All Forum Posts by: Dion DePaoli

I think A and B are correct. I don't think that is the elephant in the room though.

First, the plan you have includes borrowing the money to purchase the home and to use as down payment. This is clearly and investment property. You will not be able to borrow money and use it as a down payment in a conventional loan. The underwriting process will source and season the funds you use as down payment and for closing costs, those funds are supposed to be yours (borrower/entity).

The current deed holder, Party B, who also owes on the current mortgage encumbering the property wants $275k.

Party A, who fixed the property has nonpossessory interest in the property, they are a tenant. To some extent the repairs or improvements they made to the real property was not done in a smart manner. They made repairs to a property which they don't own. Not usually a good idea if you want to get your money back.

With the $57k they want, they really have no merit to capture that money from the property. The property is not theirs, it is Party B.

I would remove the negotiations with the tenant, no matter what relationship or level of integration into the deal they think they have. They are not of major consequence to you. Your deal is with the Seller who wants $275k. And that is what I would pay, not a penny more.

Purchasing the property for $320k does not put money in your pocket. That is a kickback. If you purchase the property for $320k, the Seller (Party B) gets the net of that sale price. I don't know why you think a purchase money mortgage let's you pull cash out, it does not.

In addition to that concept, why would you pay interest on $57k which is money you wanted to give to someone else. This means you pay more than $57k. Again not a smart idea, IMO.

We can see you are trying to appease the tenant in some fashion. Great that is nice no stop it is making the deal way to complex. The tenant is a tenant, when you are the owner you can negotiate terms with them at that time. Trying to mix that into some deal with the title owner of the property is just creating confusion. The tenant doesn't have a title interest in the real property.

I would review the lease agreement that is in place and ensure it says something about tenant does not have permission to make repairs or that the landlord is not responsible for reimbursement for unauthorized repairs and look the current owner of whether a formal authorization was given. If one was not, I would condition this from the seller, a signed affidavit. This takes the legs of the tenant out from being able to come back later and try and sue for the rehab money.

I would offer the tenants an opportunity to rent and buy the home and maybe a reduction of that sale price which would in a sense recapitalize their rehab cost back to them. That idea cost you nothing and is performance based on the tenant. I wouldn't pull cash out and give it to a tenant.....ever. I would put a new and strong rental agreement in place to also protect your future interest in the property.

Your deal is with the owner of the property and that is it. You are the only two that enter into contract with binding terms. The tenant doesn't have a say so who the owner sells to nor can they demand terms outside of their current rental contract. I don't care for situations where folks approach a sense of entitlement and in this case I can easily see the tenant walking up to that line. Clearly they could not live up to the first arrangement which was fix the property and refinance the current sort of straw borrower out. While past performance is not indicative of future results, it should not be ignored because people are nice or make a lot of noise.

Darrick P. as many suggest get a party involved that knows what they are doing which can be a licensed originator and/or attorney.

In the interim to give you a better example of a better instrument you can always review what the big boys use (Fannie Mae/Freddie Mac) here is a link, you would review the Multistate Note.

http://www.freddiemac.com/uniform/doc/3200-MultistateFRNote.doc

A HUD 1 is not the bottom line of a P&L. I don't think most Buyers ever even think about what the Seller is making at the closing table. usually they are pretty caught up in their side of the closing and whether the loan funds and they really get the home or not.

I wouldn't say anything. In most cases, I wouldn't even sign at the same time as them either. Your not their real estate agent and you don't owe them anything more than what is in the contract. You making $1 or $1 Million doesn't change the sale price you were willing to accept. It's great you have compassion for the topic but I would let that callus up a bit, it's really nobodies business what your bottom line is and a HUD 1 is not a bottom line.

Never heard of RIO. That said, but you really should not pay to be vetted for any seller. If a firm is charging to decide whether or not you are a counterparty risk there business is not really trading it is charging that fee.

Loan MLS and FCI Exchange are loan sale website/platforms. They are similar to FSBO websites whereas the owner of the asset lists the asset on the site in hopes investors will shop for notes there.

Granite actually purchases the notes and resells them. Same with Kondaur and some other firms.

