Posted by John Behle on July 26, 1999 at 22:24:16:
18’s pretty good in today’s market for a good note. Whether it is good enough for you might depend on your cost of money or whether funds on hand or equity is bringing you that high a return. As we discussed, equity doesn’t bring any return except the “opportunity cost” that you could borrow the funds at.
The other factor can be the other available returns. If you have other deals with better returns, then put the funds there. If higher returns aren’t coming your way, this might be a nice investment - even though there may not be much of an upside. I wouldn’t rule out a refinance. Offer a little discount or pay the loan costs and they should be way ahead of the game in today’s market.
Posted by John Briggs on July 27, 1999 at 19:58:41:
Sounds as though you have all kinds of great info here from very smart people. I was thinking you may be able to abort the demon seed before it pops by talking to the holder and applying some of the things Johns coarse suggests. Look at picking up the underlying and possibly prepaying or sinking fund enough to cover time to forclose or negociate if pmts late. Maybe suggesting that you need an option on the note to secure the money she needs, while she is thinking, as you are probably checking lots notes and need to set $'s asside for her if she really wants to sell.
Reif:
I would be cautious about buying into a 2nd lien position note. Make sure you find out clearly what is owed in front of you? What type of note terms the 1st lien has ? and that it is current?
With the prospect that this balloon payment may not get paid when due I would factor into the transaction the potential costs for feeding the 1st lien and litigation while foreclosing on the 2nd lien if need be.
2nd liens are inherrently risky and remember; If that balloon payment does not get paid when due your “yield” goes down the drain. Now that can be good or bad depending on other exit stratergies you have with the property and its value.
Posted by John Behle on July 26, 1999 at 19:33:12:
You aren’t too far apart on price. I’d follow up with an offer of 15k cash and a 5k note. Give her the last 5-13k of the note in payments or PV - depending on the yield. I’d work the numbers, but haven’t unpacked the calculator from the car - and I know you can work the numbers anyway. You can still get your 18% plus.
I very wise man once described a balloon, as a forecloseure in embryo. If you buy it, maybe you need to remind the people of the time-bomb that is ticking away. Then offer a discount. I would be nervous. With rates bound to climb up. Wouldn’t you be?
