous instruments. Two notes made by the same lender, to the same borrower are...two different notes.

Can it be done? Yes.

You really need to pre-plan the resale of the note or get a experienced note buyer/trader involved so you don't make mistakes that cause discount or other deeper issues like affordability.

Just for confirmation of the above.

If I make an investment say, $100 and I receive periodic payments of $10 and I hold the investment for 5 periods here is how we would look:

P(0) (-$100)
P(1) $10
P(2) $10
P(3) $10
P(4) $10
P(5) $10

Clearly, the cash flow doesn't generate a profitable return since the sum of periodic payments is $50 and the investment was $100.

If P(5) was the disposition period, then the net proceeds would be added onto the cash flow. Let's say the investment sold at the same value as purchase price, so then P(5) would be $110. This would then have a profitable IRR.

A bond functions in a manner where you invest $100 in P(0) and get it back dollar for dollar in P(x), where x is the maturity or end of investment term. You can arrange your model like this or you can amend the disposition number.

Equity can be accounted for in the final disposition and plugged into the last period for evaluation. Care should be taken to not count the equity twice, just for the record. For instance, if I purchased the property for $100 and I plan on selling it for $150, then equity is already bundled up in the disposition number. The equity accrual is realized at sale, that accrual can be from property improvement or appreciation. So in this case, you would not go back and say the property appreciated 3% over the 5 periods. The 3% is already rolled into the $150.

A different way to approach the idea, which is all that it is, is taking the $100 property and applying the 3% appreciation to come to $103 then using that number. This might be a conservative way of doing it, although as Giovanni mentions, most people simply add in the net proceeds at the exit period. In this example, this would be a simply assumption that you plan to purchase the home, ride the waive of appreciation and sell based on that appreciated increase in value. It is an assumption, just like the $150. You will not know the actual number until it happens.

In the OP, the other idea mentioned is principal (on a loan) being factored in. This would be incorrect in any IRR. The IRR calculation is NET cash flow. Principal payments on loans or other types of expenses come out of the gross cash number to produce the net number. So, if you want to plan a property with a loan, you will have to amortize the loan, go to the period where you plan to exit and payoff the principal balance of the loan from the sale proceeds to produce a net gain on sale. That number is plugged into the period cash flow. Three step process there.

The same principle applies to periodic cash. Use the net number from cash between in and out monies.

I would not suggest playing with MIRR unless you fully understand IRR first.

Thanks Marc.

I am curious, what is your role in all of this? How do you come into play and what do you do in the proposed process?

1. One partner borrowed $100k from a family member. This is documented with a promissory note which was at 7% interest and is now 5%. It is not clear if that promissory note is secured by a mortgage or deed of trust.
2. The borrower (a partner who owes the debt to a family member), might payoff the note.
3. If the borrower (a partner) does not payoff the note, you and the other partner want to purchase said note in full. (I think?)
4. Could you and partner 2, then use said note as collateral to secure an additional loan?

Could a secured (or unsecured) promissory note be used as collateral? Yes. How marketable that is depends on many things. The simplest idea is whether the note is secured. Next, you will have the relative level of security or the likelihood of being paid back or being able to recoup the capital.

Any lender using the note as collateral will have to underwrite, the underwriting (if any) that took place on the actual borrower and collateral (if any). If the note is secured well or if there is a high probability to get paid back, then the chances of using the note go up and vice versa.

In many cases, the DIY type note amongst family will have a hard time being used as collateral since from time to time, they are not conventionally underwritten, do not use conventional agreements and the file itself can have defects that impede or prevent enforcement and collection if challenged.

Why not just pay the note off and take an interest in the property and use that as collateral for a new loan?

This is not all correct, I think at the least, it is not so simple for sure. @Steven Hamilton II will know much more about this than I but I will add some commentary from my experience.

