A Commercial Note Deal…In Theory - Posted by Hugh James
Posted by Hugh James on December 21, 1998 at 17:08:33:
We’re 1000% new at this creative use of paper and notes business. And, if I should post this on the main board, just tell me and will do so. Here’s a theoretical deal that mirrors one we’re working on. Your collective thoughts are most appreciated.
John Doe has a contract in his name to purchase a 10 unit apartment building. In the space for the buyer’s name the contract reads “John Doe or his assigns.” John is buying the property from a local bank that took the building back in foreclosure. The property is not fully rented (it was bank policy not to re-rent as units became vacant), but needs only cleaning, decorating and some minor repairs to have all units up and rented. Otherwise it’s an excellent property in a good neighborhood. Gross monthly rental income when fully rented is projected to be $6,600.
The appraised market value, as is, is $100,000. The purchase price is $80,000. John wants to conserve his own cash to buy other properties and has decided to take in a small grouip of investors to put up their money to make the deal and the repairs. All have excellent credit. John will be a part of the investment group that takes title. The group will put down $10,000 cash. John will create two seller mortgage notes on the property and do a simultaneous closing. The first position note is $80,000 face value at 10.5% amortized over 360 months and ballonning in 60 months. This first lien note John wants to sell to a note buyer at the closing using the note buyers funds to actually close the sale. John will then hold his $10,000 second (7.5%, interest only, balloons in 60 months). The group is willing to accept a 1 year pre-payment penalty if it means a better cash deal from the note buyer.
Questions–What would make this a more attractive note to a buyer? Longer or shorter term? Higher rate? Will this whole scenario even work? What would note buyers of this type of paper typically pay for a first mortgage of this type? Anyone know how to locate buyers? How long does it typically take to close?
We know this is asking a lot, but time is of the essence. Any and all information you can offer is appreciated.