All Forum Posts by: Dion DePaoli

The asset manager you speak of sounds like he/she is from Kondaur, with the higher pressure and sales deadline. The Friday deadline has more to do with the end of the month and the employee wanting to get commission in this month than anything else. That would also explain their sales desire opposed to finishing the FCL and selling it themselves. That may be a bit forward and I could be incorrect in my guess, but those are similar characteristics. Not too many market participants deploy those characteristics. The deadline can always be moved, if the price is right, a sale is a sale.

If you have conducted the due diligence like you stated, it seems like this would be an exercise in verification and should move rather quickly. In order to conduct that due diligence money would have had to have been spent at the least to document the property value, perhaps in the form of a BPO and in order for you to know there are no additional liens or encumbrances you would have a title O&E report. So then you are walking away from the money and time you spent on the deal so far or you don't have all of that material. I suppose initial review could have been achieved if the Seller is providing those current reports, but that should not substitute obtaining your own material. A tactic used in higher pressure loan sales, which is dangerous, not allowing enough time for proper due diligence. Usually those reports are dated as spending money to update those reports to share with a Buyer only serves to increase the Seller's loss on the asset or reduce the profit margin.

In the last post or two you used the term "PL", which I am not positive what that means. If I guess, it means Private Lender. Which does not seem to carry the same meaning as JV Partner. That makes me curious how you planned to structure bringing an investor into the deal. Who would be the Assignee of the mortgage, you or the investor? If you are the Asssignee, how would the investor's capital be secured against the investment? If the investor is the Assignee, how would your interests be protected for finding the deal?

The math broke down a little bit in the last post or two as well. If we assume the numbers are correct, the QSV is $90k and the cost basis is $68k. A 54.60% profit in 5 months is $15,470. This would imply the cost of RE sale is around 7.25%. In order to affect a 30 day sale, which is what is planned, a 30 day marketing time and 30 days under contract plus the 90 day to FCL sale is your 5 months, it would be conservative to assume you will pay 6.0% in RE commission to achieve said deadline. You mention the taxes are already included in the $68k, so then the remaining 1.25% is title and closing costs. That seems shy about $500 or around 0.50%. In Florida, paying for the Buyer's title insurance ensures the Seller can designate the title company used, helping to control the deal. Also, that does not include the pro-rated property taxes paid by the seller at closing for property taxes in 2013.

All that number crunching said, there does not seem to be a piece for you, as you stated the 54.6% was all investor return. So then, there is a presumption that the property will sell in 30 days for more than the Quick Sale Value or you have shorted the commission to the real estate agent(s). Neither of those concepts support a 30 day marketing cycle.

The property at $90k, in Jacksonville or $60 psf, seems a bit aggressive for a QSV. From the photo, the property has a car port and the lawn seems to be in bad shape. The house looks like a 1950 to 1960 effective date. The windows look like the old standard jalousie single pane, which are not very energy efficient. The driveway looks non-existent. Generically, the property seems sub market and needs updating. Seems like these concepts would all drive that price lower rather than higher. Again with the driving force being a 30 day marketing cycle and no additional capital expenses to capture a higher market value.

I am pointing this out to illustrate that after our brief exchange yesterday, I was 75% of the way done reviewing the deal. Granted, the end result could have been a No Go from our side. A simple review of the collateral, servicing and foreclosure file would have taken no time at all. Addressing the missing concepts noted above would have taken very little time as well. On the other side of the table was a pretty experienced party and capable of ascertaining the deal in a quick and diligent manner. Buying whole loans is what we do as our core competency. Just makes one scratch their head after one day of soliciting the deal.

So, I don't fully understand that explanation. Why do you believe time has expired? What do you believe will consume the time?

Liz, I have some general interest but I am not sure I agree with all the details and terms yet. I am happy to execute your non disclosure. As far as a QIB, I would have to see that to understand it. I can understand your desire to filter out folks. In general, you can browse any of the 700+ posts I have participated in, which mostly deal with loans, I would point out that sort of experience does not come by way of pretending.

If that is a step in the right direction you would be interested in taking, I can shoot you an email and you can send over your NDA paperwork for review. From there, I would want to dig further into some of these details and deal structure privately with you to see if I and my firm agree with it all. If that works, post back and I will email you. If not, I understand, no harm no foul.

Sounds interesting but curious where the invisible elephant is on this deal. Why is the seller of this asset, after all the heavy lifting walking away by selling it so close to foreclosure sale?

Is title clean and taxes current?

Have you done due diligence on the foreclosure file, is there a chance the Summary Judgement can be set aside or vacated?

Is the UPB of this loan greater than $100k?

What is a QIB?

Lastly, what portion of the actual return is going to the capital investor?

