All Forum Posts by: Dion DePaoli

Yea, you should go speak to an accountant on the matter. The post does not contain enough information to understand what you are really doing.

The aunt owned a property and sold it to you for $30k. Ok. How much did she buy it for, did she deprecate it on her taxes yet, etc, etc. The loss you mention is unclear.

If your aunt deeds the property to you, then she no longer owns it. If she no longer owns the property the income from said property is not her taxable income, it would be yours.

There might be a better way to convey the property. You should go talk with an accountant and perhaps attorney to set this up in line with the goals as best you can.

Not sure what the question really is. A prospectus is simply a document which describes a commercial enterprise. Much in the same way a Executive Summary does but perhaps with a little less detail.

There is no right or wrong way to create one. That said, certainly the document should touch on key concepts like investment, investment term and return expectations.

So really you could boil this down to simply creating a financial plan for each property including the purchase price, costs of purchase, repair costs and then how you plan to recover the capital via rental income and/or future sale.

However the cash flow is derived, you can then set up the waterfall or distributions to the members including the manager and show what the proposed investors net return would be from the investment.

The description of the security and examples of the yield are not realistic.

First, the Rent-to-Securitization market is brand new. Brand new. As such, the methods to assign a credit grade to the security are not well understood by any rating agency. It is proposed that the first several securities of this nature will likely be issued with no credit rating. The lack of a credit rating is going to make it difficult for pension funds or mutual funds to purchase the issued security, there is minimal rating requirements and investment criteria depending on the investor class.

Additionally, the Sponsor of the security, or the first owner of the assets does not get off with no risk either. They are required to stay in the issue and will likely have to provide some form of guarantee to the bondholders. Conceptually the investor is buying the cashflow from the property not the equity in the property. These first couple issues will likely be or have some short term maturity to them say 2 or 3 years so they can be repositioned in the market after some trial and error.

Two of the bigger more active funds in the space right now are Blackstone and Two Harbors with each less than 2,000 units. A far cry from taking over the market.

The issues these asset pools will face is scalability and economics, specifically the spread between yield and cost of funds. The funds have so much capital under management that the asset accumulation for this 'class' must be large in order for it to have any impact. Not really at that point just yet. Additionally, setting up a security is expensive and an administrative burden. It is not understood yet if this will all work out in favor of the Sponsor and Issuer.

The counterparty investors will likely be simply more private money from private equity and not so much pension or retirement funds or any mutual funds or alike. The ratings, when they do get produced will not be favorable for this type of asset class, likely Baa or worse. There simply is not enough data and so the investment will be considered high risk. As such, the yield the bond offers will have to be high. Much higher than 5% likely closer to 8% or 9%. Also, we are not certain what type of demands the market will make on specific features within the security in order to attract the capital to purchase the bonds.

The legal impact of such a security is also unknown as of yet and could very well be a failure. The equity structure of this type of security could open up the the investor property level risk. How the Sponsor will handle concepts like 3rd party liens or unauthorized property sales or renewal of undermarket rental agreements is unknown. How the Investors will view those topics is also unknown.

I think it is something to keep an eye on but I don't think this is a monster that will really affect too many street level REI folks.

That I am aware of, there has not been any update to the Fair Housing Act since 1995 which was HOPA.

Perhaps the PM is concerned about disclosure to you the landlord and some potential liability for such an event. I would argue this is a bit unfounded but could certainly be steamed off by simply having a disclosure that says the credit information will be shared with the Subject Property owner in the evaluation of whether to lease or rent.

Actually having a disclosure such as that, alone with reasons why credit may not be extended to a potential tenant is not a bad idea as a landlord/owner either.

Further, I believe the liability rest with the property owner in regards to any discrimination. Thus, I would say you will not find a regulation or statute where the owner is absolved for the actions of tenant acceptance or denial related to the real property. The PM can't take that liability on for the owner or at least can not absolve the owner of liability in full. So in reverse, the owner could suffer liability for the actions of the PM, if they deny tenants due to discrimination.

Further, if a tenant is denied based on credit. A proper credit denial disclosure should be issued to the applicant. This alone with safe use and storage practices are usually questions that need to be answered when setting up an account to pull credit.

A simple Google search will provide proof that none of the tenant screening services have gone out of business, so clearly landlords can and still use those services, which includes obtaining credit reports (3rd party) to influence their rental decisions.

In the client relationship between property owner and PM, the property owner still and will always have a superior interest in the real property, so much of what your PM is telling you sounds like hogwash, IMO.

