All Forum Posts by: Dion DePaoli

If the creditor properly obtained a court ordered judgement and lien permission then the Owner/Seller will have to pay to satisfy the lien. The title company usually calls and gets a payoff amount from the creditor. The Owner/Seller would be the only person to be able to try and negotiate a lower payment.

The title company will pay off liens that are attached to the property as a function of closing. So, yes, you essentially show up, close and the title agents will cut checks to pay off the parties. You will see these items on HUD 1 as they are what is reducing the net proceeds to the Seller. You as a new owner will be getting title insurance that insures the title unclouded by these items.

The Owner/Seller or you for that matter, can pay any of these liens before the closing but will need to supply to the title company the lien is satisfied. Optional path to completion if so chosen.

The utility of ROI, where we take the net profit and divide into the cost basis is not really the financial analysis you want to put weight on. When linear equations are used, such as ROI, in a short amount of time such as one year, we see they answer breaks down and is very misleading.

Here is the deal broke down:

Sum of Total Payments = $12,332.74
Total Profit = $6,332.74
Return on Investment = 105.55%

Internal Rate of Return = 16.20%

The IRR for this deal is the better and proper analysis. Your IRR is 16.20%. We can confirm this also by plugging that IRR into a Net Present Value equation and we get back the $6,000 that was invested. (we can discuss the merits of NPV later)

The ROI shows us we doubled our money, which is why it is over 100%. To a factor of 1.05, however our rate of return on the cash flow is actually 16.20% not 105%. That is, each payment or periodical cash input comes in at a rate of 16.20% annually of the original investment amount.

Present Value (Loan) = $11,000
Annual Percent Rate = 6.0%

The Annual Percentage Rate couldn't exceed the coupon (Interest Rate) of the loan. The coupon is 6.0%. Since we are only calculating 11 periods for this loan, we will not see much of a impact from time, lowering the actual rate. There really is no place in this example for APR. APR is a consumer calculation not an investor calculation. The APR is likely higher than 6.0% since we did not properly include the other costs of the loan. Present Value is the present value of future payments, this would really only produce the loan amount.

Here is the second example:

Sum of Total Payments = $70,711.40
Total Profit = $37,114.40
Return on Investment = 114.28%

Internal Rate of Return = 64.53%

Loan Amount - $40,000
Rate = 7.0%
Term (m) = 84 {7 years}
Payment = $603.71

Since this example is greater in time, we can see the effects that time distorts these numbers. It is true, for the amount that was put in, $33,000, we received back 1.14 times that amount. A similar number to example 1, but this deal is better. Frankly, it should be. We are gaining interest on our money for a longer period of time, thus we should make more money. That is, loans with longer terms simply pay more interest.

That is an important point in your mind. Deal 1 has a 1.05x ROI and Deal 2 has a 1.14x ROI. So what is that ROI number really saying? It says, the total investment, whatever it is and however long it lasts, in summation will doubly you capital base plus. For each investment. And that is really all it says. In IRR we can see that Deal 2, is a better deal, in terms of return on the capital invested considering time.

In each deal we have gain in the sale itself. In deal 1 we have a gain of $6,000 which is 100%. In deal 2 we have a gain of $27,000 which is 81.82%. There is the majority of the ROI number right there. Interestingly, look at Deal 2, note we actually make proportionately more money in interest than in Deal 1. In Deal 1, we make $332.74 in interest income from the loan. $332.74 is 5.55% of our investment. In Deal 2, we make $10,711.40 in interest income, which is 32.46% of our investment.

So then, why is Deal 2 better as described by the IRR?

The answer lies in the evaluation of how the cash flow is returned back to you, which considers time. Remember in each deal, there is a down payment and then periodic cash flow from the loan. In Deal 2, we receive $20,000 as a down payment, (I place that into period 1), that is 60.0% of the total invested capital. In Deal 1, we get back 16.67%. That is a massive difference. If we consider that, investing in deal 2 should be better because after the first period, I have risk ratio which is less in deal 2. In deal 2 I am risking 40% of my capital expecting to be paid back as time goes on. In Deal 1, I am risking 84% of my capital expecting to be paid back as time goes on.

In looking at another characteristic of both deals. Notice, Deal 1 will pay the invested capital back in a total of 5 periods which is 45% of the total investment horizon (term). Deal 2 will pay the capital back in period 22 which is 26% of the total investment horizon. Which we can translate into, Deal 2 has a longer period of time of low risk investment.

