Flipping in this market by creating notes - Posted by Kristine-CA

import · September 27, 2007, 3:09pm

Posted by Truth Teller on September 30, 2007 at 08:12:58:

OK that makes much more sense that as a Note Buyer you at your expenses will AUDIT the appraisal against the new CURRENT opinion of Value…

I just could not see you buying a Owner financed note for a property sold in June in Vegas using the June appraisal you would be WAY out of your cushion as the values have dropped!

Thank you for clarification Makes better sense to my Dense head now…

Given your writing style I bet your course is very well written!

import · September 27, 2007, 3:09pm

Flipping in this market by creating notes - Posted by Kristine-CA

Posted by Kristine-CA on September 27, 2007 at 15:09:56:

Back when I started re-selling properties in 2000 I looked into creating notes
and selling them at closing to receive a cash profit. I ended up never needing
to go that route as the market went crazy. It became possible for me to close
on the deals with my own funds or hard money funds and re-sell them for
maximum profit. There were plenty of cash buyers or investors with
financing. Now the market has changed where I am (Central CA) and the loan
products have really changed.

I’m wondering, for those of you who broker paper, if your investors are more
cautious when it comes to to unseasoned paper, even with A credit
borrowers? Do you have any such investors still? Are they waiting to see if
values will drop lower?

Say I can buy for $100K and I’m able to sell for 200K offering seller carryback.
(Presume the $200K sale price to be current and accurate FMV). Buyer has
10% down and credit is mid 600s with documentable income. Are there
buyers for this totally unseasoned paper? At what kind of discount?

I would like to work more with owner occupant buyers now. Is the create a
note and sell at closing thing still happening. Kristine

import · September 28, 2007, 7:32am

Your numbers Discounted - Posted by Truth Teller

Posted by Truth Teller on September 28, 2007 at 07:32:58:

You buy prop for 100K

You sell for 200K

10% from Buyer= 20K
10% from Seller second= 20K

80% first lien = 160K

85% of 160K = 136,000

you get:

156K plus a 20K note minus closing costs

20K from Buyer
136K from Note guy
20K note (worthless Mostly) but if they pay good deal…

so your 200K Sale for which you will be taxed at 200k gross will net you a note of 20K cash of 20K and then you can reduce your taxable gain by the difference between 160 and 136K or 24K discount…

Taxable Gross sale of 176K with 156K cash recieved and a note for 20K…

Run it past your CPA to make sure I am not just an idiot on the tax consequences of selling on paper…

import · September 27, 2007, 3:50pm

Flipping WORKS still by creating notes - Posted by Michael Morrongiello

Posted by Michael Morrongiello on September 27, 2007 at 15:50:20:

Kristine:
So many folks in the REHAB business are distraught these days. Many are entering “REHAB” because they can no longer readily and easily SELL their inventory.
Instead of Flipping they are Flopping…

YES, I can assuredly state that we (Sunvest) still and many other “paper” investors still are buying properly structured seller financed Real Estate secured “paper” whether its sesaoned with a definitive payment history or not.

Clearly during the current “credit crunch” the parameters have changed a bit as well.

We generally like to see and prefer these days to deal with owner users as the prospective buyer/ payors on the seller financed Note.

Additionally there is a preference for at least a 10% or more cash down payment from the buyers.

The “suggested” interest rate plateau is 9% or higher.

And our preference is to work with CLEANER credit, higher credit score buyers (of which there are PLENTY of them these days given the credit crunch). Suggest 650+ buyers on the middle credit scores.

In some cases in order to mitigate discounting we advocate you also take back a smaller 2nd lien in addition to an 80% LTV seller financed 1st lien. We will BUY the 1st lien with an average discount depending on structure in the 85% +/- range. You retain the 2nd lien.

With higher credit scores the 90% LTV seller financing is still OK.

We have been advocating for years to STOP relying on traditional mortgage financing programs because as the money market expands and contracts you become vulnerable. Today, in this “credit crunch” with the MUCH tighther qualifying standards, even clean credit buyers with money to put down are having a hard time getting loans. Seller financing those folks and becoming your own so called SUB PRIME LENDER is an option that can still work.

Best to your success;
Michael Morrongiello
www.sunvestinc.com

import · September 28, 2007, 10:23am

SELL Today or discount your price - your choice - Posted by Michael Mororngiello

Posted by Michael Mororngiello on September 28, 2007 at 10:23:36:

Hey Truth Teller:
You might wish to review the below post;

Dealer Status - Seller Financing STILL possible

http://www.creonline.com/cashflow/wwwboard3/messages/23375.html

It deals with the concern about “dealers” selling propreties and also financing them by taking back “paper”.

