All Forum Posts by: Dion DePaoli

You should be able to contact the local zoning department for some clarity on the ordinances. They should give you insight into whether there is a violation or not.

Unless there is an actual violation, you don't need an attorney yet. If there is, you may need an attorney to help resolved, however the department will also give you insight, if you ask, as to how to cure the violation.

These types of issues are not universally governed from city to city, county to count or state to state, so you must seek the local guidance from the department. Asking them questions is free.

They registered their capital raise properly with the SEC, which is a good sign. I see they have some media articles which talk about what seems to be initial capital funding of $1.0 Million. Their SEC exemption claims they may raise up to $40 Million.

If they only have $1.0 Million, they might have a little trouble meeting the needs of an influx of a bunch of investors seeking funds.

I would guess the sanitary lines are at a higher elevation entering into the home and would likely have a hard time creating enough pressure to both sink down in the earth without running off and actually get under the floor or far enough down to be at the floor level of the basement. I would think there needs to be something at a similar or closer elevation that would allow for the flow.

So, my guess would be a bad septic field and it is seeping back to the house. If the home has a septic tank, that might be the answer. If the home is on public works, it may have had a septic tank at some point that was not properly dealt with.

Or we should now change your name to the Clampett's. Petro doesn't stink like bad urine, so don't get your hopes up.

Define what industry you actually freelance in, for better answers.

Freelance = Self Employed

The industry will help fill in some of the options you have, if any to prove your income.

There are loan programs which offer alternate and reduced income documentation. However, the occupation still matters. Saying you are freelance artist will likely not get anyone to believe you make $100k a year. Being a freelance mobile application developer might.

Your idea of "stable" is likely not the same idea as underwriting. Stable income is the continuity of income into the future. You can have stable income and only work one month a year or a couple weeks a year. Your income will be reviewed for the last two years. It is not an average of the two years per se, as usually wages increase into the future. A downtrend though, would not be favorable.

In addition, how you deal with your personal taxes will also affect this. You can freelance and still pay yourself a salary to some extent. If you run the income through an LLC, the LLC could actually W-2 a portion of your salary which would be sufficient documentation but we don't know if the income would be sufficient. Running it all through your own bank account or as a natural person is fine, but then how you treat your business expenses as a reduction of your income will matter.

Ian Crane,

Glad to see it seems to be working out finally for you.

If I may speculate a little on the origination process to give some insight on some of the possible deficiencies that caused the delays. Perhaps it will give you a better way to handle your financing in the future or for other BP folks.

Loan problems start with the application itself. In my experience it takes a skilled and experienced loan officer to weed through the answers in the interview process. This is only amplified when the public fills out an on-line 1003 on their own. Simple exaggerations cause big problems, but are often not malicious in nature. In example, let's say you put down you make $50,000 per year. In order for that to be true, you will need to actually earn $4,134.62 each month. However, if what happened in reality was, you earn $40,000 in salary and $10,000 came in bonus, from an underwriting standpoint you will only be able to use the $10k in bonus there is a history and likelihood it will occur again and has happened before. There are other common pitfalls when it comes to hourly workers, where last years income was high however the average amount of hours worked over the last two years does not equal the amount of money they made last year. There are lots more examples, one for each question on the 1003.

An experienced LO, will hear the client answer and will flush out the material facts. Simply by asking the same client as above if that yearly money includes any salary, would make the information in the application more accurate. In some instances, the online lenders have do not have Loan Officers but more of data entry folks on the phone. Those folks, likely do not understand the quirks because it typically doesn't affect their livelihood. Experienced LO's know what to ask and how to approach things usually from that same issue blowing up in their face in the past.

When an application has distorted information on it, the Loan Approval, which is how they put a rate and generic terms on your loan will also be flawed. Again, simply using the example above, it is easy to understand how excluding $10k of income can change your debt to income ratio which might cause a loan denial.

If I had a dime for every 1003 I reviewed from the LO's that use to work for me who failed to properly identify property, which then usually means it defaulted to SFR, I would have a lot of dimes. I could see how that exact same situation happened here. Sometimes the LO doesn't ask or sometimes the borrower gets approval without having a property so the assumption is SFR. A condo has more risk in some aspects and the underwriting is a different. It sounds like someone missed that little detail.

