All Forum Posts by: Dion DePaoli

Everyone knew this was the strategy back when many capital market firms went after REO.

Is there an opportunity for note investors in this? I don't understand what you are asking.

The bonds will be available in the market, although we don't know in what increments. So anyone, provided they have the capital, can buy the bonds.

While it does not get much media attention, there have been bond issues from pools of REO properties. None of this is really new. Just new in media coverage.

Have you closed and funded anything with them?

Any instrument can be used. Cash or a check in the form of personal, money order or cashier's check can be used. Checks are common, that is all. You could also simply wire the funds in.

And therein lies a situation why title companies have a hard time working with Wholesalers.

Asking for Preliminary Title Work suggest you are purchasing said property. This is a step in getting a Title Commitment and an Owner's Title Policy.

What you seemingly want to get is an Ownership and Encumbrance report or a Title Abstract. If you want to see if the title is clear. Those are around $100.

I guess, the next question would be, what is the point?

If you don't plan to close the deal if you do not get another buyer, then what benefit to you is there knowing if title has defects or is clean?

Any buyer you bring to the table, who plans on legitimately purchasing the property, will likely want an Owner's Title Policy for themselves. Title companies do not usually transfer Title Commitments, which is the result of asking for Preliminary Title work. So, you and the new buyer would seemingly be paying for the same thing twice. Only you would not be paying for the actual Title Insurance policy which takes place at the closing.

Marshall,

I am not 100% sure I follow your question but I think I understand.

First, the CD is its own asset and investment. This must then be treated as its own line on a financial statement. It will have its own liability line and it will have its own interest income line.

The LOC is a liability on your financials. The interest burden is a bill you have to pay. This should be its own line item as well. So you will have a total liability line for the amount drawn down on the LOC and you will have your cost line which is the aggregation of the principal and interest you pay on the LOC each period.

Will the cost of the LOC be offset by the interest income from the CD? Yes. But only in the consolidation of your financials. Each should have its own line entries. Do not mix them or try and net them in some combination of things. Also, depending on how you own these assets and properties will matter. If you did the CD as a person and you own the investment property in a LLC, you shouldn't have them on the same set of financials since the owner is different.

Treatment of the LOC capital, when drawn down, received and put to use, can be set up one of two different ways. Option 1 is treat the capital as equity. Option 2 treat the capital as debt.

That treatment is only for the owner of the asset which has the burden of the LOC. So again, you should not mix ownership. If the LOC is a person, technically what you are doing is capitalizing your LLC to purchase the property with cash. The cash goes in to the LLC and that is it. The LOC will appear on your personal financials as a liability. That liability is paid from your personal income. Your personal income is whatever you do for a living and the net income from the property you are investing in.

When the LOC is drawn down you swap equity for cash. That cash then becomes the equity injected into the new asset. It is not clear in your post if you plan on using debt to purchase the new property. So if there is no debt, then the purchase has to take place with all equity. Seems like all this equity comes from the LOC. It is of course in the form of cash, there is no other form it can come in. If there is debt, the equity you need is simply smaller in amount and percent.

I think what you are doing is making your life complicated. Trying to think of the money you invested in the CD as a portion of the overall investment into the property is messing with your mind. That is technically mixing apples and oranges. Again, the CD is its own investment. Literally by definition, the CD is its own asset. The capital you put into the CD does not count for or against the property investment. It can not, it is not in the property, which is also its own asset.

This is why 'ownership' is important. The ownership is what consolidates the Assets & Liabilities and the Income & Expenses. The money put into the CD will generate income, that income, like any and all other income, will come into the owner of the and pay for expenses and any remaining funds is gain. You will still have benefits of the CD interest income but it is not a direct offset netting from each other.

So then, whatever amount of equity you use in the purchase of the investment property is the entire investment into the property. It is not, the equity into the property plus the cash placed in the CD.

If this is all owned by the same owner, then you have two investments for that owner.

Assets:
1) the CD
2) the Property

Liabilities:
1) Line of Credit

Income:
1) CD Interest Income
2) Property Income / Gain on Sale

Expense:
1) LOC Debt Service
2) Property Costs (taxes, insurance, etc)
__________________

NET Profit

The properties performance can be measured by Property Income divided by cost to purchase and own the property.

The CD performance can be measured by CD Interest Income divided by the Face Value of the CD.

The total investment scheme can be measured by taking the Net Profit divided by the total amount of capital invested in both the property and the CD. If you set up like above, this is the only result you can get.

