All Forum Posts by: Mike Hartzog

No need to mod if the borrower can make the payment.  I would forebear and do the HHF app during the forbearance period. 

Brent - I think the transaction you described is a flip.  (Investor buys and resells at a higher price.).  In a wholesale transaction, Marques would execute a purchase and sale agreement with the seller and then assign that contract to another buyer for a fee.  The buyer then closes the sale with the seller.  The fact that the seller is offering financing can be a benefit to the deal, because the end buyer has an additional option for financing the purchase. 

Gabe,

Sounds like you picked a good note. NPN modifications are the holy grail in my view. Too often I end up owning the property.

Here are some ideas for you:

• If you haven't already done this, have your borrower fill out an income and expense statement so that you can get a feel for their financial situation.  Their payment shouldn't be more than about 30% of their gross income.  Your servicer should have one of these forms available.
• I tend to favor a higher interest rate over higher principal, and generally shoot for the 9% range, knowing that if I sell I will probably need to discount to a minimum of a 12% yield.  So for your situation, you could reduce the principal down to 85K. With a 9% rate over 30 years, you end up with a payment of $683.93. That puts your yield at just over 29% (assuming 28K cost basis with the 6K up front).  Not too shabby.  If you need to sell, you can sell a front portion to keep the ITV for your buyer reasonable. 
• You want the borrower paying very consistently.  To influence this you could offer the mod at 9.25% without ACH and 9% with ACH.
• Set the mod up with a  tax escrow so you don't have to monitor taxes.
• Since the borrower is up to date with tax and HOA, you could probably limit the forbearance to about 6 months, requiring the 6K up front and 100% on time payments during the forbearance.
• If the collateral is in an HHF state, you can encourage the borrower apply for it during the forbearance period.  That could potentially net you an additional 25K or so, depending on the state.  I would offer the borrower an additional principal reduction as an incentive if the HHF application is sucessful.

I just posted a blog on math for notes which you might find helpful in playing with different principal and interest rate values.

Hi Gabe,

Doing a forbearance up front is a good idea if you are reducing principal or forgiving any arrears, or if the property taxes are not up to date.  I tend to use 6-12 months as the period.  You can put whatever conditions you want on these.  I use the forbearance as a way to get the borrower to prove to me that they will follow through on their responsibilities once the loan is modified.  Generally I am looking for the payments to be made on-time throughout the forbearance period, and I may also ask the borrower to bring taxes up to date as well if they are behind.

For the mod, the problem you have is that the payment the borrower is offering is too low relative to the principal.  If I make the assumption you are extending the term to 30 years, that payment corresponds to an interest rate of 1.42%.  To give you an idea, if you were to finance the 205K at 7% over 30 years, the payment would be 1363.87.  So, I think you need to decide on the rate you want to use here.  In a loan mod you have principal, rate, term, and payment amount to play with here so you run some what-if scenarios to come to the right combination. 

If the property is deeply under water and you want the note to be marketable in the future, you might consider reducing principal.  I do this as a matter of course with NPNs which I have purchased at a deep discount to principal balance and are underwater with regard to collateral value.  I recently reduced a loan balance of over 200K down to 75K.  I still get an eye-popping yield and the borrower now has a reason to continue paying the loan.

Hey Bob,

This is something that I have pondered too.  I ended up creating a separate business entity, but I suspect there is a better way to do it.  I would like to look more deeply into using a Series LLC for this type of thing.  I think there is inherent risk in doing this within your existing entity, primarily because if things go wrong and your partner sues you, the assets of your current entity are exposed.

Mike

This kind of question comes up regularly.  The short answer is no.  While the lienholder may in fact sell the note.  If the lien holder is anything other than an individual investor or very small financial company, the note would be sold as part of a large package of delinquent notes.  So this angle is not a practical one.  The way to use this type of information from foreclosure.com is to contact the owner and offer to buy the property.  Many people use direct mail for this type of thing.

I should have mentioned that if you REALLY want to define risk, doing a traditional risk analysis is one way to get there.  This involves thinking of all of the potential risks associated with a particular investment or project and defining the following for each:

• Risk - Give it a name
• Event(s) - What event or events could cause the risk to become an issue
• Likelihood - What is the likelihood that the event(s) will happen.
• Impact - If the event(s) happen, what is the impact
• Mitigation - What mitigations can you put in place to lessen the likelihood or reduce the impact.

This type of analysis allows you to focus first on defining mitigations for your most likely and most impactful risks.

My perspective is that one must define the scope of the risk they are talking about to have a meaningful conversation about it.  One key risk in investing of any kind is loss of capital. For me that's the baseline risk I want to mitigate for.  Once steps are taken to ensure working capital is safe, there are other risks you can pile on top of that one, i.e., risk to returns.  If capital is invested for a period of time and the return is very low or zero, your loss is the opportunity to have invested the capital elsewhere for a better return.  There are also risks that are more of a personal nature, for example, reputational risk of you don't conduct yourself ethically and with integrity in your business interactions.  Risk to personal relationships caused by focusing too much on business.  The list goes on...

Hey Michael,

A note is not a complicated thing from an accounting standpoint.  Most CPAs will have no problem with it.  Mine certainly didn't.

As @Bob E. pointed out, SDIRA is a good vehicle for note investing and loan making.  Because notes don't have any built in tax advantages, holding them in an SDIRA makes a lot of sense.  Investing in RE with SDIRA is problematic due to the requirement that financing be non-recourse.  You also sort of waste the built in tax advantages that are inherent with a rental property, so in my view it is best to hold RE investments outside of the SDIRA.