I say this because any LO with a little experience knows that a condo is a tough loan in today's market. The processor will have to collect the CC&R, financial and ownership information on the condo complex. It is widely known that there are saturation limitations for underwriting loans regarding occupancy of the condos in a complex. Exactly like the one you are describing. Complexes with too many non-owner occupants could suffer from a sever value loss as it is assumed that an investor will walk away from an investment property before walking away from a primary residence.

Without a little more background on the rate lock event it is hard to discern what happened. In the past, we didn't rate lock until we had a clear to close or had reduced the loan stipulations to a very small manageable list. In this case, the 4.25% could have been the rate for a SFR, again stemming from the issue above. A condo would likely have a 0.50% rate hit to it. Unfortunately, rate locks are used more as a marketing tool than anything else. If an LO get's you to rate lock, it means you are done shopping for a loan and you will use them. Realty is rates from month to month are not that volatile. The public tends to think they are because of the not really being told the truth behind the scenes. Large rate hikes are not from the market, it is from a bad loan approval.

One of the other concepts here, is the loan amount. The sale price was reduced to $98k. As loans get smaller in amount, there are hits to the rate. (when I say "hit" it means the rate goes up, sorry for the jargon) An LO would have to factor this into their loan pricing for it to be accurate. An assumption could be made the loan will not be low balance with approval so when the real loan gets hashed out with a real property, the hit to the rate shows up.

I don't understand the PMI comments. It seems like you put just shy of 20% down. What really happened here? You put down $18k ($98k minus $80k) which is $1,600 shy of a full 20%. 1.0% of $1,600 or $16.00 (heck, give them 3.0% at $48 even) should not be breaking the lender's pocketbook. To some extent, it seems a bit irresponsible, IMO. You do not mention what type of loan this is, or, who the investor is for the loan, if this is an FHA approved mortgage, the PMI for $6.00 can NOT be removed for 5 years. So, I would suggest you get some clarity on that from the lender.

Usually when a low balance loan is originated it is offset with an origination fee. The standard minimal loan amount for conventional and FHA loans is $50,000 which you clearly exceed in all cases. So, this story of "cost of lending flags", which I have never heard of being mentioned to a borrower, seems a bit contrived. I would suspect this stems from the poor loan approval and pricing in the beginning. See when a LO puts a rate on your loan, they are also pricing out the fees the Lender will make in concert with the origination. The higher a rate that can be sold, the higher the fees that can be earned. In the event, the LO screws up the loan approval and a unforeseen hit on the loan shows up, that would mean the fees they planned on making are gone if they want to live up to the rate they quoted you.

Example, 4.25% SFR rate which pays out 1.0% to the Lender. The condo creates a hike in the rate of 0.50%, so in order the LO to keep their 1.0% fee, they must bump the rate to 4.75%, otherwise at 4.25% the 1.0% is gone or 0.0%.

So then, the age old debate of customer service in loans comes to the borrower table. Many of the 'explanations' that some LO's and Lenders give is simply, B.S.. The realty, IMO, is the problem started with their side not doing a good enough job initially, at least that is how I always approached it with our loans. It seems, that due to the misguided information that most of the public has on loans, they stand a very little chance of cutting through the noise to the reality.

You can see this in the song and dance you received about the closing documents being sent to the Title Company. The idea that this is not an event that is extremely tracked and monitored is simply foolish. No Lender agrees to fund a loan and then is not exactly sure when to send the closing documents so they can actually lend the money. They have to coordinate the execution of the documents with the delivery of the capital (<---- the "important" stuff). Having a Clear to Close, is a specific event. Usually once a loan is cleared it is sent to the closing and funding department for the exact reason above. It is also helpful to understand, the "market" does not affect paperwork. The actual loan documents are a template that are exported off to the title company with your information in them. 30 seconds later, they will send the same package to another title company for another borrower. It is really, a click of a button.

