All Forum Posts by: Dion DePaoli

Joe, we are trying to get out and stay out of the state. We only have a couple left less than a half dozen or so. Not looking to acquire more.

Rick,

Shared Appreciation loans for residential property is not uncommon but tends to be found in more of a public finance or non-profit finance situation. Some Neighborhood Rehabilitation loans or alike will take back a second lien, which usually ends up being 'silent' and then upon the liquidation of the asset, the lien is paid off and equity is calculated and shared or simple interest applied and paid.

The ones I have seen in the past prorata the debt/equity percent into the net proceeds. So if the silent second was 10%, they would realize 10% from the net proceeds.

I am not sure these types of loan arrangements are allowable under the new rules in 2014 unless you are a government agency or non-profit. For primary residential real property anyway.

Structuring the subordination is simply either recording the lien in second position or executing a subornation agreement in favor of the first lien holder or both.

In terms of creating and enforcing a maturity date. That will function just like any other secured loan. I have seen some that have a interest deferment maturity date, where the interest is deferred for 5 years and then an interest charge applies unless the loan is paid in full. Enforcement would be foreclosure. No real way around that. I have seen too many foreclosures from these types of structures i am sure there are/were some but in general the ones I have seen seem to be patient when it comes to repayment.

The elephant in the room is I suspect you really can't do this type of deal any more once the new rules come into play. @Bill Gulley what do you think on that? It seems to me this is now sort of looked at like equity stripping and is essentially forbidden on owner occupied property.

Originally posted by Joe Gore:

Dion,

Is your notes non performing?

Joe Gore

Joe, we have both PN's (sub/re) and NPN's. We are more interested in cash flowing loans than NPN's and will sell off most of the NPN's we end up with depending on dispostion time.

Christine,

Well there is certainly a bit more detail in that post.

A couple data questions/comments:
1. Just use your proper property taxes with a homestead exemption applied. The real benefit to homestead is the cap on year over year tax increase. Since you plan on living there you should be able to claim the exemption. Running numbers without the homestead seems like a pointless exercise.

2. I am not sure the $0.50 maintenance factor is the best to use. If each unit is 1,000 square feet this will get you $500 annually. That can easily be consumed in some maintenance. It will also depend on what is being repaired in the $25k repair budget. It's good to have a factor like this but make sure you back into your maintenance plan to ensure you are reserving enough money each period and year to achieve the plan.

3. The NOI for one rented unit is $437. The NOI for two rented units is $1,070. I don't understand why that two unit number is not simply twice the 1 unit number at $874. Let alone be $200 higher in net. Also, this net seems low still. Essentially, you are saying the cost of operating this property is around 25% of Gross Potential Rent. While it might be possible it is not very common to find that low of a cost to operate.

4. You have to get real comps and evaluate the property value. A sale price 8 years ago is not going to be your best guide nor will tax assessed value. To some degree when you purchase for $60k, you are making a comp defining the value on the day you purchase for the Subject Property. This is going to be one of the more important figures you to focus on in your overall plan. This number will give you indication of you will have lots of gain in equity to distribute or if you will have little equity to distribute. The compensation for that equity will be your cash flow and debt service.

5. It is not clear how you are working with the debt service. At 4.5% amortized over 30 years you will net around $75 per period. According to what you have typed, the property earns around $5,244 net income annually with one unit rented. Interest Only costs is around $3,825 and PI cost is around $5,168.19. Neither of those back into your listed numbers of $21/$655 which also don't seem to scale together properly like your net rent numbers.

I think you really need to dive into the cash flow here and make some decisions on how you plan to earn equity. Do you plan to pay principal down to earn it or are you hoping to gain equity through appreciation and gain from rehab. Certainly you can do both, but one of these will sort of be the leader in your deal. The higher the one side, the lower the other side can be and vice versa. I am guessing you likely need to pay down principal to make the deal really work. I am guessing, but I don't think you will get drastic gain in value from the resale.

So if you tighten your numbers up you can figure out ways to back into what your family investor is interested in. I mention this as it appears the cash flow on fully amortizing will be a little tight. And I don't think you want to fall into an Interest Only trap, you will want to pay principal down. When you start to do that might be the variable. For instance, if you have a solid plan perhaps you make an I/O feature with your family member which allows you to pay P&I but fall back to the I/O in case you need it. If the property has cash flows remotely like you suggest then when you convert unit number 2 to a rental you will have some payment power to reduce the principal balance. You have to figure out where the 'meat and potatoes' are coming from in your deal and use that income or gain as the work horse for how you structure your deal. If you can really achieve a property expensive of 25%+/- then you have some power in your rental income which then is a matter of tapping into the income in the future. So you will have to figure out how to move yourself out and convert your unit into a rental.

That payment stream idea will be important as when you go to refinance remember that you will be doing a Cash Out Refinance so you will have a lower LTV than a purchase as far as the conventional finance goes. If you can still call the property owner occupied, that will give you a little boost but that might be problematic in your plan as the lender will want you to stick around in the property for 24 months to call it Owner Occupied. The point is, you will need some equity to make it all work. That equity will either come through principal repayment or appreciation. Again, I don't think you see enough appreciation over the short term to make it all work but I could be wrong.

Some other's might chime in as well.

It is not uncommon for higher net worth investors to pledge alternate collateral for a loan. Depending on what is being pledged the risk for the bank may be a little less than that of a mortgaged property based on the liquidity and value of the collateral. I have seen these types of deals as pledges of existing securities and where the bank sells a security to be held, like a CD, during the term of the loan. Aside from the particular details you seem to have a decent handle on the structure it is fairly straight forward. The barrier will be the value of the collateral and it's stability in terms of value as you mention along with the ownership structure of the collateral.