Often times I see the mistake folks make, which is typical to example number 2. Where they take the ROI percent, divide by the total number of periods and then multiply by 12 to annualize the number:

114.28%/84*12 = 16.33%

That simply is not correct. That is not the proper way to raise that number to the power of 12 mathematically. The proper equation:

(1+n)^12-1=X

You also would have to understand what number to plug in for "n", which would be 4.24%, the periodic return. We are raising the period return to an annual return.

I don't want to speak for Wayne, but I think he was making a conceptual point. The Deal 1 profit amount is $6,332.74 is just over $500 per month. That is just not a bunch of money. It is still return and your profit but is the time you spend on it each period worth $500. Only you can answer that. From a return standpoint the deal would be considered good.

I think many folks suffer from the same math issues. Not fully grasping what math to use and then what the math says. It is important to understand, analysis is not simply one math equation. If we simply used ROI as the only evaluation on these two deals, they look pretty darn similar. Once we started looking at IRR, we see they are worlds apart. Once we looked for what was different the true merits of Deal 2 came to light. So, ROI was sort of like, eh, no biggie. IRR was like, heck yea and then understanding why the IRR is so different like, holy cow, that is a better deal.

Some of this depends on what you plan on doing and what type of peace of mind you want.

A stabilized market is simply a market which has established an equilibrium of value. It is not void of volatility but the volatility is a little more predictable and the peaks and valley discrepancy is a smaller percent number.

There seems to be some logic that points to you under evaluating some of the assets you are looking at. The offers are being rejected.

Many newbies I think suffer from this. Likely stemming from a rigid application of guiding numbers and percents. While it is not clear what your finite projections look like, if you are simply applying 50% or 60% on all financial projects you may be doing yourself an injustice.

A good way to recalibrate your assumptions is go look at the properties you did make offers on and see where they sold at. How is it those investors, who purchased said property, are making their Sale Price work and you are not?

We can assume, that investors seek similar rates of return in comparable risk situations. This too might be what is throwing you off. If investors are willing to take 12% returns and you price offers at 15%+ you won't get many accepted offers.

It is impossible based on the post, with little information, to comment on what you have going on the capital stack (equity plus debt) in your offers. There is an optimal balance in capital stacks which is rooted in the overall cost of capital, both equity and debt. Fundamentally, debt provides two things to an investor. (1) provides capital above the amount of equity on hand to make an investment. (2) provides capital cheaper than the cost of equity. If you only have $10k and you need $100k, you obviously have to borrower the $90k. Equity generally costs 8% plus and debt in today's market costs 8% or less. The closer your debt is to equity, the less of an impact of it will have. So if both debt and equity costs 8%, then it doesn't matter what the proration of each is, they are the same. As such, as equity is more expensive, say 15%, it might take cheaper debt at a higher percent to get the equity return. (I hope that made sense)

What I would do, is like I said, go look at where the assets you made offers that were turned down and sold. Spend a little extra time to get more accurate on the exact expenses opposed to a percent application in your projections. You should start to see a trend, if you can get a couple of properties to look at, on where the investors are willing to get into a property and what type of capitalization rate they are seeking. From there you can play with your debt portion of the offers to see how that will affect your return.

Just some feedback on this evaluation. The ARV number, $480k, seems a bit inflated. The comps in the CMA are not the best choices, IMO. You left subject property subdivision and crossed over a main road to seemingly select comps that seem to be superior to the subject property.

Comp number 2 you crossed over Allisonville Road and Keystone and it is on water or much closer to water than subject.

There is listing a block or two away from subject property which seems to be blowing your ARV price out of the water. 5942 Camelback Ct is superior in size and seems to have been upgraded in line with your $40k estimate and it is having trouble selling, currently listed at $309k being reduced from $329. This is a 5,374 square foot home and has the upgrades subject property needs. Similarly overbuilt like subject property for the subdivision, which I think makes this property important in the consideration of subject property.

I think the core issue with the CMA and ARV value is that the comparable sales are not some of the best comparison and it is skewing the value.

I also am looking at the repair number you have. Essentially what you are saying is if someone puts $40k into the home, they should get over a 3 times multiple on their repair dollars. The repair dollars are, as you said, seemingly mostly cosmetic. It appears you may get dollar for dollar on that capital but I don't see dollar to three dollar.

I also note, this property has a pending sale at $289,900. I think that is pretty close to its value As Is. Not sure how you fit into that equation but your purchase price at $310k didn't hold in the market either, if someone is buying it for $289k.

Are you trying to wholesale on top of that transaction? If so, it seems like you put $20k on top for no real value add. What you really need is a discounted price from the $289k.

Not picking on the OP, just making some observations. Curious what others think of this valuation.

