All Forum Posts by: Dion DePaoli

There is a big elephant in the room here. You are assuming that someone would be interested in selling the note at a discount. Discounting is a function in the market place but I am not sure you understand what prompts a discount and what does not.

Private lenders are going to be Par or Premium sellers not discount sellers. Why sell to you at a discount if the note is new and the borrower is performing?

Discount sellers have assets that are defective in some manner. Paperwork defects, borrower performance defects or collateral defects, etc.

Perhaps it is not posted but there is a wide array of notes to purchase. Purchase criteria can be your desired yield, investment term, property type, geography, occupancy, maturity, performance, etc, etc...the list goes on.

Additionally, through the post I am not sure you understand the difference between the originator and the note holder. Not all lenders hold loans in a portfolio, even private folks sell stuff off. That then leads us to an understanding of the risks involved with that business model for a note investor.

Some concepts to think about as you venture off into the sunset.

At a glance, I don't think your numbers are correct with return. Your deal return is more like 25.45% depending on what period you capitalize half the note. That is still a general estimate as it is unclear when you capitalized the repairs and purchased the property with no cash flow coming in.

Bill didn't pull any punches and Wayne sort of has a similar point. There is a lot of complication around a small deal. That said, I suppose there is a but for every seat. The deal structure for the partial note sale is not bad for the partial buyer with a 16.56% return depending on where they enter the note schedule.

As to not understanding what the term "par" means is sort of a flag, so is not understanding the general asset class (residential whole loan/ note). The asset you are asking about selling is the note and the note is made up of the unpaid principal balance and any future interest payments. The repayment of that note is secured by the real property, you are not trading nor do you own the real property to trade it. In the numbers I am assuming the purchase price of the house is $25,000. The note beginning balance is $22,500. Selling the note at a 25% discount is $8,437.50. IF you sold the note in period 0 as in period 1 a payment would reduce the principal balance by $160.

This is then contingent on a buyer be willing to purchase the note at 75% with no seasoned payment history. Since you are not a conventional underwriter, it is unclear what sort of DTI this borrower has nor is it clear what sort of due diligence you completed on the borrower to ensure they are and will be a successful borrower.

While it is good to offer a guarantee of payment to the partial buyer, I see in your post the intention is use the purchase of the partial note as capital for another deal. So then, what happens if the borrower goes delinquent and worse defaults. Your capital will be tied up in another project making it difficult to handle any guarantee or buy back. So then, you are likely a decent counter-party risk which, if it were me, I would discount the deal further.

If the borrower defaults there is potential for a loss on the asset. If you have to guarantee the payments, you will have those costs plus the costs of foreclosure and eviction. Not to mention any rehab costs fixing the property for sale, again. So $1,978 for payments and close to $4,000 in note costs. You will quickly erode your margin and will have to create some form of installment contract to recoup your money or liquidate and take a loss or very thin profit. The foreclosure would normally be your responsibility to manage as senior in the deal.

While I like to say, there is no magic in mortgages, there are still lots of moving pieces. Certainly, you have to start somewhere but it is a better utility of your time to start with research and understanding before structuring a deal which you don't fully understand the risks involved.

All of that and likely a lack of understanding how to navigate the mortgage secondary market to sell your partial. That partial might take some marketing time to find an interested buyer.

1. A bankruptcy will stay the foreclosure process until the bankruptcy plan is dismissed or discharged. A BK can stop the process all the way up to sale within minimal timeline of notice to the sale entity.

How that affects your position? Not sure what you are asking. Your lien position is not affected, if you buy a first, you are in first position.

2. When you set your bid level for Sheriff sale, the sum of your fees, advances, interest arrears and unpaid principal will be the maximum bid. These are all described (or should be) in the note. Any sale overage at auction will pay down other lien holders behind you or be remitted to the borrower. You investment level is not exposed.

3. Yes, you will set reserve price when you send it to auction. In some counties there are minimum standards to what this number must be.

4. You will only have one Sheriff Sale event, not multiple. It either sells or reverts back to the Mortgagee (you).

5. This is called a Deed in Lieu of Foreclosure ("DIL"). You can offer this anytime you want prior to the Sheriff Sale but there is no duty for the borrower to accept. In some cases you may have to pay for them to leave, referred to as "Cash for Keys". In the event you take a DIL, you are forgiving the debt in exchange for the deed to the property. In a commercial loan or investment loan, this can cause an income event for the borrower which can be its own barrier to completion at times.

Joel,

The resale spreads are not large. Sellers, especially localized commercial note holders are not taking huge discounts. I think you have to decide how active of an investment you want this type of thing to be. Active investments are going to be situations where you have to work with the borrower to reinstate and stabilize the loan. Slowing paying or non-paying borrowers do require a fair amount of work and administration. Input value from you will have a barring on gain on sale size at liquidation.

While from time to time, you can find a diamond in the rough, generally speaking, there is not an innate arbitrage built in to most notes without some input of value add. In other words, your not going to easily and often, be able to find a note for X% and resell it for Y%, expecting the Y% difference to be a large windfall. With little to no value add, the spread will look more like a commission of a couple points rather than some home run and it can certainly hit zero and negative if you over pay or something happens to the loan when you liquidate which diminishes your value like a loan fading from delinquency to default.

