All Forum Posts by: Dion DePaoli

@Daniel Miller to address your post:

I don't think anyone here will say your right or wrong, again, speaking to the spirit of the thread that is the debate, how to access risk and is it quantifiable.

To me, it seems like you have a lot of moving pieces which are assumptions. So the influence of one assumption, which impacts assumption #2 can amplify you in either direction. To this degree, that is some of what was/is being debated or at least creates some of the basis of this discussion.

It does seem that there is a persistent idea in your assumptions that all things go up over time. Certainly, that may not be reality. Rental rates can decline. So then, in reality if rates do decline, the further out you are with an upward trend, the more wrong (sounds weird) your number will be.

If income increases and expenses increase, the impact only comes from the net effect whether flatt, positive or negative. I think you just have to be careful that as you turn both dials that you are not exaggerating either one's affect. Again, to some degree, that is the spirit of debate. That RE investing analysis as it trends into the future becomes less and less accurate because we can't know how that particular feature of the model will truly react. My only advice would be to try and understand what isolating those effects do and remember to stay to the side of conservative assumptions.

I am not positive you are calculating and interpreting NPV properly. I don't understand how you believe NPV is illustrating equity at period 0. In its nature, NPV and IRR are time value of money calculations, if there is no time factored in what you actually measuring?

Further, in the $25k and $27k idea, those make me believe you are not setting up the equation properly or are misusing/interpriting the formula output. There would be a natural increase in any calculation output as you have an additional year(s) of income which will naturally increase the return if all other inputs are equal. That will be the case for NPV, IRR and PV.

I don't understand how, with additional time, which means additional income, you see any plateau.

I may not have fully understood your setup and or interpretation of the results.

@Jared Foster , sorry didn't notice the comment here. A couple thoughts on your comments:

1. Research the market area. Figure out comps for rent and pick a number to apply to the property. Now reduce that number to something lower.
   Picking the "right" number and then reducing it would create the "wrong" number, wouldn't it? If a discount or reduction is called for, use the proper number based on the data. An haircut on top of a reasonable number would in a competitive market simply price you out of the market.
2. Research vacancy rate and pick a number that represents the market vacancy rate. Now increase that to something higher.
   This is sort of the same thing as above. Find the right number and use it. Certainly you can use a conservative number, but haircutting the number simply just sends your pricing downward and if other investors don't model like they, mathematically they will have a higher bid than you.
3. Assume 0% appreciation.
   A flatline appreciation is fine, it is a conservative approach. That said, the amount of time the line stays flat or goes up or down would be what affects your model.
4. Assume that income and expenses escalate at the same rate. Maybe assume expenses increase more than income.
   The key is the assumption, since we don't know the future simply needs to be prudent and make sense in either direction. Also bear in mind, that if they both increase/decrease at the same rates, the net effect is zero.
5. Assume 50% expenses, seems reasonable.
   This general assumption works for high level analysis. It is widely practiced but that general assumption without some work on the finite numbers might price you out if you don't costs to manage with if you do better than the competitor, you can execute better.
6. Crunch the IRR. How does that number compare to a "riskless" investment, say a government bond. Lets say bonds are at 5% and your IRR is 10%. The question I would ask is whether all this work is worth a 10% return if you could make 5% doing nothing. Maybe you can do a sensitivity to determine a range of IRRs.
   This is, to some degree, the spirit of the debate. Determining a proper hurdle for perceived risk or a justifiable return for the same. Certainly when the risk free rate of return is high enough, less investors will choose riskier investments. Why should they? What that number is precisely is personal to the investor and the debate is whether the number used is erroneous or has merit. To that degree, our debate is academic in nature here, with good points from both sides, IMO.

Residential finance doesn't have have bonds like that in most cases. Some local community programs have bond program where the bond is sold to an investor, but the property owner still gets a mortgage. A bond would not secure interest in the real property, the mortgage or deed of trust would.

You might want to look at notes instead of bonds for a more appropriate catagory of I think what you are looking for.

If you are listed on the Mortgage and Note, you are a Borrower, there is nothing to Assume, you are already obligated on the debt.