I see what your saying. As I mentioned, it is not uncommon for ALR language to be found in some standard residential security instruments. Pretty common in Fannie/Freddie instruments. When the property is a 2 to 4 unit, you will from time to time see the two instruments separated.

You recorded, what seems to be one instrument with two "titles", which the county slang termed "two documents". This is county specific. LA county does have guidance on the matter as follows:

COMBINED DOCUMENTS (Government Code 27361.1, 27361.4 and 27388)
When two or more documents are serially incorporated into one form or sheet, they will be considered as two or more separate documents. An appropriate base recording fee of $7.00 will be charged for the first page plus a $3.00 District Attorney Fraud fee when applicable, and $3.00 for each additional page, PLUS a base recording fee of $7.00 and District Attorney Fraud fee $3.00, as required for each additional title to be indexed. + $1.00 SSN truncation fee per document title.

You would have to get some more guidance from them regarding what they index as a "title" and what they do not. Generically it does seem like some additional fee is included in your $70 fee.

Sometimes county recorders are a little quirky too. They will charge if the format of the document is not what they specify. This can mean the margin on the top of the page is wrong or specific text is not present, etc. Some recorders reject the document and some just charge a fee. Again, this is specific to the county recorder.

Richard, I actually do have legitimate experience purchasing some pools of bulk REO. That said, that was back in 2009, amongst the reshuffle of financial institutions to shore up balance sheets.

Aside from what Jon mentioned, which is really indications of a broker or a broker chain. Which also teeters on what a wholesaler does there are asset and trade concerns that can flush out if a deal is good or bad as well.

Asset pools in Detroit were probably one of the more common geographic pools in the public domain. Likely stemming from the institutional owners understanding that the assets would likely not provide solid capital recovery. We all know in certain portions of Detroit the properties are riddled with tax liens, municipal liens and many are subject to demolition.

Some pools did certainly trade and like Jon mentions could be practical to find a private investor who owns a portfolio. One of the easiest litmus tests for REO trading in the Detroit area, IMO, is asking if the Seller will provide a Warranty Deed. If they will, it is worth sticking around and having the conversation around value and price, perhaps. If they inform you they will only convey the assets via a Quit Claim Deed, I would run.

The issue stems from many banks simply ditching the defaulted mortgages the had written. The assets became a bit of a hot potato. Investors bought some looking for a way to profit and found out, there were not many ways at all. So, files deteriorated which caused ownership defects in the mortgages. We owned a pool of Detroit assets, which frankly, I had to write off for exactly this type of reason. GMAC loans that were purchased by my predecessor which we couldn't get clean title to the property post foreclosure, if we could even proceed with foreclosure legally.

More recently, smaller portfolios of property, which also seem to regularly involve Detroit do circulate. This attractiveness of this is the properties are cheap in price but have some decent rental income. That is also how I have seen those portfolios marketed. Essentially trying to sell the yield.

It sounds like you are familiar with the market, so you know you can get cheap property there and hit some home runs with rent, provided you can rent the property to a paying, long term tenant.

That is why I say the litmus test is what type of deed you get. You can jump into a QCD deal and then next week, the city evicts and tears all the homes down.

BTW, a Due on Sale clause is likely found inside your DOT/Mortgage and is not a separate standalone instrument. DOS does not encumber on its own merit. The DOT/Mort and ALR does.

I assume you mean your Assignment of Leases & Rents was a separate document behind the Deed of Trust. In that instance, it is its own instrument subject to recording fees. It is possible to have the assignment clauses which contains similar language but generally not in full within the DOT/Mort.

It is possible to not record the ALR but this can create complication down the road. The document itself is considered inchoate, that is partially in existence. Fundamentally, it only exists legally when you want to enforce it.

Not filing the ALR with the DOT/Mortgage separates the two documents from a legal perspective to some degree. Filing the document with the Security Instrument (DOT/Mort) gives proper public notice of the intent that the rents and lease income is also encumber under the security instrument. So not filing it opens up to possible defense against the same concept.

In addition, filing it seperately, say when you need it in the future, could also create release issues clouding title. Basically acting as a stand alone Security Instrument, then needing a stand alone release.

IMO, you did the right thing, filing both instruments. At the end of the day $70 did break your bank, in light of making a loan on a property in LA. For the extra $35, you have both instruments perfected properly giving the enforcement and remedies properly at your disposal now and into the future if and when needed.

Brian is correct but just for clarity around the topic let's define some of the terms a little more for a better understanding.

According to the SEC and FINRA a "finder" is an individual, company or service that receives compensation in connection with the solicitation of potential investors. Common examples of legal finders are broker-dealers or investment bankers working for broker-dealers. These are licensed and registered people and firms.