I answered the ball park question:

"If we assume we are discussing RE Values around the median US home value ($180k) we see 3 to 9 months disposition time at 62% 68% of RE Value. In general, for every additional 6 months the additional discount is around 5%. As the RE value falls, so will that level."

It may of got lost in the length of the post. I am happy to throw further detail into the ring if a question arises with a specific scenario.

The reality is it is hard to quantify the price level easily even though folks like to have the discussion. Many factors have to be considered and from asset to asset, those factors can vary greatly.

Whether you use UPB or a RE Value as the baseline of price discussions is specific to the assets and seller. The driving force for the price will be the RE Value since the purpose of a loan is to be collateralized with some level of equity. The two ideas are related obviously. In general, most of the discussion generally occur around the real estate value and percent thereof. In those cases, UPB discussion are an idea of loss or potential loss of the current mortgagee so you tend to see banks and lenders resort to that baseline more often than PE firms who purchased that asset.

In the event the loan has negative equity, discussing the price around UPB does not present a clear understanding of what is likely the final disposition of the asset and I personally think can be a little misleading for an investor or new buyer. A loan which has negative equity can trade for 10% of UPB but that does not really express the idea in relationship to the amount of equity the investor is entering into that asset at but it clearly denotes the loss on the UPB.

For instance, loans in the Midwest and other geography which has seen large drops in real estate values saying you purchased at 10% of UPB does not clearly represent the level of equity. Say the UPB is $100K, well in some Midwest geography the real estate value may only be $10k, so that is not really a good deal.

The opposite is true if we reverse the numbers and discuss a loan with equity. If the property is $100k in RE value and $10k in UPB buying at 10% of RE Value is still not a good deal. (the example is only meant to illustrate the point, not a legitimate deal) If you are an experienced NPN investor, you already understand this and I am only typing this out for other readers who hear 10% and think it MUST be a great deal.

All that said, they are interchangeable concepts, one number and percent equals the other in some fashion. From a Buyer side stand point, it is usually a good idea to consider it from a RE Value standpoint but I really think you should never discuss the other without an understanding of the other.

The price level is going to also be heavily influenced by the RE Value. RE Values less than $120k see a drop in price and there is a price drop for less than $50k. It used to be, many moons ago that RE Values less than $20k were automatic zeros. There is still some justification to that idea. As a RE Value approaches zero, it is simply too hard to out run the fixed costs of foreclosure, repair and resale. It is also possible to generalize the assets based on geography in some sense. RE Values in the Midwest tend to be around the $50k or less so putting them into the discuss in relation to RE Values outside of that area skews the discussion.

Additionally, the timeline to get to the asset in the case of a NPN matters. Certainly we know we have judicial and non-judicial foreclosure states. So innately, non-judicial go a bit faster. So the discount applied for time value of money will not be as great as judicial states. However, one concept that seems to allude the conversation is the amount of foreclose seasoning in either jurisdiction. The more seasoned the foreclosure is, in general, the faster you will get to the disposition. So two assets in the same jurisdiction and even with the same relative RE Value can have two different bids. The shorter the time for disposition, the less the discount that will be accepted.

So provided you can take into consideration those driving forces, we can have a very general and vague discussion around the price levels. If we assume we are discussing RE Values around the median US home value ($180k) we see 3 to 9 months disposition time at 62% 68% of RE Value. In general, for every additional 6 months the additional discount is around 5%. As the RE value falls, so will that level.

I think it is important to understand, the math which is used is the same for everyone. Time is a major factor. Net recovery is a major factor. When I discuss trades with lower tier capital investors, the main point has to be how they can exploit some form of niche. In general, a sale will not take place unless the investor can reduce the time or somehow capture more market value in their disposition plans. Otherwise, any seller of an NPN can do the same thing and does not need to take any additional discount. Laymen tend to think there is a duty for a seller to sell at a discount and this is not true, even for banks.

Acceptable bid levels tend to go under scrutiny this time of year every year. There is a little fuel to the fire from investors who are factoring in some form of RE Value appreciation. In some cases, that uptick is simply from it being "season" for sales. More RE sales tend to take place in spring in summer than fall and winter. There tends to be a fairly consistent investor sentiment that "good" deals are drying up and so price levels get pushed up because RE Values are being pushed up. I would also add, this year probably more than most in the past, there are many more "street level" investors trying to get into the whole loan markets. While the general consensus is that street level investors with no experience are simply vulture bidders it creates activity around the asset class giving it more attention, attracting more people which drives up the price.

Liz, sorry for the thesis, but I thought the additional ideas and concepts were needed.

James Hiddle, I was and still am getting a vibe from this thread that there is a cavalier attitude toward the lending event. Additionally, the lending event basics seem grossly misunderstood. Granted some of that vibe might be derived from the awkwardly incorrect posts on charging points, but I think the OP has some undertones that are cavalier too.