You can not simply remove the other party unless the Mortgagee agreed to remove said Mortgagor. Being able to remove a borrower is largely uncommon. Even in some cases of divorce, where one spouse has the obligation to maintain the obligation, the other spouse stays on the instrument and note until a refinance is completed formally or the property is sold. Any foreclosure action would show up on both credit, etc.

Anytime someone is listed on a loan, until that loan is fully satisfied, YES, it will affect their debt to income ratios. Sometimes in underwriting you can offset the obligation by showing payment from a third party as income. In most of those cases, it will not be a dollar for dollar offset. To that extent, the property is treated like an investment property with rental income, which is applied at 75% of total.

The idea of a credit partner in my opinion is Guru crap. It is really not practical. You can't just have good credit and not have the ability to pay the debt back and vice versa. Even in a marriage the major income earner is the lead borrower, regardless of the the credit score. So, if your credit partner has an 800 FICO but has no money, you're going to have a tough time getting a conventional loan.

The general idea itself, "A Credit Partner" is a straw man and can result in fraud charges.

You are better off looking into a Hard Money Loan or a Private Loan which is based on the equity in the property and has less impact from the borrower's income, assets and credit.

The documents used are standard Fannie/Freddie instruments. Section 6 is section 6 in the security instrument which calls for the borrower to take possession and live in the subject property within 60/90 days.

Something to the effect of this:
Occupancy. Borrower shall occupy, establish, and use the Property as Borrower’s principal residence within 60 days after the execution of this Security Instrument and shall continue to occupy the Property as Borrower’s principal residence for at least one year after the date of occupancy, unless Lender otherwise agrees in writing, which consent shall not be unreasonably withheld, or unless extenuating circumstances exist which are beyond Borrower’s control.

So you have one instrument saying it is Primary and the other saying it is Investment. Other paperwork in your loan file may be able to conclude how they treated the Occupancy. A final 1003 at the top, provided from the actual lender should have that designation. In addition, you may have signed a disclosure ascertain Occupancy at closing.

To some extent your protections under the law change if the property is an investment. It may also have implications on your taxation. However, for taxation the loan designation is not the only determination of occupancy. The rate and terms you received on your loan are based on how the lender underwrote your occupancy. If you received rate and terms based on a primary residence, they will expect you to take up residence as the above paragraph says. If they underwrote this as an investment property, then it will not matter to them if you live or don't live there.

The Lender is supposed or has the option when they deliver the documents to the closing agent to mark sections accordingly. Section F in the Assignment of Lease/Rent can be deleted altogether if the borrower plans to reside in a unit. It is supposed to be deleted if the property is a second home. Having the option to delete is just that an option.

Since it is a multi family unit, the terms of the loan you receive may not divert that much from an investment property. If your plans have now changed from how this was underwritten, I would suggest you simply check with your lender. They still would have the ability to call foul on you, which you would have to defend yourself. No sense playing that game when a simply call can resolve the issue.

@David Klick Some of this really makes little sense.

If you raise capital and inject into the project, you are an owner. The equity you plug in is not debt, it is equity. How you plug in 1.5% and get a balloon makes little realistic sense, that would mean you are debt not equity. If true, then you are financing them, not the otherway around.

The second part of the same idea, where the term ends and you have to refinance the "debt", which you raised, to carry in your name is hocus pocus BS. Any debt attached to the project would be attached to the project, how would you refinance said debt and essentially unattached it from the project, which is the collateral, and then carry that in your name? You would not. I to a certain degree do not understand why anyone would think that is a good idea. That idea, takes you out of the project, you removed your capital contribution, you no longer have a monetary interest.

Sorry to say, this doesn't pass the sniff test. I don't know what a "Pension Fund Group" is, but Pension Funds are highly regulated. Investing alongside a PF will be a very, very involved setup. This project in general sounds like it is too risky for a PF Manager to even think about looking at this. PF's have low yield requirements but the principal must be protected, this with the draw idea, which sounds like construction is a HUGE risk. Generally in projects like that the PF would be permanent financing and another investor would need to take the risk on the construction in case the project goes bust.