In order for a Non-US Citizen to receive tax exempt income it must be explicitly deemed tax exempt. The United States has a tax treaty with Canada (and other countries) which allocates a 30% tax on all US sourced income. That tax is to be collected or impounded by the administrator if it is required. That taxation is exempt for interest income paid by a bank or savings institution on deposits held in US institutions and it is also exempt if the investment satisfies the Portfolio Interest, which allows for tax exemption.

The rules around Portfolio Tax Exemption or what are called Portfolio Loans, can include Non-US Residents lending to US Borrower and being secured by a mortgage or deed of trust. However, as I understand it, and as Steve can clear up, the regulation does not recognize mortgages (or deeds of trust, etc) as a form of registered or bearer obligations. So, a Canadian injecting funds directly into a loan and getting a mortgage/dot and note back would not qualify for under the Portfolio Tax Exemption as it is not a Portfolio Loan.

I ran a blind pool fund, which did qualify for Portfolio Interest Exemption. It was complicated to say the least in structure and cost us a pretty penny to setup. I know from our pool, the fund could not directly own or take an interest in a mortgage but could take a co-investing role with certain restrictions.

It get's pretty hairy after that simple understanding that I have which may need some tweaking but this is not a simple DIY situation. All the pieces have to be properly setup in order for it to produce the tax exempt results.

Other issues with the over simplification here. A loan will have interest income. Points paid at origination is considered interest income. Not all payments come from a title company, the borrower in many cases has to make periodic payments of interest or more on the obligation. Does the title company ensure the lien is satisfied as a function of conveying clear title? Yes. But that is not to say all income comes from a title company.

If the investor invested in a Canadian company which then lends money in the US. That is not going to qualify. The investment is made into a domestic company. Normal taxation would apply. The Canadian lender would be subject to the 30% tax between countries.

Further, in the event of a foreclosure and the property reverting back to the Canadian investor, all the taxation rules would immediately change. The investor would certainly become taxed as their income would come directly from the real property investment. When the loan is extinguished it is booked as a gain or loss. The booking of the loan is closed and the booking of the real property is opened. Now, I am not sure how practical this would even be, as the investment vehicle can't take an ownership interest, so if it was structured in this manner, where it could, I am not positive the structure would qualify to begin with. Essentially, this is like owning a bond for a mortgage security. The investor does not directly own the underlying mortgage nor the underlying property which collateralize the mortgage. The bond does not covert into any different type of obligation when a mortgage turns REO. So taxation is not interrupted. It does not seem this is a structure being suggested in the post.

The idea of further security of a personal guarantee and being able to enforce that guarantee is also not going to be so straight forward. The big issue is similar to the above, by taking back the guarantee, the loan may not qualify for interest tax exemption. In addition, whether it is best to pursue deficiency in the US or in Canada is more in-depth than the simply idea given. A foreign court may not uphold the ruling in the US that the borrower still owes. Needless to say, this is a complication that seems to require much more detail than posted.

Last but not least, the loan and the lender are subject to US law. Usury comes into play at the rate and terms you seem to be alluding to. A loan with 17% interest is definitely on the radar. At the very least, this loan will be considered high cost and subject to certain disclosure requirements. Any entity acting as a lender in the US is subject to US license. I am not aware of any US lending license issued to foreign companies that do not have a brick and mortar business in the US.

So, in short, there seems to be much, much more to the idea than expressed here. Investors should seek proper accounting and legal advise as there are many moving pieces here.

A bankruptcy filing will "stay" (halt for a time being) the foreclosure proceeding. It does not technically 'stop' it. A stay order is simply a pause in the process.

Many folks tend to use the word dismissal but do not mean it legally. Dismissal can come in two forms, (1) With Prejudice and (2) Without Prejudice. Essentially, without means the plaintiff can refile the same complaint using the same facts and that something more like a paperwork error caused the dismissal. With prejudice, means the court no longer will hear the case essentially. Sounds great, right?

Courts have ruled and upheld that a foreclosure dismissed with prejudice is particular to a default date. So, the following month when the borrower defaults, that is a whole new case not covered by the dismissal with prejudice. Point is, not even a dismissal is a safe haven for long in most cases.