In the OP, the first line, "I am looking to lend some money to a RE friend for one year for her seed money to buy an investment home.", seems to have the starting line. The money, $10,000, will be borrower with a one year maturity at 12.0%. It appears the plan is for the borrower to make periodic payments, as the OP was looking for the correct math to calculate the payment. However, the term "Seed Money" keeps standing out. Also, the notion buying an investment property has its own implications.

Seed money, in its common use means the early stage investment into a business (equity). That investment is a security. Generally speaking, seed money will garner a portion of equity greater than 10%.

Granted, the OP came back and proclaimed the money to be 'unsecured', which seemed more like a 'from the hip' reaction rather than a contemplated risk assessment. Problem is, seed money, the term, implies a form of security. It is unclear from the OP, if other investors are putting money into the seed round of this investment. So then, a more sophisticated investor might be able to take on a superior interest, causing a subordination of sorts of the OP. In other words, investor #2, if there is one, can come in and ensure they obtain equity or an interest in the property. Does the OP seem to fully understand this risk, from the thread, no.

The idea, that it is hard to obtain a secured interest in first position on the real property due to the low loan amount is simply false. The $10,000, could easily be secured by a mortgage or deed of trust in first position. It is not 'hard' at all, it is simply what is done in most real estate lending events. So, that makes me think the borrower has other debt or capital stacking plans. Either they plan on raising more equity or raising debt, perhaps the borrower knows the debt will take the superior position. So then, is the OP's $10,000 a down payment for said loan?

In the world of loans, this, if true, will present its own barriers. We know from the post, the money is not being gifted. So a loan is being taken out to use in order to get a real property loan which might disqualify the borrower. With the OP joining on title, this situation could be addressed to suite a larger lender's requirements.

So to me, it seems the OP is not fully understanding the event, perhaps there is a general understanding of the risk but then it does not seem it is understand how to protect their investment. The reaction to call the loan unsecured illustrates that to some degree. The lack of security is a benefit to the borrower and a sophisticated lender would likely not allow that to take place.

The claim is a first position lien is hard to obtain, does not seem to contemplate whether a second position lien is in order either. Simply accepting they must be unsecured when lending the money. This points to a lack of understanding the details of what is taking place.

Since we believe from the OP, period payments are being made, it is plausible the money borrowed is being used to purchase a property which will generate cash flow. So the debt service seems to only be supported by the property. Which, on it's own merit is not a crazy concept. However, the short term maturity (1 year) is concerning. If the money being borrowed in this loan is to be paid back in one year, that would imply there is some form of event one year from now which will allow the borrower to pay the OP back. In most practical cases, this would only be plausible from the sale of the real property that was purchased.

So then, it seems the details are missing in regards to the use of funds borrowed from the OP. Are the funds being used as down payment? Are the funds being used to repair the property? Are the funds being made to purchase marketing material? Are the funds being used to make payments on another loan? I do recognize this can simply be purposed omission of the details by the OP, which then I am reading too far in.

On the other hand, perhaps there is not what most would consider a reasonable understanding of the loan, the use of the funds and how to protect the investment for repayment.

However, the state of Ohio, as many other states have regulations around short term loans. This loan for one year, is short term. In fact, there is no exemption, that I know, which grants the ability to make this note without a license since it is short term. Can it still be originated? Sure. Will it have problems with enforcing the terms if something goes wrong, more than likely. The entire note could be thrown out and the OP will have to talk the loss. This is aside from the possible penalty that could be assigned for making such a loan without a license.

Even if the term of the loan is extended, the OP shot from the hip and proclaimed the loan to be interest only. Therefore, creating a balloon event. Balloons have regulations that need to be adhered to to retain their enforceable as well. A detail that clearly is not understood by the OP.

I am certainly not trying to rain on any parade but simply point out concepts that seem to be missing from the whole story and I also recognize the whole story was not given. In the event some of these concepts are new or not fully understood, I suggest the OP find an attorney to consult with to ensure her interests are being protected.

Good Luck.

Just curious for the sake of conversation, is the money given secured by real property?

If so, will you be on title to the real property?

Or... how is the money, provided it is supposed to be, secured for repayment that you are lending?

The information on the minimum interest rate is not a function of Texas but rather the IRS. The IRS has a minimum, called the "Applicable Federal Rate", which is updated every month for short, medium and long term debt instruments secured by property.

Essentially, the IRS says, if you create a 0.0% interest rate and the prevailing AFR is 3.0% you will be taxed (as the note owner) on the 3.0% regardless of the 0.0% note rate.

The issue is, without the AFR, the loan is really equity disguised. The rule also was meant to curb inter-family loans with no interest as a tax sheltering event or alike.