Remember too, time is needed to improve value on these types of assets. Borrower's who are slow or spotty pays or defaulted non payers will need to be incubated before you will see a rise in value for their payments or continuity of payments. In general, quick time frames would be 3 to 6 months. Think about what it would take to get a non-paying borrower back on track. Property data and financials along with borrower financials to review to reestablish credit worthiness and the constant monitoring to ensure they make each period payment.

To some extent, commercial loans have a level of business acumen to them since the borrowers usually are operating some cash flowing property. This is both a blessing and plaque. Sometimes they are easier to work with than a residential borrower and sometimes they are not. A footnote to that concept, Seller's generally do not sell easy to work assets.

Trading the asset is no light work either. Once you find a note and do what ever you are going to do, now you need to sell it. This will require market exposure which is time consuming. You will need to show the loan to likely several different potential buyers and deal with their bids and questions. You know what this takes, it is similar to your commercial RE sales. Sharing files, fielding questions, chasing documents, same stuff. Moral of the story, I think folks get the impression that these asset trades are fairly light in workload and I would say they are not, they are more involved than real property because you have real property and the borrower/debt.

Certainly you can purchase more passive loans but remember this a better quality loan which will initially trade for a small or zero discount. Still a decent amount of work to run through the purchase cycle. The arbitrage here is really a simple difference between hurdle rates between you and the Seller and you and the Buyer. Seller willing to sell at 10% yield and a buyer willing to buy at 9.5% yield.

The yields and returns will depend on the quality of loan you purchase. In better CRE loans, institutional yields flirt around 7% to 8% for 'decent' stuff. Certainly higher yields are available through discounting but come with increased risk. Remember the originated and/or the modified rate is going to be pretty low in most cases 6% +/-, so getting to double digit yields takes sizable discounts or large amounts of negative equity. You might be able to target private loans which have a bit of a higher coupon like the HML rates mentioned above but not too much discounting in that market so you pay closer to par or even a premium.

Certainly you are capable of all of this but the time devotion caught my eye and stuck. Loan investments are being marketed as passive investments and to some extent this is very true but not all are. The 'passive' sales pitch is more of a longer term hold with smaller risk of default. A more passive nature can also come into play working with or through a competent broker or adviser and servicer who helps with the heavy lifting.

The "Velocity" trading model has been around for quite sometime and often gets look at by newbies as a good way to make good returns with controlled risk exposure. Problem is, the Velocity model has caused more failed investments than not. This is because the investor was never really in a position to actually work the asset and assumed there is always a perpetual upside bidder behind them. It is because of this that many folks still try and play this game by showing the potential purchase loan to an exit buyer hoping to create an arbitrage in a back to back trade. Most seller's don't want their loan passed around to unknown parties. Sophisticated Buyers will quickly vet out the fact you don't own the loan you are showing them. This model also promotes a lack of skill and knowledge on behalf of the intermediary party. Since you never plan to work the asset, learning and understanding how to do that does not get a top priority which puts the intermediary at risk for over bidding by not understand certain impacts of asset or trade.

Don't mean to be a 'Debbie Downer' but wanted to make sure you got a little bit of a realistic insight to the amount of work it really takes to make this sort of thing productive.

This got a little confusing following which loan is which. For the sake of conversation, let's assume the 'First Loan' is the loan which is the HELOC and which is the loan that the OP purchased. Let's also make sure that the OP purchased the actual note and security instrument. So then, the 'Second Loan' is the loan which is disputing the priority of the First.

So this is a quiet title action. The Trustee sounds like they canceled or rescinded the sale after learning of the action. The Second Loan should go cure the defect of Lis Pendis if indeed it did not occur, but that is also a pretty novice mistake. Perhaps the OP simply missed the Lis Pendis during his purchase process and notice to the trustee of a new beneficiary or proper notice did not occur for the First Loan giving grounds to rescind the sale.

I know a court can rescind a sale even after new deed is issued. I am not sure a Trustee has that power but if the deed is not issued post foreclosure sale, then a Trustee can rescind the sale. In this case, learning of the Quiet Title Dispute, would be grounds for such an event.

I suppose one of the elephants in the room is did the First Loan give proper notice to the Second Loan as a function of its foreclosure process. If it did, then was quiet title disputed properly in line with the right of redemption? If the notice was given properly by the first then I don't see how the second can show up late. The purchaser acquires the legal title at the sale, but that this title, as evidenced by the certificate of sale, is subject to a condition subsequent-that there will be or was a valid redemption period.

I am not sure that a quiet title action post foreclosure sale would be voided under the presumption and proof of redemption period elapsing. Is failure to act to protect the interest of the Second Loan in redemption grounds to deny the potential quiet title action? Not sure, question for a lawyer.

One of the other concepts that comes to mind, did the quiet title suit call for the foreclosure process to become judicial? If it did, then the Trustee rescinding sale also make sense but still not sure if that pertains here.