According to the SEC and FINRA a "broker" is any person engaged in the business of effecting transactions in securities for the account of others.

Events or actions such as helping a company sell shares to raise capital, engaging in other activities like participating in presentations and negotiations, making recommendations to investors concerning securities, receiving transaction-based compensation (i.e. commissions or finder’s fees), and continuing or regular involvement in sales of securities are evidence of activities rendering a person a broker.

The term ‘‘security’’ means any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a ‘‘security’’, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

Finders can avoid registering as a broker by limiting their activities to:

1. Introducing prospective investors to a company without engaging in negotiations.
2. Not recommending the company’s securities to prospective investors.
3. Basing their compensation on a flat fee that is not contingent on the closing of a securities sale.

You can find most of this on line on the SEC website. A copy of the 1933 Securities Act can be viewed here.

I think there is also a flaw in the idea that a firm that has a book of clients would allow it to be mined or shared in any manner. Client 'books' or lists are pretty guarded. Most Capital Market firms do not share or distribute their list of clients. The sharing of said list likely violates company rules and would result in termination. There could even be harm to the firm and fees and penalties under the law. The list itself is the property of the firm, not the Asset Manager. I have seen folks have legal repercussions for trying to take or use client lists for utility away from the company which the investor has subscribed to.

Forming a pool of investors requires proper disclosure and subscription documents. One does not simply decide to put a pool of investor together and run off and do it. This is really not a DIY concept. Subscription document preparation and the filing of exempt status is a costly event. In most cases exceeding $35,000. Depending on the detailed nature of the prospectus and other filing requirements that fee can increase based on the attorney workload.
If the OP was able to negotiate an ownership stake in the company which issues the shares, then the OP would become the operator and would be open to promote, within the guidelines, the investment in the company issuing the shares which in turn purchase said asset(s). There is some guiding rules around this concept and an attorney should be sought out to properly setup the documents, review the disclosures and ensure that all rules are being followed on both the federal and state levels.

For anyone who has been around the real estate space for any length of time, most have seen various types of solicitation material. When people and firms put together a project summary and distribute said summary to the public, they are indeed violating these rules. For the most part, it is hard for the regulators to stay on top of all of the violations. So we tend to see them only involved when folks lose money or if a promotion is publicly distributed in volume. Most of the time, the properly prepared document can be identified by the disclosure contents, which is more than the simple email disclaimer folks put in their email signatures.

I think laymen have become accustomed to hearing how Accredited Investors can participate in Regulation D offerings. This is a specific type of exemption filing for Regulation D 505 and 506, where since the investors are considered "Accredited" meaning they are viewed to be capable of interpreting the investment on its own merit, that somehow they are in the clear. This is not completely on track. It is the function of solicitation to those types of investors which enables the registration for exemption. Not lack of registration. To say it a different way, by only solicitation to Accredited Investors does not relieve the promoter of exemption registration, it is what gives them the ability to request exemption. Under that idea note, all forms of a security are required to be registered unless they can file for an exemption. To that extent, you are still filing, either as a listed security or as a security exempt from registration.

I do not think so. Investors have influence on the acceptable market yields in the backdrop of where US Government bonds trade. That is, the risk free rate of return that you can get on a Treasure Bill, backed by the full faith and credit of the United States. Mortgage notes are set on spread on the market indexes. Right now we are seeing the lowest spread between Risk Free bonds and 30 Year mortgages. It is a little bit of an anomaly, the risk in risk free is zero, the risk in mortgages is more than zero. The spread is not accounting for the risk. That said, there is lots of money after mortgage bonds since the yield as a matter of number is higher and to some degree that is what really matters to investors.

I am sure these firms have a plan and it all make sense but I tend to think this will be a problematic securitization space. The bonds performance, which is based on the underlying rental payments, could have some volatility from year to year. Additionally, we don't fully understand what the rental market will look like in 10 years. Also, the ratings on these things right now will be non-existent. It is difficult to build a credit profile on a tenant in an asset which turns the tenant over every year. At the least, you not see this ranked as 'AAA' anytime soon. As such, mutual funds would likely be excluded from purchasing these bonds I believe.

My guess, this is really just a method for these guys to finance the trade. They probably have some short investment horizons for these as their bread and butter is still within the 'normal' scope of fixed income products such as MBS, RMBS, CMBS, ABS, etc. Likely not a large volume of issues so the institutional counterparty who buys them can park their money for a couple years and still exit out in the short term while getting a competitive yield on their capital.