The idea of removing salary information and credit information from the information stream to the owner of the real property related to potential or current tenants is frankly a bit absurd. I am waiting for the PM to come back say, "Trust me". Sure, trust him/her, if they guarantee the rent every month on time. If they are not willing to do that, there is no law on the planet that would remove decisions of who to rent to and why from the landlord/owner. Therefore, any PM that wanted to remove the landlord/owner from the decision process would not be a PM I keep employed for long.

David Beard let me address your questions in order:

1. Re Performing simply means the loan was in default and is now performing again. That does not mean the loan is not delinquent. That does not mean the loan was modified or is in forbearance. Although, both and neither can be true. Simply stated, the loan use to perform, stopped and is now performing again.

Sub performing is when the loan has a slow or spotty payment history. Where 12 payments are due in a year, the loan might have only had 9 payments or perhaps the borrower catches up waves of delinquency every so often, like missing two months payments then making 3 payments every 90 days.

2. Kondaur's motives are not always anchored into selling the loan. That is the real takeaway. Not every action is based on a future re-trade value many times it is simply the best disposition option for the loan to recover maximum value. That said, certainly adding value will increase the value of the asset. So a loan that progresses from non performing to re performing will have a gain in value from the borrower being reinstated and the loan cash flowing again.

The point is/was there are firms which really purchase with only an intent on re-selling. Other firms do a bit of both, work the asset and look at re-trading opportunities as exits.

Gemini is a newer player. They have recently been in the market place with some of their pools. They seem to be trying to figure out how to capitalize on somewhat of a velocity model. They are not much of a market force right this second.

The real contrast is pricing and value within these two types of models. One model, the re-trade, seems to really base its price and value on what the downstream trade will give for any asset. The problem then lies in unsophisticated bidders and buyers bidding and buying these assets which might not be the same bid or purchase price of a more seasoned loan investor which is aware of the costs and values of various disposition strategies.

3. Let's make sure we understand the terms. The primary loan market is the market where the borrower and the lender exist. This is also the retail market. Lenders compete for borrowers on various interest rates and program designs.

The secondary market is where loans trade or sell amongst investors. Whether that is among private or institutional investors, it is still all the secondary market. The purpose of the secondary market is to provide liquidity to the lenders to provide more capacity or an on-going capacity to make loans to borrowers in the primary market.

Loans can be sold off as whole loans or as securitized bundles of loans. Both are secondary market. Fannie/Freddie generally do not hold onto whole loans for very long. They purchase the loans and put them into securities and then sell the bonds off to investors.

4. It is not that FNMA/FMLC or any other whole loan investor sells performing loans to a company like Granite as much as a company like Granite would buy performing loans.

Performing loans have been trading for decades. It is not new. An investor can purchase performing loans in whole or in part through securities.

Loans that are rejected by FNMA/FMLC are considered scratch and dent loans or near miss loans. The loan doesn't fully meet the criteria for FNMA/FMLC to purchase the loan. The defect might be simply a missing document or signature and not much to do with performance. In fact in most cases, reject reasons are for performance as delinquent or defaulted loans are not eligible for sale to the GSEs.

The coupon does influence the purchase decisions but remember than most of the loans are securitized. So one loan's coupon being up or down from market does not mean the bond will be up or down. Although market rates help firm up demand on fixed income.

5. If a loan is securitized, the loan is owned by the securitized trust. That is the investor who owns the loans. The natural person, as an investor, purchase partial interest in the security. A security can have 40 investors inside. So the ownership is split amongst all the investors. None of the investors are managers, they are all silent members. The management is directed by the security documents and enforced by the trustee and mortgage servicer.

Fannie/Freddie do not own loans which stay in the whole state for very long. The loans are purchased in put into a security pretty quickly. So you really do not "buy" loans from FNMA/FMLC. In fact, you don't even buy the bonds from them either. They are a bit more administrative in their secondary market function pooling the loans and issuing a security through a broker dealer for sale as bonds which recapitalizes the institution to buy more loans. The same is true for the origination lender, they lend money and sell their loans so they have the liquidity to make new loans. If we didn't have this system banks and lenders would have to raise new capital as soon as they put all of their capital to work. That would be a pain since the instruments are long term instruments.

In some of the securities, FNMA/FMLC offer buybacks and payment guarantees which means sooner or later they do end up owning loans of lesser performance. FNMA/FMLC offers these pools to the market through an auction. Any approved bidder can bid a pool. Getting approved is not a walk in the park.

