Posted by Alexander Burnett on October 20, 1998 at 13:21:28:
James:
Any interest in posting your ideas about these second mortgages?..
A Question for John Behle or Terry Vaughan - Posted by Alexander Burnett
Posted by Alexander Burnett on October 18, 1998 at 21:26:04:
I have an opportunity to purchase $100,000 face value second-position (12% interest) 5-year balloon notes for $50,000 (about a 33% yield).
These notes are created by an investor who purchases distressed property, improves it and the resells it at full market value by taking back a second on each property.
The houses are owner-occupied and the buyer’s credit is a B.
Between first and second mortgages the total LTV is 100%.
I would like to know:
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If the reward these notes offer is worth the risk of having to keep up the first while foreclosing on the second.
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Are there in your experience alternatives to foreclosing in the case of non-payment?
Thanks in advance for sharing your experience.
Re: A Question for John Behle or Terry Vaughan - Posted by Bud Branstetter
Posted by Bud Branstetter on October 19, 1998 at 21:52:56:
In looking at the spread sheet it indicates that instituitional buyers carry the 1st so there should be a appraisal no matter how friendly. The total of the 1st and 2nd are slightly over 100%. If you buy a partial you should know how to do foreclosures and manage slow pays. With only 1000 to 1500 into the properties the buyer don’t have much at stake. With a little more ageing some buyers will pay up to 85% of appraised value. If you want to buy a partial on the note I would make sure it is a house you want to own. The 10 times the payment for the next 12 months gives you the 35% return. Option to do it the next year. Play it conservative with your money and don’t consider more than a year at a time. Do you know how to do esstopels? Bottom line - if they were in my back yard no more that 10k for the next year. I would feel bad if I didn’t get them. You could offer to loan the 10k against the mortgages and have him sign personally. One more stuckee.
Re: A Question for John Behle or Terry Vaughan - Posted by Bud Branstetter
Posted by Bud Branstetter on October 19, 1998 at 12:12:58:
Maybe I would be wasting my time but I would ask to see a schedule of the notes. How much cash down would be a very important question. If actual appraisals were done or sold for what the “fools” were willing to pay. I would want to see if I could cherry pick rather than buying the whole portfolio. Maybe I would offer to buy the next 12 payments for some figure. If it is take my deal or nothing-Adios.
Re: A Question for John Behle or Terry Vaughan - Posted by Terry Vaughan
Posted by Terry Vaughan on October 19, 1998 at 03:22:27:
John is right. There is so much business out there you don’t have to take the marginal deals. The more experienced you become the more choosey you become.
However, it never hurts to ask (as john says) for more collateral. Not long ago I did a deal on a large second note on a house in a ritzy neighborhood along the California coast. I found out the note holder had ZERO collateral after I did my homework on the deal. The payments on the first were $10,000 a month. Everybody in town had passed on this deal. I asked the one question everbody had failed to ask, “What other colateral do you have”?
The only other property he had, was an office building with a $23,000 a month positive cash flow and six million in equity. It turned out he needed about $200,000 to make tenant improvements on the building. I asked him to give me a second on the office building as additional collateral for the note. He agreed. I sold the note to another investor friend who liked office buildings and I made a quick $27,000. I had been the only note investor in the area who thought to dig further for additional collateral.
Pure Speculation - Posted by John Behle
Posted by John Behle on October 18, 1998 at 23:42:07:
There are two primary rules about deciding to buy a note. First is would you buy the property under the same conditions. In this case that would mean a 100% LTV plus the costs of foreclosure and carrying costs. Not a great deal. Second rule is “hesitation is a NO vote”. If you ever find yourself asking yourself or someone else if it is a good deal, back away. If you find yourself trying to justify a purchase or being enticed by a small part of a transaction - then back away. I sense the 33% is enticing, but will you get it? Not likely.
A 33% yield really isn’t that hard to achieve - and you do not have to sacrifice your safety to get it. You can get those types of yields on good paper.
Pass on this deal, it isn’t right for you - right now. It might be a possibility for the right buyer if they used some “Staged Funding” or talked the investor into putting up some more collateral.
Re: A Question for John Behle or Terry Vaughan - Posted by James Davis
Posted by James Davis on October 19, 1998 at 13:30:16:
Alex, you have and interesting oppurintiy before you I think you can do a parital and came out way ahead on this deal. E-mail me for some great ideas
Re: A Question for John Behle or Terry Vaughan - Posted by Alexander Burnett
Posted by Alexander Burnett on October 19, 1998 at 13:26:39:
Bud:
I sent a spreadsheet of the notes to your email. See what you think.
Re: A Question for John Behle or Terry Vaughan - Posted by Alexander Burnett
Posted by Alexander Burnett on October 19, 1998 at 07:46:58:
Terry:
As I mentioned to John, I do not believe - will confirm this- that there is any additional collateral. These are $60,000 to $70,000 homes in lower-income neighborhoods.
Thanks for your answer.
Re: Pure Speculation - Posted by Alexander Burnett
Posted by Alexander Burnett on October 19, 1998 at 07:51:10:
John:
I do not think there is any collateral on these notes besides the house itself. Your answer is right in line with expectations that these notes are too risky for me.
Thanks for your answer.
Whats wrong with sharing those ideas here? - Posted by Terry Vaughan
Posted by Terry Vaughan on October 19, 1998 at 15:17:42:
James the purpose of this forum is to exchange ideas. Just “email-me” doesn’t help those that are trying to learn.
The ideas you have can benefit all for discussion. Post them here.
Re: Whats wrong with sharing those ideas here? - Posted by james davis
Posted by james davis on October 20, 1998 at 11:33:58:
Terry you are correct I am new to this site and was not sure what response we can or can not post, but i am good to go now and will post all my ideas.