Another hole in the story, if you locked in your rate, a shifting market would not affect said rate, which is the point of a rate lock. Food for thought. Below is the historical 30 year mortgage rate during your loan origination timeline:

July 25, 2013 4.31%
July 18, 2013 4.37%
July 11, 2013 4.51%
July 3, 2013 4.29%
June 27, 2013 4.46%
June 20, 2013 3.93%
June 13, 2013 3.98%
June 6, 2013 3.91%
May 30, 2013 3.81%
May 23, 2013 3.59%
May 16, 2013 3.51%

When you locked in your rate, you were 1.0% above market. Now that you're getting your loan, you are 0.20% above market. That is a cost the Lender may have to swallow, perhaps by loss of revenue, for not delivering the loan to you during the rate lock. I also recognize, you paid for the lock. A lock is usually only good for 15, 30 or 45 days. You can keep a loan locked forever technically, but someone, either the lender or the borrower has to pay for the investor to maintain the same market rate from the lock period. You didn't mention any called and asked you if you wanted to extend the lock for another fee, usually a sign the Lender is making the logistical errors for the origination because if a borrower caused the loan to take longer, you bet they get a call.

Moral of the story, you have managed to get what you were offered, which is great and I commend the Lender for doing the right thing. I would revisit the PMI thing to make sure you know what you are getting as well.

In the future or for any borrower, I think the only real defense against much of this is taking ownership in your own loan application. Every field in a Uniform Residential Loan Application (Form 1003) has an entry/answer to it. For your own sake, it is wise to take the application before signing it and make sure the information is filled out and is 100% accurate. Loans are a game where details matter. Don't be afraid to ask the LO questions and if the answer is not great or they don't know, have them get a supervisor or underwriter who does know. Just because an application was put in your hand today doesn't mean you can't take it home for a day or two and google some answers as well.

The honesty that nobody wants to say here, NO ONE, will care more about your loan and your loan terms than you. The LO and the Lender certainly care to some extent, but it is rooted in the monetary nature as to the level of care, which is simply how the world works.

Mark you lost me.

I wrote this, "Again, the question, is the cash out from the refinance a return of investor capital, which then would mathematically reduce your cost basis."

Note: it says the cash out a return "of" not "on".

I don't think it is a reduction of the cash you invested. You invested, what you invested into the property. You swapped equity for cash, that is not same as reducing what you spent.

The final paragraph is off kilter to what I wrote and I don't understand where you pulled that from. Perhaps, I don't understand the question there.

I agree with Tom, you should consult an account and attorney.

When we purchase loans we put them into a company structure, typically an LLC. Not all that complicated. Not all states have the same rules on these, for instance not all states recognize single owner LLC's.

When digging into the NPN space, I think one of the mistakes or one of the ideas overlooked by the newbie investor is the cost of disposition from a capital funding perspective.

When you buy an asset, you will have the purchase price plus the cost of your due diligence as a cost basis for the asset. It is easy to quantify and capitalize those costs. Then comes the ownership costs which is harder to estimate in advance but will be needed.

Because of this idea, mistakes can happen where the entity does not have enough capital to hold and disposition the asset. Servicing costs, attorney fees, tax and insurance advances all add up. Capitalizing the company post formation in an on-going manner creates complications for your accounting.

Thinking out loud, for instance, your rentals bring you in $1,000 per month (net for ease). You put two loans into the same LLC as the rentals. Annually, you will need around $1,800 to simply hold the loans at a servicer. Then you will need $5,000 for unpaid property taxes on the loans. From a portfolio management perspective, you may not want the capital burden of loans to diminish the performance of the real property. Since what you technically are capitalizing is the LLC, which owns all the assets. In other words, the properties do great in performance, but when looked at on paper, the LLC is losing money until the loans are turned into positive cash.

Is that good or bad for your personal and company situation currently? Only you and your account can speak to that.

It is not uncommon to have a mixed bag of assets inside an LLC when dealing with loans, especially NPN's. Since NPN's sometimes have to be forclosed and sometimes that foreclosed loan becomes REO, real property and loans are from time to time held in the same company. The portfolio planning is more of a future needs plan to maximize your tax deductions, depreciation and other taxable benefits.

You do not have to put the loans into a company and you can become the Mortgagee as a natural person. Again, this may have impacts on your personal taxes, so you should spend time to plan this out with your accountant and then bring your attorney in to help set up the plan.