Congrats on the find and the family member willing to work with you.

There is not really enough detail in your post to work with. How much will you be able to rent one side out for? Since you plan on living in the other unit and you want to live there for "free", you will need to derive the debt service from the one unit you rent out. In addition, the rental payment would likely have to cover taxes, insurance and maintenance. As such, completely "free" might be a little tough unless you can get some pretty high rent for the one unit.

The investor is open to terms but doesn't want a 30 year term. You plan on holding the asset for 3 years or more. So it seems like you will have to create the exit for the investor by either selling the unit or pay the investor off with your own cash or a new loan.

It is not clear if your investor would be amenable to no cash flow from the investment and simply be content with an equity split at the end. If the investor wants debt service or some cash flow while invested your cash flow burden will be tough as mention. If the investor is happy with no cash flow and allows you to pay the property obligations and then retain the remaining cash flow yourself, then you will simply give him a good equity split when you cause his exit either by selling the property or cashing him out with your funds or a loan.

We don't have your numbers to judge the gain on sale or property value improvement so it is tough to really zero in but generally the larger portion of capital the investor puts in the large the portion of the net gain they will get, since it is their capital that took all the risk. You could look to a typical 80%/20% split and work from there. Generically speaking if you try and achieve a 10% return for the investor you will have to NET him/her $8,500 per year. So in 3 years the investor would need to generate around $25,000. That might be a little tough if you are hoping to pull that all from an increase in property value. Again, hard to say without the details.

If you post a little more detail, it may be a little easier to give some opinions.

George generally the note is not recorded only the security instrument (mortgage, deed of trust, deed of security). The instrument will only have the original loan amount and maturity date in most cases. The amortization, payment, rate and other repayment features would be found in the note only or in a recorded modification agreement.

I can't speak to trying to reverse inquiry from the courthouse like you are trying to do. I am sure some folks have done so with blanket letters or alike. I can't imagine it is overly easy.

I have a couple Georgia loans we would be interested in selling. Are you properly licensed in the state of Georgia to own a loan? If so, PM me, I would be interested in showing you the couple we have to get rid of if that is of interest to you.

Property taxes can be found on line at your county tax authority. Association dues can vary so you should look to this listing, agent, seller or call the association for the right number. Insurance in condos can also vary from property to property and associations. This depends on the areas and structures each party (association or owner) needs to insure. It is common for many associations to insure all the property and structures along with the common areas. The owner would the be responsible for their portion of the property not covered by the association. Many times you can simplify the idea by thinking the owner insures from the drywall inward and the association goes outward. That is not always the case, so do inquire about the owner liability with the association or their documents. As such, those owner policies are pretty inexpensive since the association covers the expensive stuff. An owner policy like that will look like a glorified renters policy but a little more expensive. The most certain way is call an insurance agent for a quote.

It would seem you are trying to simply imply this asset will sell for a 10% cap. The seller seems to have priced it at 4.6% cap. You seem to be pretty far apart. Bringing it down to 7.9% cap is still pretty far apart. It would depend on details not present in the post to comment further.

As a function of the BK, the borrower/owner would have either had to reaffirm the debt or surrender the asset. Reaffirming the debt essentially means the borrower agrees they owe and they will have to pay it back. If the home was surrendered, a discharge order will be issued for the mortgage.

If the home was selected to be surrendered, the mortgagee may opt to finish the foreclosure to deal with any additional encumbrances on title or a Deed in Lieu can also be arranged along with a directed sale of the property to produce funds to satisfy the lien. Legally the Trustee will become the party who controls the asset and usually moves to work with the Mortgagee to satisfy the lien through disposition. There is no way to know what is happening on this asset unless you ask a knowledgeable party which may or may not be the agent. Do not simply assume, the home was surrendered or seized (due to equity) by the Trustee, it may still be fully controlled by the borrower/home owner. The agent could tell you who they report to, which is the communication line of folks to follow. Careful not to confuse conversation where the owner's BK counsel is referenced versus the actual formal BK Trustee.

The borrower could have reaffirmed the debt which caused an automatic stay of the foreclosure. The borrower would then have an obligation to make payments or the mortgagee could file for relief. This may have been what the borrower did, if they and their counsel believed it was best suited in the BK plan. This then means the borrower still has the legal authority to direct the asset. The borrower and their attorney will have to file a motion to sell which is what the Trustee will use to decide on approval and will use to make decisions on the application of any net proceeds from sale related to the BK plan.

The moral of the story, you would need to really get to the bottom of who is legally controlling the property. If the Trustee is in charge, they likely already obtained some RE evaluation report, whether a CMA, BPO or appraisal and have a notion of how much they will sell the home for. They are not without their quirks with pricing but can be accommodating if you make a case for a lower market value than perhaps what they initial thought or received from the vendor which delivered the evaluation. If the home is being controlled by the home owner still, then you maybe dealing with pie in the sky ideas of value and sale proceeds which includes emotional attachment. Sometimes those are a little harder to negotiate. I am guessing since it sounds like the property is fairly stagnate in MLS, the property is still controlled by the borrower. If you hit the 120 DOM mark and there has been little price reduction that may be further evidence of the same. Most Trustees look to liquidate the home fairly but quickly and tend to not let the sale extend to much past normal marketing times for the area. They are not confused, like an owner might be, as to the idea, a properly priced listing produces a sale in the normal marketing time for the area.

Gaining an understanding of who you are actually negotiating with may affect the strategy you use to negotiate and the offer level you put forward. Good luck.