The property by itself doesn't benefit from the CD and the CD doesn't benefit from the property. The owner benefits from both. The CD income may help pay for things related to the property, from the interest income, but only after the Income is realized from the CD, therefore, it is its own income. What you do with the income when you get it, is up to you.

I also suggest you get away from using Cash on Cash Return equations and look up how to setup an Internal Rate of Return. That would be better suited for the analysis of what you are trying to do, IMO.

The wording here is a little tricky.

What is owed on a property can be made up of one or more liens. Example, 1st Mortgage and 2nd Mortgage or 1st Mortgage and Mechanic Lien. The sum of those liens is what is 'owed' by the property owner.

The amount 'owed' in a foreclosure proceeding is specific to the lien that is being foreclosed. The amount will be equal to all unpaid principal, interest accrual, advances and fees.

You can find amount owed in both judicial and non-judicial proceedings on either the Notice of Default or in Summary Judgement or Order of Reference. In some states, there is an order of Referee which acts as the objective calculator for the parties. Also, I believe some counties list this information on line when the sale is scheduled.

Great.

Now, what's the point?

Finding what is owed does have a bearing on things but your post is not dealing with any of that. Your concern of not paying too much for a property is rooted in what the property is 'WORTH' not what is owed. There is no notice of value or anything similar in foreclosure, you as a potential bidder/buyer have to determine what the property is worth and bid accordingly.

Also, when you purchase said property at a Foreclosure auction, you are NOT buying the debt. The debt and all legal interest with that specific lien is extinguished. Often times most of the subordinate liens are also extinguished as well. Be mindful to pay attention to things like taxes and HOA liens.

So, if a property has a Foreclosure Balance of $100 but you only think the property is worth $50, then do not bid more than $50.

If the property is worth $100 and what is owed is $50, you can exceed $50 balance of what is owed because the property is worth more. The property is what you are purchasing. Any excess proceeds above what is owed from the borrower to the lien holder pays down the lien holder in action, then the other lien holders in succession and then pays the borrower any remaining funds.

Outside of knowing what specific county rules on minimal foreclosure bids are, in order to filter a list of potential properties down to a list of potential working properties, I don't really see too much benefit or need to understand what the total amount owed from the borrower is for the lien that is being foreclosed. Certainly helps fill out the history of the property but, you should only bid on at the auction based on the property value and the expenses to cure physical defects or title defects. In other words, knowing the borrower owes $100 on a $50 property doesn't change your bid at auction, it has zero affect on your bid and your plan for the property.

I just want to point out, I disagree with the above statements almost in their entirety.

Loans are pooled and sold in geographic concentrations or exclusions as a primary practice all the time. They must be because investors have geographic concentrations and exclusions in their desires. Pretty normal.

Now that doesn't mean that all Sellers have all geography, etc. So, you have to find the seller that is related to what you seek. Certainly a regional or local bank will ONLY have that geography and a national entity will have that geography plus more. The concentration of geography in their own portfolio will be the difference.

In addition, the game is not late, nor do I consider the game to even be on a timeline. The American mortgage secondary market has been around since the late 1930's around 1938 to be specific. So almost 85 years.

When loans are made, some are good and some are bad. The market is not going anywhere anytime soon. Investors purchase good and bad loans. Where ever you have borrowers getting loans, you will have borrowers that default. If that were not true, we wouldn't need legal action like foreclosure. So, I don't think it is going away anytime soon. Accounts of mortgage law stems from ancient India in the form of the Code of Manu, an ancient Hindu script that rejects deceptive and fraudulent mortgage practices. Those date pretty far back in human history. So, again, the idea that mortgage investing is going away or somehow someone missed the 'boat', seems a bit counterintuitive to the hundreds of years the concept has been around.

Having a local niche will be the best thing you can do as a 'street level' investor. Your local knowledge and resources should provide an opportunity to disposition said asset that reduces the expenses and time to recover or collect.

Understand also, that banks are not the only holders of loans. Private investors make loans and investment funds make and purchase loans too. I do think it is a good idea to gain help from an industry participant to learn how to navigate the market and as you can see here, also to help keep the public rooted in reality as to the market.

Sharon Hiebing

I believe I distracted myself with the 15.85% and had another use of that number which I was going to comment on but didn't come back to my point properly in the post and jumbled my thoughts a bit. Sorry for the confusion. Clearly, 1585.81/6000 does not equal 15.85% and the math is 26.43%. Lori emailed me but I didn't come back to the post and comment on my mistake.