6. A note seller is a note seller. The instrument can be institutional in nature or private in nature. That does not change the need or desire to sell the asset in the market place.

7. No, I mean the difference between institutional grade and private grade. The institutional mortgage market, mortgages that follow formats similar to FNMA/FMLC, FHA, VA or alike is much larger than that of the private market or Bob seller financing his property.

8. I think what happens is real estate folks want loans to be explained and make sense in a real property fashion. Well, too bad, they are not the same. This promotes confusion and allows for 'Guru's' and mentors to make statements or infer concepts that are not always true. One of the bigger ones we see, even here on BP, is folks who expect to get the house as a function of foreclosure.

When you buy a loan, you are buying the debt the borrower owes. You are secured by the real property which means the real property can be used as a resource to recover the amount the borrower owes. You are only entitled to the debt, not the real property.

This is also the case when concepts attempted to be dumb downed which really can't be. You as a Mortgagee (Investor) can not rectify the borrower's credit. Only the borrower can do that. Additionally, you can not control who or where a borrower refinances or if the borrower qualifies for a refinance. HAFA is misunderstood by most. HAFA is a program that was rolled out to help create a base of treatments for loans that are alternative to foreclosure. Offering refinance and short (pay/sale) programs alternatives. Additionally, the program help pave the way for a bit more of a standard approach to modification and what that means. In most cases, private mortgagees will not spend the time nor resources to see if their borrower will qualify for the program. The frontline of the program is really at the mortgage servicer. The servicer and investor can get incentive pay from the government if a loan qualifies into the program. In order to do so, the program parameters must be met for the loan which include the way and time it is handled and the final outcome/structure of the asset. It is not really a retail program, even though the way the media carries on about it, one might think that it is.

When an NPN is properly priced out, the price reflects the expenses and time that it will take to enforce the remedies provided in the note and security instrument. Generally speaking, there are not 'Home Runs' when it comes to this price. An investor can create better than average returns by reducing the expenses or shortening the time to disposition. Nonetheless, the NPN has a price that follows based on all of that. That price is the 'lowest' price or value you will find in the marketplace for that type of asset. If the asset evolves in performance, it becomes another thing and has a value increase since now there is cash flow from it.

I guess the best advice, is if you look into this asset class, do some diligence on your own so you understand what these programs are and things are and not overly rely on someone in a meeting to sell you on what it means, which might be more of a sales pitch than an actual program.

Wendell De Guzman, no offense, but that rock ain't gonna float in my water, sorry to say.

The billboard analogy is great, except you are offering to pay the drivers who pass by the sign a fee for sending you the person who needs legal help which is not the drive who read the sign.

Second, a lawyer paying a marketing fee to a company who owns a billboard has no relationship to the amount of clients that come from seeing the billboard, that would link it to compensation for referrals. Not really the way a billboard company works. You purchase billboard space for a fee and the fee for that billboard has no affinity to the amount of business you get, you don't pay the billboard company per client for the sign they made for you. You can call a dog a cat, but that doesn't make it so.

Third, you keep mentioning "your firm", but YOU do not seem to be an attorney, unless I missed something. So how is it "Your Firm" provides any type of legal defense for anything? The one site has one noted attorney, Deborah M Martinez, which does not appear to be your name. Perhaps you use a pen name on BP?

Additionally, how does going to court have any great bearing on short sale approval or deficiency judgments on NOO properties. That seems to be a stretch. In Illinois court, a judicial foreclosure state, all alternatives to foreclosure need to be exhausted and shown to be exhausted to the court by the plaintiff. This would include Short Sale. So is it really the magical work that is done or is it simply state statute? In addition, courts rarely cross the line of telling and forcing a company where and when to take a loss, that's not very capitalistic. So in that regard, a short sale is done when it makes financial sense to the mortgage and in the case of IL, the court only makes sure the alternative was explored not executed.

Wendell, I am sure your a nice guy and perhaps you believe what you have here is good and proper. In that regard, I think you might be a little too rosey about this business model. In the 16 posts you have here on BP, this is the first one that address this concept, so I am going on a limb saying this is new for you. Fine, now that we understand that, I suggest you walk away from this and go back to REI and Wholesaling. I guess some other folks can chime in and tell me I am crazy.

I suppose you could consider placing a property with a large amount of equity into a separate LLC. If we are talking about a residential property, I personally would not do that thinking it is over kill.

Generally speaking there simply not going to be very many events where the insurance you carry does not cover you. And then even in those cases it does not mean you the other assets in the LLC are attached or used for settlement opposed to simply writing a check.