Michael Morrongiello

import · September 28, 2007, 8:17am

Re: Your numbers Discounted - Posted by Kristine-CA

Posted by Kristine-CA on September 28, 2007 at 08:17:42:

Thanks for outlining the numbers above. The thing that gets me is the
discount purchase. I’m an experienced purchaser of discounts. But my
experience is with distressed properties and/or title issues.

In the note scenario here, in order to profit 20K plus a throw away note
I have to purchase a $200K home (today’s FMV) for 130K. This
assumes no repairs, etc. That’s 65%. So I’m purchasing at 65% but
being paid agent’s wages. I’m confused…or spoiled…or both.

Regarding the tax consequences: your comment about being taxed
200K gross or 176K gross does not make sense to me. Since when
have I ever been taxed on the gross of anything? Kristine

import · October 8, 2007, 12:42pm

Re: Flipping WORKS still by creating notes - Posted by Andrew

Posted by Andrew on October 08, 2007 at 12:42:14:

Hi Michael,

I’m a big fan of seller financing and have sold a few houses and many mobiles using it. Typically I hold the paper and wait for a refi. Right now I have a couple of properties that I’d like to sell now and have thought about seller financing and then selling the paper.

However, with the criteria you’ve listed (e.g. 650 FICO, 10% down, 9% APR) I don’t really see much, if any, difference from what a typical lender would require. Of course, the big difference on my end is that I don’t take a discount if the buyer is financed by a bank.

So, I’m trying to figure out what a typical lender (e.g. BofA, Countrywide) requires that you do not? Do you verify income, DTI, etc?

Thanks for your help.

Thanks,
Andrew

import · September 28, 2007, 12:47am

Re: Flipping WORKS still by creating notes - Posted by Bob Smith

Posted by Bob Smith on September 28, 2007 at 24:47:48:

Is the 90% LTV first (+10% down right?) still a ~15% discount, or is the discount even higher despite the better qualified buyer?

import · September 27, 2007, 5:45pm

Re: Flipping WORKS still by creating notes - Posted by Kristine-CA

Posted by Kristine-CA on September 27, 2007 at 17:45:47:

Michael: one more question about the “smaller 2nd lien.” Typically,
what percentage of the loan amount are you asking the seller to
carryback? 20%? 10?

When I work the numbers for deals I have in front of me, it seems to
me that I have to have a very good deal in order to profit on a flip by
creating a note to sell at closing. I understand that I retain the
downpayment and the note but in order to profit further, I have to have
bought (and or rehabbed) for a very good price indeed. I thought I was
pretty good with buying at a discount, but I guess those appreciating
years messed with my thinking…and my expectations. Thanks,
Kristine

import · September 27, 2007, 4:11pm

Re: Flipping WORKS still by creating notes - Posted by Kristine-CA

Posted by Kristine-CA on September 27, 2007 at 16:11:20:

Dear Michael: thank you for your reply. Since posting my question I’ve
read many threads of a similar nature where you and others have
already addressed the question of creating notes to be sold at closing
in the current market. I thank you and David and John for the very
good and detailed information provided.

All of the things you outlined are do-able: owner occupant buyer, 10%
down, 20% seller carryback, 9%+ interest, selling the 1st at a 15%
discount. While 650 credit scores are out there, I know that will be a
challenge in my market. I’ll have to rethink my marketing for buyers
on that one.

I am assuming that you have people in various areas to do appraisals
for your deals. Are you seeing more deals where the appraisals don’t
match sale prices? My observation of seller financed deals from the
past in my market is that the sale price can be really inflated.

Thanks again for your help, Kristine

import · September 30, 2007, 8:45am

Taxes owed (sale minus total basis)-paper or not - Posted by Truth Teller

Posted by Truth Teller on September 30, 2007 at 08:45:21:

Kristine:

Simply as I understand it…

When I sell title/escrow will send out a 1099 that says I sold for 200K…

It is upon me to prove through my tax return and record keeping what my basis is… Purchased at 100K fixed up for 20K = 120K basis + any closing costs at aquisition… + any closing costs at sale and everything in between.