My opinion is, this is a complete and utter waste of your time based on the facts in this post.

If the $18k is "unsecured" it is not a "Mortgage Payment". It is unsecured debt like Ellis mentioned.

That is an important idea as mortgage payment history will be looked at in underwriting. However, you are not giving a mortgage unless you draft the security instrument and then you should also record it. Stop calling it something it is not so you clear up any potential confusion.

I don't know why the advisor is suggesting to not record an instrument, I would suggest you draft and record the instrument. You never know what will happen in the future and you want your parents interests secured in the real property. This will protect them from many other liens taking priority and gives them an interest in the real property.

If the loan amount of $18k is NOT secured by a mortgage, it is unsecured debt and an unsecured debt is a Cash Out Refinance which carries restrictions on LTV and can affect rate. I would be inclined to call it bad advice.

The general conventional minimum loan amount is $50k So as everyone suggest, you will have to find a local bank or credit union who will portfolio that loan amount as it can not be sold to one of the GSE (Fannie/Freddie).

To some extent, I question why you even need to refinance. You're going to spend extra money on closing costs and the terms from your parents will likely be as good as a bank. The loan amount is so low, you might be better off simply trying to pay it down faster than messing with a refinance.

It is also not clear what the property value is. So the loan amount you would actually be looking at refinancing is less than $18k as you would make payments on the principal of the loan over the course of time before you refinance. So you need a bank that will refinance under $25k (technically under $18k), which is certainly getting into a tough area of financing. Usually you are not going to find a bank which will do a refinance at 100%. So if the property value doesn't increase, the value will be $25k. At $18k you need a loan of 72% LTV or less. At $25k it is 100%.

@Robert Howell and @Nate Crump

You both sort of asked the same question. Second liens due to their position trade for a much steeper discount. A performing second can trade around the mark I mentioned 15% to 25% of the UPB. Those loans will have a little bit of equity to negative equity. There is still risk of not being able to collect and with the limited to no equity position, enforcement can be limited if the first position goes into default.

There are some general price levels and certainly variations on some of that pricing depends on what the first position is doing in performance and how much equity there is for both positions to come out whole. If the combined current LTV allows for both positions to recover, then you see a higher price paid for the loans as they can likely recover more or a larger part of what is owed. When the loans don't have that much equity the price shrinks as recovery of what is owed starts to become limited.

Nate, the Detroit foreclosure would be pricing more conducive for a first lien not a second in my example. Assets in some of the war zone areas in Detroit trade for very low percents due to the low value of the real property and the liens that also usually come with them. I have bought and sold some of those firsts for less than 20% of BPO. That can be pretty low on the UPB scale sometimes in the single digits around 8% to 10%.

The general pricing is comes from the time and costs to disposition the asset. There are variations, like a scale if you will, since not all assets are at the same point in the cycle nor do all assets have the same amount of liens or value, etc.

I will point out an important idea. Many folks tend to talk about notes using a percentage or cents on the dollar. For instance, like we are doing here. However, it is imperative to understand what dollar is the base of the percent. There are two UPB and RE Value or BPO. I have often heard folks talk about getting, buying or selling loans at "10 cents on the dollar". Well, which one? They can mean two very different ideas. If the asset has a property value of $10k and a unpaid balance of $100k, then our 10 cents on property is $1,000 if it is on UPB it is $10k, the property value.

The point is, in most cases you can't talk about one of the ideas (percent of UPB/BPO) without the other idea to determine if it really makes sense. In the example, if you are talking about 10% of UPB, you are talking about 100% of property value. Not much upside there.

I point that out Nate because you sort of miss labeled what I wrote when you rewrote it. In addition, it becomes important when pricing a loan out, either first or second. A second lien that has equity stands a good chance to recover what is due. A second lien with no equity will have a harder time collecting. In general NPN 2nds have traded around the 2% to 5% of UPB. That is going to be little to no equity which is why they trade for so low. A performing second will trade in the 15% to 25% range with the same equity level. More equity in the property for the second to use for its recovery will increase the acceptable price. If the CLTV was 75%, you would see high bids for the second because it stands to recover more and at a higher probobolity.