At PAR the loans yield is 9.72%. It must be less than the interest rate, not more than the interest rate. The interest rate of 10% is the maximum cash flow the loan will have. A portion of that cash flow will be interest and a portion principal. For both, the borrower and the investor. However, the schedule of payments, since the loan is discounted, is not the same principal paydown for each party. If we want a barometer of what we are 'making', then we must only use what we are making to figure the number out with a linear equation such as X/Y = Z.

This concept illustrates the breakdown in the utility of the numbers being used for the calculation. If we apply the knowledge that says, the yield can't be more than the interest rate if the investment and the loan are equal to each other or a Par investment, we can sort of see the formula is flawed when we don't properly figure out what "X" is.

The 15.85% shows us the failure example of the above concept. The interest rate is 10%, so then the yield can't be more than the interest that accrues on the note. If we do $1,585/$10,00 = 15.85%. That means we are getting MORE money than just interest.

At the Discounted Price the investment's yield is 16.43%.

The 15.85% is giving us a percent telling us that $1,585 is 15.85% of $10k. If we take the 15,85% and see how many times that goes into 100%, we get 6.31 times. Which, we can use as years or multiply by 12 to get total periods. Periods = 75.72. If we take the full amount of payment per period, we can see that 75.72 periods paying $132.15 actually equals a little over $10,000. In other words, period payment 0 to 76 all pay the invested principal back and payments 77 to 120 all produce the profit.

The $1,585.81 is not just the interest being paid to the investor. It is all of the principal and all of the interest. Remember, the interest for year 1 is $972.39. Since we took the loan at a discount, we have money coming from the gross payment stream of $1,585.81 where a portion of the borrower's principal payment is also a portion of the investor yield.

A way to set this up is pay the original capital balance of $6,000 back within the term of the loan (120 payments). This puts the each investor payment at $50 per period or $600 each year. Taking note to remember, that profit is what comes above the initial investment.

$1,585.81 less the principal paid back is $985.81. $985.81/$6,000 = 16.43% Yield. There is the yield, that investment will make, provided the investment principal is paid back in this manner and the investment is made at this discount. The principal does not have to be paid back in that manner and the manner in which the principal is paid back can be altered according to the involved parties. The yield can be manipulated by manipulating the amount of capital that pays the investor back for the principal amount invested. You can really only do this when you purchase the loan at a discount.

So then, what is the number 26.43%?

This could be considered a form of return, but it consists of all the parts, both principal and interest. And perhaps the best lesson here is look to the formula to understand what the number is. That will not lead you wrong. The number tells us, $1,585.81 is 26.43% of $6,000. It tells us about all the cash flow. Not the net or not the interest by itself. We must solve to find the net cash flow or the interest.

Another way to look at it, 26.43% goes into 100% 3.78 times. So, it takes 3.78 Years to pay the $6,000 back if the gross amount is $1,585.81. This also equals 45.4 payments (3.78 x 12). ($132.15 x 45.4 = $6,000.00 (rounded)). So, if 100% of the proceeds were used to pay the investment back, the investment would be paid in full on payment 46. Payment 47 to 120 is all profit. Can we pay the investment back this way? Yes. Or we can pay only $50 per period or frankly any other number that is agreed to.

Since the investment is disassociated with the borrower, they can both follow different paths to zero principal. If the loan is at Par, we have less choice. This is because the borrower and the investment must pay to zero at the same time. So when the loan is at par, the investor and the borrower amortize on the same schedule.

When looking at the loan in par form then. We can also see that the interest in year 2 is less than year 1. Year 3 is less than Year 2. The principal in Year 1 is less than Year 2 and Year 2 is less than Year 3. Etc. We know this is the way a loan amortizes. It is this gradual reduction of interest payments and gradual increase in principal payments that reduces the Interest Rate to the Yield to Maturity. Where calculating Yield to Maturity would include adding up all the interest each year into the amount invested. It also illustrates if you purchase this loan at par in year 2, you will have a slightly different yield than in year 1.

Aside, from me perhaps making some of this confusing, you should see the relationship of the numbers, which is what I am driving at.

Calculating yield is not a bad idea. IMO, you are better off using an IRR (Internal Rate of Return) calculation as the best method to figure out what your actual return is opposed to yield, which may only be a portion of the return and can be distorted depending on the year or period the calculation is observed. In an IRR calculation, the formula uses the gross payment number from the borrower. So then, you don't have to mess with figuring out what portion is principal. In addition, the formula takes into account Time Value of Money.