I then depending upon my holding period may or may not have Depreciated the property which would lower my basis… or I could have additional expenses which may or may not increase my basis… ( this is why CPA’s earn their money, some of them)

So when sold my 1099 arrives with 200K whether I got cash, carried paper, some of both and

I then take whatever my basis is at the moment ( including the Purchase closing costs and the Sale closing costs )and subtract that from that gross amount of 200K

if it is a regualar sale( no paper) then I am taxed at my gain no prob…

If I carry Paper then I am taxed at the FULL sale value and depending on my staus as a DEALER or investor I will either have to pay ALL the taxes now ( full sale price - total basis = profit {even if I only got paper}) or I can elect to use the Installement method (which means I pay taxes as I recieve the payments)…

so what may happen to some investors moving multiple proerties in a year is if they are classed as a dealer then they HAVE to pay the taxs on the full amount even if they took paper back as a majority…

What I meant earlier is that if you DISCOUNT the note in the previous example and get CASHED out of you note then any DISCOUNT you took would lower the amount you owe in taxes as long as it took place in the same year as it would lower your SALE price by the amount of the LOSS or discount you gave to the note buyer as your New equity partner…

I am not a CPA so please run it past a CPA who has experience in note purchsing and selling as they can help you mitigate your taxes exposure…

But there is a Fact that one could find themselves owing taxes on a “note based” sale when the investor did not actually recieve the cash upfront but still must pay for the full value of gain upfront…

Michael is very initmate with the Note business and likely work with you and your CPA on any transaction he is involved with to make sure your are covered…

Michael is also very correct is that Note based sales can Move a property today ( QUICK) and the note buyer becomes an equity player via the discount they achieve off the note you sell them… when you discount the NOTE it is a loss against the asset and can be taken right then mitigating the amount of taxes you owe…

You could elect just to lower the price and hope it sells Quick…

if you are not a dealer in the eyes of the IRS then many CPA’s will elect to use the installment method for you cap gain taxes due and you will not be as effected…

not sure what the current number of transactions a year it takes to be a dealer check your CPA for the answer…

Anyway your point about being taxed at gross was correctly positioned as I should learn to be more thorough…

I am looking earnestly into unloading my properties through discounted notes as values are continuing to fall in the Bay Area on some of my holdings. Especially my Daly City stuff

And actually I would hope a CPA would reply to this more correctly as I am not a tax expert!

let the truth be told!

import · September 27, 2007, 4:22pm

Re: Flipping WORKS still by creating notes - Posted by Michael Morrongiello

Posted by Michael Morrongiello on September 27, 2007 at 16:22:21:

Kristine:
Believe me there are a lot of buyers out there these days who suprisingly have strong credit.

However in todays market I would not dip under 630 as a middle credit score for an unseasoned “new” or as David likes to say “Green” unproven seller financed Note.

The following AXIOM migtht guide you;
The lower the credit scores, the lower and more conservative the LTV - loan to value should be (80% LTV or and higher).

As far as appraisals, - we will require a current FULL BLOWN appraisal of the subject property with interior photos along with a copy of the appraisers state license and qualifications. The “comps” used must be in close proximity to the subject property and recent comps.

There is no reason why one cannot get or obtain the appraisal FIRST to determine approx. value or resale potential before marketing the home for resale.

That appraisal is good for 90- 180 days.

Michael Morrongiello

import · September 28, 2007, 7:42am

Appraisals are good for 90-180 days WHERE??? - Posted by Truth Teller

Posted by Truth Teller on September 28, 2007 at 07:42:46:

What markets are you comfortable Buying notes based on 3 to 6 month old Values???

In your own back yard you would buy notes on 6 month old value in the BAY area? with a 10-15% slippage in value at a minimum already?

import · September 27, 2007, 4:55pm

Re: Flipping WORKS still by creating notes - Posted by Kristine-CA

Posted by Kristine-CA on September 27, 2007 at 16:55:03:

Michael: all good points, thank you. And very good point about working
with a current “full blown” appraisal before re-marketing. Kristine

import · September 28, 2007, 10:13am

HERE - Appraisals are good for 90-180 days - Posted by Michael Morrongiello

Posted by Michael Morrongiello on September 28, 2007 at 10:13:50:

Hi Truth:
We clearly always prefer a CURRENT or RECENT appraisal. However oftentimes files come to us where a borrower or seller had an appraisal done months ago and now wish to still use that report rather than incurring the expense of another report.

The question which was addressed involved how dated can an appraisal be before it is considered “stale”.

Generally a 90-180 day old appraisal inspection date is considerable acceptable providing the Comparable sales of other SOLD properties “comps” which was used in that report are RECENT comps. We’ve seen appraisals which might be 90 days old that used prior sales comps which were also 180 days or longer ago. So, an appraisal dated June of this year might have comps from early 2007 or even 2006 used. This is completely UNACCEPTABLE and worthless. That type of appraisal report would have to be RECERTIFIED with current comp data and / or it might make sense to simply have a new apppraisal done.

Additionally I might add we internally will always conduct at our own expense additionally a CURRENT opinion of value. This is done to see what variance if any might exist between what the supplied appraisal indicates and our report.

We will purchase new seller financed “paper” in ANY state. Clearly in marketplaces where foreclosure activity is high we will suggest the structure of the deal be a bit more conservative.

Hope that provides some more clarity.

Warmly,
Michael Morrongiello