Posted by David Butler on October 11, 2006 at 13:06:13:
Hello Tanya,
Not sure if I met you in Atlanta this past May, but you are right. I’ve always enjoyed the CREOnline Convention, and this year was extra special in that John Behle was able to make it; I met John Corey, Ray Alcorn, and Tony Coella for the first time - both of whom are such intersting and first class people - and seeing Lonnie Scruggs and his wife JoAnn is always such a pleasure… as is getting together with Terry and J.P. Vaughan, their daugher Jeanne, and one of the few times each year that I get to meet with Mike Morrongiello. It really was great. But… I better get to your questions here, eh;-)
The deal you are describing here is a very real scenario, though you want to be clear on your thinking in putting it together. So I want to clear the last part of your questions here first. The direction you take with this question, would indicate essentially a loan transaction. In that scenario, and without the seller being involved, you do not have a note transaction, i.e. a note being bought per se. Nothing wrong with that, and it is done all the time. The distinction is one that carries many legal ramifications you’ll need to be aware of regarding usury rates, disclosures, and lending law requirements.
These are discussed at length already here in the Forum, so I’ll just make mention of them here. BTW… you mention that the seller is the recipient of the payments of the note, so how could he not know about it? And if he is the recipient of payments, you couldn’t create a note and sell it to a third party without them getting the payments?? In that scenario, you would simply be giving the seller the $80,000 proceeds from the note in one lump sum, right?
The nexus of this kind of deal is creating and preserving the exemptions that go with seller-financing - wherein the property is sold with seller agreeing to carry part or all of the financing, and being able to subsequently sell the note shortly thereafter to get the cash they need and/or desire.
An easier method, if otherwise feasible (and if a more suitable institutional loan program is not the better answer for your situation), is simply having the seller carry back the note, structured in a way that will facilitate a sale of the note after closing on the sale of the property that creates the note; which meets the needs of all parties to the transaction - the seller, the buyer, and the note investor!
This topic (simultaneous closing) has been discussed extensively here in the Cash Flow Forum, most recently with several indepth replies by Mike Morrongiello. Use the term “simultaneous closing” as your keyword in the search facility at the top of this Forum to pull up a mountain of helpful information you’ll need to know to have a good understanding of how this technique works, including a number of my own replies.
You’ll also find related valuable information using keywords such “creating notes”; “note clauses”; “table-funding”; “camouflaged loans”; and “safe harbors” to complete your research.
In today’s market, with the credit and LTV you describe, you have the base for a likely satisfactory conclusion to creating and selling the note. The unknown at this point is the rate and terms of the note itself, with respect to how much cash and investor will pay for it.
The final determinant in note pricing is investor’s required yield for a given note, and this is reflected in Time-Value-of-Money concept. For example, all else being equal, a note fully amortizing over 180 months will be worth much more than a note amortizing over 360 months. A note amortizing over 360 months, but paying off in full in seven years by a scheduled balloon payment, will usually be worth more than a fully amortizing note of 180 months, though this might only be a matter of degree (again, depending on rate and terms).
Terry Vaughan, Mike Morrongiello, myself, and several of our successful students will be discussing the above and many related important creative concepts in our upcoming Workshop - The Full Spectrum: How to Profit from Private Notes… Up, Down, or Sideways!, which will be held in Denver on November 3-5. For more information on that, just click on
http://www.creonline.com/cash-flow/workshop.html
Hope this helps get you on the road you are seeking to travel, and best wishes for your success.
And…
Have Fun For A Living!
David P. Butler