Mark,

I don't think comparing a purchase to a refinance proper for this. Again, the question, is the cash out from the refinance a return of investor capital, which then would mathematically reduce your cost basis. I still say, I don't think it is treated that way.

The difference between a purchase and a refinance is, in the purchase you put X into the acquisition. Where X is your capital, unencumbered. When you pull the cash out, you are free to use it but technically it has to be paid back. I think, this doesn't formally become your capital unless the asset is paid off.

Deducting your commission doesn't strike me as proper. Again, in the same way that on the way to the closing table, you pick up your salary check from your day job, let's say. That is a vehicle which gives you the cash to use. The costs are still the costs, having money to pay for the costs does not reduce the costs, it simply lets you pay for them.

I don't believe in two worlds of numbers. The proper accounting is the true scoreboard, otherwise folks simply add and subtract numbers at will with no standard to quantify. Additionally, in my experience, if an experienced investor wants to invest with you, they want your accounting numbers, while numbers plugged in by an operator have some meaning, they can be skewed.

There is and has been a large supply of folks trying to work with whole loans (notes) as "wholesalers" or like Bill said, "brokers" for several years. As we have put some time between now and the crash, I see more folks with less real estate experience trying to play with this asset class and it seems to be on the rise.

The problem is, there is a supply of plenty of wanting participants but they are undercapitalized and lack a competency in the asset class. After the crash, many were lured into this asset class, perhaps as a function of trying to chase after REO and found themselves hearing this "NPN" mentioned over and over. Some folks latched onto the possibility of a high dollar trade and the crash produced an abundance of NPN's. Some of the institutional sellers also helped encourage or maybe helped enabled folks to try and get involved by flipping their loan tapes out into the public and then quickly losing control of where they went. GMAC was certainly one of those trading desks that seemed to be more than happy to send a data tape to anyone with a heartbeat.

This fostered many fallacies in the marketplace. Brokers then started getting in lines to try and link buyers and sellers together in hopes of trading some extremely large pool of loans and to become independently wealthy overnight. Crazy concepts of independent 'compilers', which don't exist, gave rise to the idea that buying loans could be as simple as driving through Burger King and ordering. As that was happening, the illusions of large pool trades prompted some brokers to lie and misrepresent truths about their identity and the owner of the capital and the owner of the loans. The sad part, is that many folks are still running around chasing their misconceptions of this asset class today.

Can someone be a successful broker of whole loans? Yes. Can someone do that without a solid understanding of the asset class, NO, I don't think so. As a broker, you should want to help your clients find suitable assets they wish to invest in. That means cutting through some of the BS as mentioned above along with getting through legitimate Sellers simply trying to take advantage of unsophisticated Buyers. I have heard horror stories, though it has been a couple years since some of the worst ones, of investors spending money on due diligence only to find out the pool did not exist to begin with, along with Buyers paying too much for loans, as they thought it was a deal.

The point here is, there is more to this asset class than I think many folks understand at first glance. Perhaps this is a form of not knowing what you do not know.

Is it possible to wholesale notes? Yes of course. Anything is possible. Perhaps the question to proceed that is do you have a book of clients at your disposal already that you think you could wholesale to? If the answer is yes, then you might be in good shape. If the answer is no, the battle will be uphill and not all that easy.

If you have a book of clients, then you would be attractive to any legitimate firm working in the secondary market. The presence of your book of clients offsets the lack of understanding in the asset class and if your book is good enough, many firms will not care, they can pick up the slack around you as you learn. Having the book of clients will help you learn since you should be able to put deals together with some guidance from experienced folks. Trying to do this on your own, I think exponentially increases the failure rate.

Without a book of clients, you honestly do not have much value. You do not know the asset class and you do not have clients. So all the burden falls onto the firm who would bring you on to teach and train you. Becoming proficient takes time and putting deals together takes skill which takes time to develop. Time that could be weeks, months or even years, during which you best have some other form of income.

The best way for a beginner to begin? I just want to point out, you shifted gears after the first question. You inquired about being a broker and now it seems like you want to know what it would be like to be an investor. Well, being an investor will be easy if you find the right broker or firm to align with so you can learn. In this type of relationship, you are the client, the guy with the capital, certainly firms will work with you so they can earn their fees. I think sorting out which firm to work with is probably a little tough at first, but talk to several and try and compare what you get from and with all of them and pick your best option.