I understand the angle of the OP but I am not sure it is not flawed. At Sheriff sale a purchase takes the equitable interest of the lien holder's instrument and establishes a legal interest only in the portion of legal interest the lien had in the property. It does not guarantee full legal interest just the same as it does not grant possession. So ownership interest is validated but it is not superior or un-fractured.

I would be interested in a recap clearing up the instrument and lien positions here to make sure the OP is understood. California Trust Deeds and Sheriff's deeds tend to mix terminology making conversation confusing. Noted by the confusion of why did the OP get title insurance? Insurance for what? The DOT lien priority or the the Deed to the real property? It certainly sounds like the intent of the OP is to end up with possession of the real property, which at the end of this road may still not happen if the OP purchased the Deed of Trust, which is what I think he purchased opposed to the Sheriff's Deed.

I would say $3k doesn't sound too far off, adverse to what others are saying. Engineering firms are fly by night type of companies and they tend to know their market. As Joel pointed out, if they are crammed with work, their bid will go up. So getting quotes is smart.

It is possible to break it into pieces, if you know and understand what you are doing. There are companies who specialize in getting things through the proper departments which can be hired independent of the work.

The elephant in the room is, we know it is 100 lot subdivision, however we don't know much about the land and its features nor it's location and the adjacent land features. Having any wetland or sometimes dealing with new water engineering can be costly. Additionally, ingress and egress engineering can also add costs based on the access roads to the property. You mention this is an old quote, how old, that could affect the price as well. All that or just as simple, that is their going rate for your area. Looking at the number and speculating why it has the price tag it does is an exercise in futility without a better understanding of the actual project.

As for the cost of excavation, don't take this the wrong way, but I think you need to spend sometime and learn the process of what you are about to go through. Again, asking a open question with no concept for the reader to understand what is entailed on the lot can have large affects on pricing. Does the lot need to be cleared? You will have to cut the timber down and ground out the stumps. That will add charges. Will the lots tie into a city water system with sanitation, sewer and potable water or is this septic and well?

Why did we just go from lot design to lot excavation, which is usually further down the list after you cost out the elevation, road and utility excavations. As a developer, are you going to develop the lots or sell them off and the let either the home owner or builder hook up to the main utilities and dig the foundations?

What "construction bid" do you mean? (Home construction?) All of this is construction. Again, I say spend some time and get a better understanding of the process from start to finish when doing development and final build out work.

Any conventional loan will require flood insurance if you are in a flood zone. New flood maps were just updated after Sandy hit. It sounds like you are going to be in a flood zone no matter what due to your proximity to the stream.

I glanced at this. A couple thoughts. You conflict yourself in the end and the beginning when you say at the end, renting is not attractive and in the growth plan, renting is a goal.

The growth plan discusses the consignment or purchase of homes to be put on lots as a function of getting some sales. This is not really clear nor what type of capital this calls for. How would this impact the P&L, etc?

The park has a current vacancy loss of 8%, how historical is that?
What is the average term of residency of the current tenants?

Its not clear what the business plans utility is, are you trying to use it to attract capital investors or just plan your own venture out? If you plan on using it for capital raise, I suggest moving the numbers to the top and the other stuff below it, the first thing I will do is turn to the financials.

If you are using this to raise capital, there is no ask. How much money do you want and what does that mean in terms of equity? How will your equity with your partner be diminished? Usually, I have my ask, then my financials and then the story. If raising capital, you highlight the return to the investor.

There is not exit strategy, what and when do you plan to liquidate this and how?

The rest of the loan terms are missing what term and amortization do you believe you can get? Do you already have any lending interest or conditional commitment?

Last elephant in the room, who is the manager? Where do they stay and how do they work etc and what experience do they have? What does this mean for the existing service contracts you mention, what are those?

Bryce Y., Bill is right, Fannie/Freddie loans allow seller carry backs. Its the originating lender who may have an overlay which precludes that type of structure or reduces the CLTV to 90% or less depending on occupancy and borrower qualification.

As far as a lender not caring what you do post close, not true. If the loan program has a CLTV restriction and by putting the Seller's lien on post close you exceed that CLTV, the loan is defective and could trigger acceleration. The loan will be checked, so saying nobody looks or cares is simply false. They may or may not do anything but if it is within the terms of the note and security instrument, they have a right to act in accordance with those terms.

Perhaps I am missing something but the it sounds like you are trying to leave the current mortgagee in place, presumably 1st position. You are not going to get a new senior lender to take a second position, you will have to satisfy the first mortgage.

This home now becomes an investment property for the mortgagor. The borrower will have to qualify in full for the new loan and be able to carry this loan plus any new loan they may have and have the required reserves and ratios suitable for an investment property.

I think you are going to have title issues. If the previous owner sold you their interests in the property, then you would have to make them whole again in title to get a loan for them. The new lender will check the chain of title and see your conveyance which might create some red flags.

Of course, you can go get a loan as the new owner, take out the existing financing and completely remove the fractured interests of the previous owner.

Its really one or the other not some hybrid of both, etc.