Not all firms are equal and not all trading environments are the same. Some of the process is different which puts different steps of due diligence in front of other steps in the process. I would be inclined to say this is what I view as the distinction amongst sellers. In more open market type trading environments where the assets can be reviewed and bid on by masses of people there is risk that dollars spent on initial due diligence may be spent in vain as by the time you make the offer the asset could be sold or you simply do not have an acceptable price. This is a little easier to get by with one off loan trades. A seller can demand a buyer only bring a final offer and not an offer subject to due diligence or certain restrictions on due diligence re-pricing. A bit more impractical on larger trades as the dollars to conduct due diligence on a 50, 100 or 500 unit pool can be fairly costly.

I don't mean to infer that one way is 'right' and one way is 'wrong' only that you should understand how you are trading and how you will clear the trade and perform your due diligence and ultimately practice capital preservation. Trying to buy something that is already sold is no fun and working on a trade that you are pretty far apart in price is not productive.

Loans come with lots of moving pieces and things to understand. You don't learn that overnight or in a class of a couple hours or days. There are many beasts here. One is an understanding of the asset and another is an understanding of the market, perhaps even both primary and secondary but for sure secondary.

In commercial lending it is common to have some form of environmental inspection on the subject property. American Society for Testing and Materials (ASTM) E1527-05, Phase I ESA All Appropriate Inquiry standard or AAI Phase I or Phase I Environmental. The phase number increase as the detail of the site investigation increases usually where Phase II involves soil samples and other physical inspection methods.

A leaking storage tank can cause environmental damage, as we all know, depending on what was stored in the tank and the degree of deterioration of the tank. Tank deterioration is a higher concern for in-ground tanks as above ground can simply be hauled away. The risk is ground contamination or collapse.

The concern then is any value loss due to some environmental hazard. That is not particular to ground water contamination. Soil can become contaminated as well. Additionally, just because the property is on public utility does not omit the potential water run off from the contaminated site to the subject property. The water all goes somewhere.

The loan notation is for a leak that was discovered on a property within a 1/8th mile radius of subject property. Depending on what the leak is, in terms of containment, will determine how the bank deals with the issue. If the leak was cleaned up and provides for little or no issue for the subject property, you will be fine. If the leak is more of concern to the bank, they will likely order a Phase II inspection to see if the subject property is affected by the leak. These can get as involved as seeking some form of guarantee or indemnification from the contamination site for any potential future hazard. This sometimes happens with gas stations that have been shut down.

The bank will view the leak event as a potential future hazard. Imagine being downhill from a nasty oil spill. The oil will diffuse into the soil and come down hill with the water run off. This means all the property in the path of the run off stands a chance of contamination.

Clearly a contaminated property creates a value decline as the cost of cleaning up those types of events can be costly. Those types of properties are referred to as "Brown Field".

If the issue was resolved property, there should be nothing to worry about. If it was not, the bank may require an additional form of environmental insurance coverage to protect the costs of clean up for you or the bank.

Page, the state act calls for a license to originate any residential loan unless exempt. You can look up the full exemption list if you google the statue code below. Moral of the story, Seller's are not exempt. Your attorney can help you in accordance with the exemption statement below.

MO Safe Act:
Unless licensed, no person may act as a mortgage broker, mortgage lender, or mortgage loan originator with respect to a residential mortgage loan secured by a mortgage, deed of trust, or their equivalent consensual security interest on a dwelling or on residential real estate located in Montana, unless the person is exempted from licensing requirements by Mont. Code Ann. 32-9-104. Mont. Code Ann. 32-9-102, 32-9-103.

32-9-104. Exemptions -- proof of exemption. (l) a Montana-licensed attorney who negotiates the terms of a residential mortgage loan on behalf of a client as an ancillary matter to the attorney's representation of the client unless the attorney is compensated by a mortgage lender, mortgage broker, or mortgage loan originator or any agent of the mortgage lender, mortgage broker, or mortgage loan originator;

Bill is offering you insight to the origination process which from time to time and amongst different situations can be a problem. If a Buyer somehow creates and delivers all the loan terms. He is telling you that sometimes that event can cause problems related to the enforceability of the instruments.

If you use your attorney, it would seem this will add some layer of protection against that concept. Certainly in order for a borrower to borrower and a lender to lend, terms must be mutually agreed to. If it was looked at where the Seller provided terms only beneficial to the Buyer, that could have negative consequences. For instance, if someone took advantage of Grandma Betty, getting favorable financing on her property, etc.