A bankruptcy filing will involve the borrower either (1) reaffirming the debt owed on the mortgage or (2) surrender the home. In the event the home is surrendered, the Trustee becomes the legal owner and proceeds to market and sell the property to satisfy the debt on the mortgage. The owner will have very little to do with this process, if the home was surrendered. If the home was reaffirmed, the borrower agrees they owe the balance and must make payments on the balance moving forward. Sometimes this is done through the bankruptcy plan and trustee and sometimes it is done separate.

In both cases, the court is involved and so is the trustee. If the borrower or trustee wish to sell the home, a Order of Sale must be prepared and submitted for review by the court and trustee. A Trustee can cram down the debt, which means they can make the debtor take less than what is owed or the debtor can take less on their own accord. It does not happen as much as folks would think.

A Bankruptcy does not need to be discharged in order to settle an asset. The asset can be discharged during or after the BK plan is deployed.

In a BK there are many moving pieces and players and they can affect the process and outcome. A borrower is to make payments according to the BK plan that was approved. While the borrower does so, the plan to discharge the debts proceeds as designed. If the borrower defaults on the plan, the plan is vacated and no protections under BK are afforded. A borrower can be in BK, miss a mortgage payment (after reaffirming) and foreclosure can continue. There are other examples, you get the idea.

A Bankruptcy will not permanently cloud title. Any Lis Pendis from or related to BK assets or liabilities can be cured working with the title company and the seller. Not really a big deal.

If the asset is surrendered then the Mortgagee and the Trustee will work in unison to disposition the asset. This may result in the Mortgagee filing for Relief of Stay, which is asking the court to unbind the restraints the BK filing initially put on them with the Order of Stay. This allows the Mortgagee to continue the foreclosure process. A Trustee, if the home is surrendered can do a DIL, since they have a legal interest in the home upon surrender. A Mortgagee can choose to finish foreclosure to wipe out other liens.

Bankruptcy assets are not complicated to work with and can be pretty regimented if you understand the system properly. Most folks do not understand the system but act as if they do. As such many words get tossed out with improper legal meanings and people get misinformed. A Trustee is good to work with as they can be emotionally unattached to the property and can make objective decisions about value.

So, to answer the question direct, it will likely be the same or better depending on who is making the decision on the short. The trustee presence, if they are indeed present, might make for an smoother deal but no deal is without its hiccups. Good Luck.

If you can show that as an agent/broker you are a "procuring cause" you may have grounds to seek the split and not simply the referral fee. If you have a contract with the Buyer but failed to execute a Co-Broker Agreement which formally documented the broker to broker arrangement you may still have grounds to force the 50/50.

There is a stipulation to the on-going and casual communication with the Buyer. It may not be a stretch, since it is your friend, that the communication was not interrupted long enough to terminate the relation. Every case is dealt with on a case by case basis for the most part.

Since the broker trying to re-negotiate is your managing broker, I think you may also have some ground to stand on, since a Co-Broker arrangement would be inter-office and as a subordinate licensee, you should be able to rely on a verbal contract with your managing broker. Maybe not.

Not a lawyer, just thinking out loud for you. You should be able to look up the state rules on procuring cause and see if they may apply to your situation. Since it seems to be worth 30%, it may be worth your time. Good Luck.

A commitment letter?

Are you sure?

In most cases lenders issue a conditional commitment first, which is a commitment to lend subject to stipulations or conditions. Some folks in the industry refer to this document as the "Stip Sheet".

Lenders do issue commitment letters and usually it is right before closing and funding the loan. A commitment letter is very detailed and I suggest you not DIY this type of thing. Since it is binding, the terms by which the Lender is bound are obviously concerning.

The public has done a good job of making the concept of a Commitment Letter confusing. Many times I hear Sellers ask for a Commitment Letter at a time in the loan process when there is probably not one to have. This steams from wanting something more than a "Pre-Approval" which is not a binding offer to lend.

What are you trying to do?