Alex B,

I am curious. Why do you want to go invest in notes?

Do you have any other prior real estate experience or would notes be your entry into the RE universe?

Do you understand what a non-performing note is?

Are you planning on being a principal or broker?

Why do you think 30-60 cents on the dollar is the pricing?

What "dollar" are you referring to when talking about the discount or price?

I agree with what Bill has said, but from a different angle and history of experience I have some other thoughts to include.

In my past, I actually opened up a commercial loan division in one of the companies I use to run. It is important to note, this was after over 4 years in residential retail lending as a Director overseeing all our loans. Back then, it was likely a little easier than it is today. There use to be many commercial lenders and investors in the marketplace, just like the residential market. However, since the crash, that landscape has changed. There are far, far less now, almost to the point where it really is only banking institutions doing the majority of CRE and C&I Loans.

This is important to understand because if you are only brokering loans for finance. If there is nobody to broker to, it is tough to get any work done.

I think it only took one or two iterations of shopping deals before I started hearing terminology I had not been overly exposed to and dealing with concepts that were new to me. It also became clear the work load to simply have a file looked at was pretty darn involved. Commercial is different, more involved and has more moving pieces. It is, residential on steroids. Every aspect requires more detailed knowledge. Certainly folks are capable of learning, but trying to start in advanced math class before you know simple math can be a bit tough.

While going to school to get a degree in finance will help with the academic side, it is not the business. Learning how to calculate Net Present Value is important for sure. Once you know how to figure NPV, you still have learn where to find a deal, and where to put a deal. This then leads you to, learning why a deal does and does not work. In residential, the learning curve is smaller because the deviations from the middle are not that large. In commercial, they are huge.

Property types cause lending variations that make deals from one asset to the next be very heterogeneous. Writing a loan on a SFR compared to an Apartment Complex compared to Mixed Use is not all the same. The level of borrower complexity changes as well. Natural persons are usually your typical residential borrower. In commercial, mix in natural persons, companies owned by natural persons, companies owned by companies owned by natural persons....etc.

If that wasn't enough, understand as well, that usually the laymen refers to all things not residential as "commercial". There are sub-categories in the world of non-residential loans. Lending can take place with the property as collateral or it can have other types of assets, such accounts receivable or equipment mixed in.

So, I think you get the point. It is for these reasons that folks try and break into the world of brokering non-residential loans and have a very tough time which prompts a long period of time to actually get your fist deal done. Mind you, that first deal is not going to be the home run deal where you turn into a fortune 500 company overnight. More often than not, it is smaller in size and looks more like a residential loan, from a loan amount perspective than not.

Now let me say a couple positive things. I too, developed a desire to work with commercial over residential back in the day. The borrowers are more sophisticated with a little bit more of a 'maturity' toward getting a deal done. There are good places to work where you can learn the commercial lending side of things. More often those places, such as a bank, offer salaries which sure makes learning easier on the pocketbook.

Starting your own Commercial Loan Brokerage, is not something I would suggest you attempt. To contrast the uphill battle, your current knowledge would have to compete with folks like or similar to Bill and myself. Don't take this the wrong way, we have likely forgot more than you know right now. We would even have challenges starting a brokerage company right now in this climate as well. So, I like the idea of working with an established company but I think you should put opening up your own company into a longer term plan after several years.

To address the question, do loan brokers make more money than real estate agents right now. Well, that too is complicated. The commercial RE agents I know have a mixed bag of business in the market today, where leasing is a major supplement to their income. Commercial deals take longer than residential so you can starve between closings with no small stream of income in between. Some of the feedback you might hear could also be from residential agents trying to break into the commercial market but their brokerage has no history of commercial deals. So some horror stories are from those folks. For some good commercial agent feedback, go talk to folks with CCIM and other designations who will be a better barometer of the industry than those who tried and failed.

You might want to look for part time jobs (or full, depending on your schedule) and even internships with firms that are involved in the commercial sector. That will certainly help get exposure to the industry. You may find that other aspects of the business are even more attractive to you such as working with Capital Markets side of the industry. I guess the point is, right now you have some ideas of what you seem to like and not like but you also have not had a rounded exposure to the industry. There is a chance a different segment of the industry is even more inviting to you than what you believe today. The plan I would say is find a path that allows you to gain that exposure and be prepared to modify your goals as you discover things you didn't know.