A title company is a title company. A mortgage servicer is a servicer. While agents of a real property transaction and mortgage, they are not SAFE Act parties. SAFE Act is "Secure and Fair Enforcement for Mortgage Licensing Act of 2008". The act applies to originators and loan negotiators (forbearance/modification) dealing with the origination event or any event where the public negotiates with a mortgagee such as modifications.

David Beard the roles in the market place of each of those firms is a little different. Granite and Kondour are investing firms. Those firms have funds and purchase pools of loans. The performance status of the loans can range across the board from performing including sub and re performing along with non-performing. Granite is more geared to purchase and turn around and resell the loans in a 'Downstream' trade opposed to owning and working the loan. Kondaur sells and manages their loans in little more of a 'regular' manner where working the asset is as high of a priority as re-trading the asset.

FCI is a loan servcing company which also has an internet market place called FCI Exchange. This is a brokering function, FCI does not own the loans. The owner of the loans lists the assets on the FCI website.

Loans in all performance status and other marketable characteristics trade in bulk. It is a little easier to understand that loans trade in three ways. Premium or more than the UPB. Par or for the UPB. Discount or less than the UPB. UPB stands for Unpaid Principal Balance. Generally a loan trading for a discount has some sort of defect. That defect can be in the paperwork or the borrower's performance. Point is, the loans do not HAVE to be NPN's to trade in bulk, they can have some form of performance to them as well.

FNMA/FHLMC sell their loans through an approved loan sale advisory firm. Examples are DebtX, First Financial and Garnet, but there are many others. FNMA and FHLMC are in the business of taking new originations which trade for a premium and par and pooling those together and teaming up with a Broker/Deal like JP Mortgage or Citi and selling the RMBS or MBS. The RMBS or alike are sold in the form of bonds in the fixed income market by the B/D sales force.

If the loan is pooled within a securitized pool, the loan is not considered 'whole' any longer. When the loan is pooled into a security different portions of the loan such as interest payments or servicing rights can also be bifurcated from the loan and sold separately. The investor only owns a partial interest in the loan and their interest is in ratio to the number of bonds issued minus any portion of the loan that might have been sold outside of the security.

RMBS/MBS trustees typically do not conduct loan sales. If an investor purchased a majority share of the security, they may elect to try and unwind the security but first would have to purchase the outstanding issues of the security and make it whole again. To deal with these instruments a securities license is required.

A hedge fund and distressed asset fund or any fund is really just and investor. The label 'distressed asset fund' simply notes what type of investing they are doing. Any investment fund can hedge. Moral of the story, for the most part, those are all the same thing.

A broker and a trade platform are pretty similar in most cases. The trade platform, such as FCI above, doesn't own the loans but knows a seller and finds a buyer. FCI does this through their website and sales staff. Brokers do the same thing. They find sellers and then go find buyers. That said, not all brokers are made the same. Many have zero experience selling a loan or owning a loan. Since the crash, many folks have migrated to the distressed loan sale market place in some broker form in hopes of turning quick profits. This creates ghostly deals, pools of loans floating around and eventually had folks pretending to be principals when they indeed were not. Because of that, which still takes place in some corners of the market, makes legitimate investors ability to find real deals or assets to purchase difficult and frustrating. Those brokers who step outside of their role and try and 'wholesale' loans like wholesalers of real property have a very very small chance of actually trading. There is simply too much complexity to a loan trade for this to really be effective without being an owner. I suppose some of the broker scene was filled with folks who misbelieved that the discounts to these assets would always be so great that there is plenty of room to jump in the middle. Not true.

Loan from of a private nature or originated by a private lender such as a hard money lender or even seller financing can be sold in any performance status. That said, typically these are PAR trades as a private hard money lender doesn't have an interest in taking the loss for trading at a discount. Neither do some seller financed folks. Although on the Seller finance side of things you do find Seller's whose cost basis into the real property which they agree to finance is less than the loan amount in the instrument so selling at a discount is not unreasonable in those cases.

Institutional loans have more of a conventional underwriting process and can include conforming loans and non-conforming loans or prime and sub prime. There are much more institutional grade loans that trade as performing and sub/re preforming loans than private. There are simply more institutional grade loans although the private loan market is pretty sizable, it's not the size of the institutional market which is in the trillions. Due to the size and nature of the investor who owns the institutional loans it may seem like more there are tons more non-performing and sub/re performing loans trading that are institutional in nature than private. The institutional investor is more inclined to take a loss on bad loans and sell at a discount.