That is the best way for a beginner, IMO, to get involved. If you don't get with someone who can teach you, then you will waste a lot of time and possibly money.

The question of what type of performance status to invest in will be a little more of a personal preference. When my firm interviews potential investors to work with, we explore concepts such as the desired passive/aggressive desire as an investor, what type of return they are seeking along with how long they want to be invested. Through scoping out the desires of the investor, a box of desirable assets can be identified. I think some brokers expect their clients to already know this, I tend to think newbie investors don't know this and need a little guidance.

Just like Tom's answer above, Tom understands why he thinks PN's are better than NPN's but that is for Tom. Perhaps a fix and flip investor or landlord type investor is comfortable with an NPN since they have some exposure to certain aspects that will be similar. The easiest truth here though is, the more perfect the loan's performance, the less the investor has to do. That can be offset by the Mortgage Servicer you use, which is a whole other conversation.

I think I sort of addressed my angle on your last question. IMO, if you are a newbie you need some help. Competent help. I am seeing seminars pop up all over the place lately. It seems that investment funds are training their buyers as a new trend. I personally find this interesting that some don't see a conflict of interest. I am not saying that all the seminars are bad or all the firms that do it are bad, just saying it is interesting that the seminar is put on by the firm who then uses the venue to sell their loans. By definition, that is self interest.

As Bill mentioned there are plenty of threads related to loans from many angles including brokering and investing and owning. Certainly a good place to continue to dig into the subject matter. Help yourself understand what you don't know yet, this will help whomever you do choose to help you be more of an asset to your learning and experience than not.

First, I want to say Mark Ferguson, not picking on you but I do want to run the idea of the thread through the ringer a little more. I will admit yesterday when I commented I misread where the return was coming from, that is my fault from reading too fast. After a read this morning, I agree, you are not claiming the cash out proceeds are your return. That said, you are claiming the cash out reduced your cost basis into the asset.

However, I would still argue the claim is a bit misleading and the math is a little, 'loose'. Perhaps, let's say, this would not pass an audit any time soon.

Key concepts to the claim, is the cash out proceeds a reimbursement of investor capital diminishing the actual cost basis?

I still say NO. The proceeds are not free and clear as of right now. The proceeds are from from a loan. Loans have to be repaid. While the loan allows us to swap equity for cash, the amount swapped still has to be paid back and while it is not paid back, you are paying interest on it. You don't pay interest on your own money, you earn against your own money. So I think this speaks to the concept, that money is not yours.

I am looking at the numbers link in the blog. I don't come up with the same numbers.

1. Your cost basis into the original acquisition is $37,850. The Commission does not count against that cost basis, as the Commission is income you made which gave you the money to invest. Just because the commission came from this deal doesn't not mean your COSTS were reduced, it means you earned money to pay for the cost, similar to picking up a salary paycheck before you went to closing to pay for the closing. It also looks like you put the Seller Concessions in against cost, which would also be wrong to reduce your cost basis by that number. The $37.85k bought things, it is money you had to spend. Concession is really a reduction of the purchase price paid, you didn't receive capital for it. I don't come to your exact number of $33,540 so something else is not being done correctly here.

2. The next issue is your yield calculations are being manipulated. You are starting your calculation from the time you started renting. That is not correct. You purchased the property in October and you were rental ready in January. So you did not rent for a full year even though a full year passed. Your real first year yield is closer to 15.46% not 25%. (It is not clear if you rented in January or simply were ready to rent and rented thereafter). Your gross potential yield is the 25% and one would assume with no vacancy in year 2, that is what you would realize.

I would be curious to see what Steve the account says about the treatment of the cash out versus cost basis but I don't have available to ping. I think your book would show the cost at $37,850 and that cost is what your return would be calculated against. I think you can take the $26k and put it into a new investment to generate return in a compounding sense, but I don't think you can simply reduce your cost by taking out a loan.

That idea, seems 'ponzi-ish' to me. Using someone else's money as return. Note, I am not saying that Mark is a ponzi guy, clearly we are debating the order of operations of this math in the accounting of return.