To Bill's point, the note is enforceable. In fact, the state of Texas, as many other states actually have zero interest rate loan programs through community programs which are secured by DOT on real property.

You can look up sections 7872, 1274 and 483 of the Internal Revenue Code.

I am not overly familiar with the books but I have certainly ran into many folks who have read them. I also not a fan of any gurus but I have ran in to a ton of folks who have paid for their service. My take on the lessons the folks walk away with from both sources, IMO, seem to point to a lack of proper understanding of the asset class in general. I think that is because most of these courses and books are modeled after the real estate (real property) guru genre and while indirectly related you simply have to know and understand much more to be good with notes.

I think you can see this if you take a step back and look at how notes in general are discussed, as if they are homogenous assets. They are not and that is the first key to understanding the asset class. The lack of homogeneity amongst notes is also what helped spawn securitzation and might be fuel for their exemption as a security. That is probably a topic for a different thread though. Back to my point, the discussion and request seem to be very broad in nature opposed to specific, which I think also illustrates a lack of acute understanding of those attempting to engage in a discussion about notes.

So can a book from 1999 do some good? Sure, some knowledge is better than none but many very influencing things have changed. Regulations have changed, investor participation has changed, origination has changed, mortgage products have changed....the list goes on and on. So from that type of publication or course if you can walk away and define an area of interest in more detail, I think that is a win. Then you need to follow up on that area specifically. That will take more specific topics and inquires and frankly research.

Just amongst the folks that Bill named in the above thread you have several different business models and market functions. We do not all seek the same note nor favor the same disposition strategies. Some of us have more exposure to first liens opposed to second liens or more institutional opposed to private or even specific collateral variations.

So when I see the question, what is a good book to read on notes, I sort of always want to say what type of notes, on what type of collateral, dealing with what type of borrower or origination source? A book written on commercial loans will be different than a book on residential loans. The learning curves are different due to the difference in collateral and borrower sophistication. Additionally, certain legal aspects are different. I know these are all things most people understand but it seems to never makes its way into these inquires.

Bill speaks to this and I agree when he says that some of these gurus 'sell' the foreclosure disposition as a path to riches or some magic short pay strategy, etc. Rightfully so, when he sees this he corrects it, as I do I. That is the dumb down marketing version of what they are selling which is only a small segment of the asset class and often times the take away is not entirely correct. People understand real estate investing in general so they lach onto that understanding and go to market with the book/course selling to some extent, what folks want to hear. "You can make money too this way....!" I always like to say there is no magic in mortgages. That is because it is true. There is no new disposition or strategy floating around on the street which has not been around for a long time nor pursued thousands if not millions of times.

As an investor do you HAVE to have this in depth knowledge of the asset class? No, I guess not, as suggested above you can subcontract it out. That said, not all brokers and advisors are made the same either, so one needs to be careful not be led by the inexperienced simply because they are more experienced than the pack of folks following them.

So what are good books to read? Well if you want to learn about the financial aspects of notes pick up a book on finance. You should learn to understand the time value of money and the math behind it. If you want to gain more knowledge about specifically investing in foreclosures, pick up some papers written on current foreclosure situaitons, perhaps even state specific to your desire. Additionally, reading some literature on contract law, as that is what the security instrument and note conform to will also help. After that, I would also suggest reading up on the more major headline events such as the Robo Signing and the MERs debate, I even suggest reading up on the Dobb Frank Act effect on the mortgage secondary market. That will start to prep you a bit for what the institutional climate looks like or at least expose you to may possible tangents of further learning.

The other problem that you run into, is reading up on it all is fine. Heck, I read a ton but in my very own opinion, experience is going to be the best source of education. The first question I tend to see from a new investor when I show them a loan or even a loan pool is, "Ok, where do I start?". There is a lot of data when it comes to loans and many fields have their own thesis to understand such as foreclosure events and bankruptcy events. I think having a supporting mentor, trainer or group will work wonders to help evolve skill sets. Make no bones about it, there is a lot to learn. Another good thing to remember, is everyone has an answer, but not all answers are right.

And with that, I will plug BP as probably one of the better sources of current in depth information on whole loans that I know of currently. And I think it's great. There are real folks here with real experience who participate often on topics. However, with as much interest as notes have started to garner and in tandem with the multiple times I have seen this exact question come up over the past months, it seems nobody wants to use the resource they are currently using. Which I suppose is slightly humorous. So there in lies the conundrum, for those newbies who want to learn more, where are your questions? I know I am happy to type a thesis on whole loan topics as many of the other guys are as well, but it seems we have to build the body of what information is being sought in order to get it out. In that sense, if we get more specific questions on the topic we can give specific answers or have valued in depth discussion on various legitimate topics.

Ramble, over.