You can track loans down in all sorts of ways. Certainly one of those is look up in public record who the Mortgagee is and make an inquiry about a sale. Additionally, you can work with some of the firms above or firms like the firms above in accordance with their role.

You don't purchase "through" Granite (specially), Granite owns the loans they sell so you are purchasing from them. They simply might have only owned the loan for a couple of days. Same with Kondour. You purchase 'through' a firm like FCI as they do not own the loans. Same with any other broker.

The question about returns is not a simple answer. It does depend on performance and paper grade. The point of a loan is lend money and have it paid back. Those loans which have good credit grades where the risk of default is small will trade for more money as a percent of the UPB. As the credit grade goes higher on the scale the price for the loan will approach 100% or more of the UPB (Par and Premium). Since there is no discount to the principal balance the only return will be from the interest payments. At par a 7% interest rate loan will pay a little less than 7%. You could sell that same loan for say 102% of UPB which might drop the yield and total return down to 6%. (made the numbers up)

I want to make a terminology distinction. I sometimes see folks refer to their investment level as "LTV". That is not the correct concept. LTV is simply the loan to value, the UPB divided by the value of the real property. Not to be mistaken for the idea of "ITV" or Investment to Value, which would be the amount of capital into the loan (say purchase price and due diligence) divided by the real property value.

So the example of a $50k SFR at 75% means the UPB is $50k and the property is valued at $67k. The loan is at 75% loan to value. That loan purchased at PAR will return, in the form of yield, a little less than the interest rate of the note.

If what you were describing was the mix up and your example was purchasing the $50k note for a 25% discount or at a 75% ITV then the return will be what ever the yield turns out to be plus any collection of the discounted principal. The question did not include an interest rate for the loan. Let's say it's 7%. Then you would purchase the loan for $37.5k and the yield would be around 10%. The total return of the loan, depending on how you disposition the loan can be more than that since you have the discounted principal now function as a portion of your return. So there is $12,500 hanging around out there which the borrower owes to you but you didn't capitalize. Depending on when and if you collect those funds your total return will increase.

In general a binding contract requires:

1. Parties capable of contracting;
2. Their consent;
3. A lawful object;
4. A sufficient cause or consideration

Note that the above does not include a mandatory escrow deposit but rather 'consideration'. Earnest money is a form of consideration but not the only form.

California Civil Code Section 1605 defines "consideration" to be the following:

Any benefit conferred, or agreed to be conferred, upon the promisor, by any other person, to which the promisor is not lawfully entitled, or any prejudice suffered, or agreed to be suffered, by such person, other than such as he is at the time of consent lawfully bound to suffer, as an inducement to the promisor, is a good consideration for a promisor.

When the Buyer makes the offer and the Seller accepts the offer the Buyer suffers a prejudice. The prejudice is purchasing the property in accordance with the terms and conditions of the contract. That is consideration.

A formal escrow deposit is not required to create a binding contract. It certainly makes things clear and easy to understand and a little easier to enforce but it is not a requirement to create a binding contract.

The seller may not like the answer and if the seller does not sell, the buyer would have to sue for Specific Performance. That can get messy with residential transactions as they can move quickly if the Seller contracts and attempts to close with another buyer. If you know the Seller has entered into another contract to replace the current Buyer's they may want to look into putting a lien by way of the contract on the property to cloud title to dirty the water a little bit so the Specific Action can takes it course. This is opposed to trying to unwind the second buyer's sale.

The way I see it, based on the last post by OP, the brother committed to conveying the property the Victor prior to death. No will was present and this conveyance is verbal.

The property not passing through probate might be an issue and is somewhat state dependant.

Quiet title seems appropriate as an argument for Victor to have an interest in the real property is present with the verbal agreement. Albeit, not the greatest argument with no documentation. The spouse abandoning the property 17 years ago also seems like good support this indeed is a believable concept.

That said, the fact the property was not properly probated can also create some title clouds. It might be the property needs to go through a probate process.

Any which way, this is a little bit of a hairy situation and should be addressed by a qualified real estate attorney. I would be interested in hearing what the outcome or plan of attack ends up being if an attorney is engaged. Good Luck.

Victor Leon, have you spoke to an attorney about a Quiet Title action on the property?

That is more of what you are looking for opposed to Adverse Possession. The UCC lien is not what you are looking for in this case.

The unjust enrichment would only come if you sell this real property without properly owning the property. A QT action usually doesn't take that long but the statue is different from state to state.