All Forum Posts by: Scott Arpan

From a note buyer's perspective, any note investor you approach will require the underlying lien is paid off on a wrap. They don’t want to risk the first going into default.

If your buyer can qualify for a conventional loan, you will be much better off going that route. Any offer from a note buyer for an unseasoned SF loan will assume the buyer and/or property cannot get other financing at decent terms. If other financing was available, the note would not have been created to sell quickly at a discount.

As such they will probably offer to buy a number of payments where there investment is less than 50% of the sale price or as is market value of the property, whichever is lower. If the underlying lien is greater than 50% LTV, you will be stuck with the loan for awhile. As the note becomes seasoned with a well documented pay history, a note investor may be willing to invest up to 70%-75% of the property value on a SFR secured note. If the buyer misses payments or the property is devalued, all bets are off.

Logan,

It sounds like you need a hard money lender to give you cash to buy the property. Your seller can carry the note to keep your cash free but they will not receive much if they want to sell it to a note buyer.

It all depends on the quality of the loan. While I would love to have those returns, loans that can be managed passively with a ton of borrower's equity may justify a 8-10% return. I would say the average note created by rehabbing a property and selling with little down, poor credit buyer or poor documentation would be discounted to yield 15-20% and 50% LTV.

Austin,

With nothing down and the property needing work, IMO you would not find takers for the note until your buyer was finished with repairs and at least 7 units were occupied.

Even then, an investor would likely only want to purchase enough of the note to be in no more than 30% of real market value. If all payments were made timely for 2 years, they might buy more payments so their total investment went up to 40% of market value. I don’t think you will have any investing more than 50% of the property’s value at any point in time. This assumes the property sold for market value and the sale price was not inflated by financing the sale. Most note investors won’t touch the note if the property is upside down.  Better to keep the sale price low and bump up the interest rate.

As for a discounted yield, 14 to 18% would be in the ball park. Your buyer’s experience renovating and managing apartments will have bearing on what note investors ultimately offer.

When you sell payments from your note, your position will be subordinate to the note investor who will hold all the cards in case of foreclosure. If in default, you would likely have an option to buy-out his position if you have the cash.

Joel,

You have a great interest rate and seasoning. That is a positive.

Assuming the house is in reasonable shape in a quiet neighborhood, and you can verify the last 24 payments were made timely, you are looking at more of an LTV play. I would probably price this at 70% of the house's current value less the underlying. A 75% LTV would be the maximum if they buyer made all payments timely and the house is in excellent shape.

If the house is worth $115K, I might offer $80,500 (70% of the property value) less the underlying so you would not gain much from selling your note. If I could go up to 75% the best you might net is $7,000. I suggest you keep the note. There is no getting around paying off the underlying lien if you sell your note.

I am curious roughly how many mailers you have received for your note in the past 2 years? I always like to keep track what marketing SF note buyers are doing. 

Thanks and good luck.

Lawrence,

There will be plenty of note buyers mailing you offers to purchase your note. They will pull your name off the deed of trust in the public records.

Most owner financed notes purchased are partials as Scott Wagoner explained. It is very difficult to sell the entire note for close to the current balance. Note investors will want discounted yields of 10% on up depending on the property and borrower. Lower yields are possible if you find buyer who easily qualifies for a bank loan. Something I rarely see in seller financed loans.

If Dodd Frank applies in your situation you will need an RMLO and servicer. If not, you should still have an attorney draw your docs and close through escrow. Buying a lenders title policy at closing will save you some costs if you decide to sell you note in the future.

Efrain,

If your borrowers are willing to accept a 9 or 10% interest rate, the likely discount rate will be 14-16%. The high loan interest rate indicates the borrowers and/or properties are not very strong.

A partial at a 30 to 50% investment to value would be the most likely scenario. (i.e. if the property was worth $100K, their investment in the partial would initially be capped at $30K to $50K) If the note performs, they would likely buy more payments in the future. Not to say I know what every Houston investor would pay.

Here is a short list of factors that determine an investor’s target yield.

• Property type, use, condition and location
• Buyer's financial strength. Are they in stable long term jobs? Double income family?
• If Dodd Frank compliance is required and properly executed
• Crime rates, amount of investment coming into the neighborhood and other indications it is a desirable place to live and will be in the future.
• If you purchased a distressed house and rehabbed it, can you show evidence all repairs were completed. 12 months of seasoning and a clean borrower interview will go a long way toward alleviating this concern.
• Your ability to prove all payments were made on time. A servicer helps. However, if you are selling the note, servicing may need to transfer which can cost a few hundred dollars.
• Size of payment- the same effort is required to collect and account for a $600 payment as a $300 payment. A higher yield is necessary to compensate for smaller payment streams.
• Minimum discount- Even if your note rate approaches the investor’s yield, they want protection from early payoffs.

Hope this helps.

Scott Arpan

Efrain,

In your scenario, is the interest rate on the note 13% or the discounted yield to the investor 13%? 

@Cameron Ellis 

Talk to your investors before creating the notes to confirm everything you do complies with their requirements. I am assuming you are selling homes and creating paper. Notes on other property types will be different. You will need to ask your potential investors about:

• Having your notes comply with DF.
• What loan terms and down payment will give you the highest possible price.
• What they are looking for with the buyers so your investor will be comfortable with them when you sell the note.
• What documentation they need to feel comfortable any rehab/repairs you made to the property were completed properly.
• Do they want a specific servicer to be used or perhaps none at all? Many investors require notes they purchase be serviced by them internally or their hand-picked servicer. Or it may not make a difference if only the buyer is paying servicing fees.

Some investors will ask why are you creating the note and holding it instead of cashing out at sale. If the answer is banks will not finance most properties in the neighborhood, don’t expect the investor will be very interested either. A partial will be the only option.

Investors will not commit to buying anything you book. If the market suddenly changes, notes you are holding may not bring the price you hoped for.

I am sure others will add to this list.

Cameron,

Are you creating the notes yourself or do you broker notes created by other sellers?

Every investor has their own guidelines based on what they feel is important. There really is not any standard.

I think Memphis would work every bit as well as Houston. If you are brokering, you probably need to expand your market since Houston is a much larger area and produces many more notes then Memphis. You would have much less competition in Memphis then Houston.

Good luck