So bluntly, I think one primary LLC is more than fine for a pool of residential properties upward to 100+ units. I say that regardless of equity. On an institutional basis, there is more of that structure for firms making millions, to put it into perspective, one LLC for lots of assets of similar nature and relative low risk of out running the insurance master policy.

How is it you are a law firm and you pay a referral fee to a non-lawyer?????

The ABA, which most states follow their rules says in Rule 5.4 (a) states that “a lawyer or law firm shall not share legal fees with a non-lawyer.” Rule 7.2 (b) states that “a lawyer shall not give anything of value to a person for recommending the lawyer’s services.”

Also, this program you have described on "Foreclosure Walk Away" seems a bit misleading. You are not trying to help the borrower stay in the home, you are hoping the borrower wants to walk away and then you have an attorney attempt to respond to the foreclosure complaint and muddy the waters in an attempt to get some form of short sale approval. Then you buy the home for that short sale price and the homeowner gets a mere 20% from you.

That seems to be outside of the best interest of any borrower seeking legal advice or help and frankly sounds more like self-dealing.

Am I missing something or is this a scam someone thought up and by somehow using an attorney attempts to bring some form of authenticity to it, which seems to have just failed here on BP.

You do not need to put each property into it's own LLC. You can vest all the properties into one LLC. Insurance will always be your first line of defense, whether the properties are in an LLC or not.

The danger in all properties in one LLC is they are all contained within the same ownership structure. So it is possible for something so horrific to happen on one property that the LLC is sued and if the insurance falls short of the judgement then additional assets might be looked at. Those assets can only be assets vested in the name of the owner who was sued. So this event can be against a person, if all properties are in the natural name or in the name of the LLC, if they are all held in one LLC. If the properties are in separate LLC's then the liability would be 'contained' within the LLC which owned the property which ended up with a judgement.

It can be a little scary thinking of all the "What If" situations but as I said, for the most part your insurance will handle the majority of the liability issues.

If you put all the properties into one LLC, you can simplify that down to one bank account, owned by the LLC and one set of books. You can roll the income and expenses into the LLC financials in a segmented fashion, having each property separately accounted for or you lump them into one. In most cases, residential does not have a complex income and expense line so to some extent creating separate accounts for each property to roll up into an LLC is more work that it is worth. For instance, a one unit house only has one renter, so there is only one income line and the ordinary expenses are not a long list of items. That is opposed to the income and expenses of a large apartment complex which has a couple different revenue lines and a longer list of expense line items.

You can keep that same single LLC for as long as you want and put as many assets into it as you want. You would need a new or different LLC if the ownership structure of the asset is different from the rest. So if all four are owned by you, they can all be put into the same LLC. If you have a partner one now or a new one in the future, you will want a new LLC for that one.

Usually separate LLC's are used for larger single assets to mitigate liability. So an owner of two large apartment complexes might put each into it's own LLC. In example of justification, any type of class action suit from the tenants could be large enough to outrun the insurance coverage and you would that event to try and make claim on the other asset, if it was in the same LLC.

Cap rate numbers are not 'official' numbers. They are market driven numbers. Higher class properties have lower cap rates, in today's market A class in primary markets is around 4% to 6%. B Class is around 7% or 9% and C class 10% to 12% and D Class around 13% to 18%. That is just ballpark numbers and will have some variance depending on other criteria like property type or can move based on property location such as prime market or a tertiary market.

The cap rate, like I said, is a market driven number. As capital flows into A Class properties it drives the price upward which drives the cap rate downward. Commercial property is related to capital markets. The markets will respond as the costs of borrowing drop (interest rates go down) you will see a move into CRE or as the returns of less riskier investments such as T Bills goes down you will see a move into CRE.

The market value of the property will be influenced but not based solely on cash flow, NOI or cap rate. Other things such as additional capital expenditures on the property like deferred maintenance can influence what the property's value is. A property with a strong cap rate can still be a property that needs a fair amount of recapitalization to maintain its capacity to compete in the local market. Like owning an apartment complex and having to replace all the roofs or rehab many of the units to make them more modern or repair the common areas of the property such as pool club house areas.

You have to be a little careful when reviewing cap rates from others. Certainly most experienced commercial real estate agents and investors have a better understanding and properly put the numbers together but I have seen plenty work ups or project summaries which show a cap rate but the NOI they use to figure the cap rate out is flawed or the value they use is flawed. I guess my point is, while there is a proper way to calculate the number, Cap Rate is sometimes abused and done improperly.