The Collateral is the most important - Posted by John Behle
Posted by John Behle on October 27, 1998 at 19:26:04:
The driving factor of “What is a good note?” is the LTV or Loan To Value ratio. It signifies how much collateral backs up my loan or note. The lower the ratio the better. Most paper investors view 80% as the top range. Some will go higher if the buyer has good credit. They may get stung on individual deals and totally have their feet swept out from under them if there is an economic downturn. It’s foolish to sacrifice LTV for good credit or any other factor.
Generally a first position note is better than a second or third, but not always. You can have a better LTV on a second than on a first. Again, go with the LTV. The ratio between the first and second can be important. Do you want a $10,000 second in back of a $950,000 first? Most would scream NO! But, it depends on the value of the collateral. If the value is 1 million, then absolutely not. If the value is 5 million then, you might have an attitude of “please don’t pay me!” and hope to get the property back. Yet, can you handle this deal if it goes into foreclosure? You better be able to wrestle the first if the buyer flakes out.
Evaluating the property is the same process that you should do if you were buying it. Your bottom line assumption should be that you could get the property back. If you would not buy the property under the same terms and be excited about it, then you don’t do the deal.
The legalities of a note are handled by a title insurance policy and the review of an attorney or other pro to look for any problems.
The discounting is a one week course, but I gave some examples in another post. What yield you buy at or sell at is market driven. It’s supply and demand. The note market is an “inefficient” market. You can’t open up a paper in the morning and price a note. You have to shop it around if you are selling.
If you are buying, what is your yield? What do you want? What do you need? What can you get? My yield is based on those three questions. What do I want? Well a triple digit yield is always nice (100%+), but I’ll settle for less. What do I need? At least two percent over my cost of money. If that is 9%, then the lowest possible yield is 11%. Yet I can show you how to make tremendous profits on notes you buy at a 12-14% yield even if your cost of money is 18%. That’s a few light years beyond this conversation though.
What can I get? That depends on the competition. In some markets there is heavy competition for notes, and some have little. Yet, again, this is an “inefficient” market. All of the notes are not gathered in a room with buyers bidding for them. There is no real MLS of notes (not to put down those that are trying - it just isn’t there yet). Most note sellers don’t even know where to find a note buyer. Many note holders don’t even know they could sell. Many good notes are long gone before they see the light of day. Your typical inexperienced note broker can get totally cut out of the loop with a little bit of marketing strategy. I rarely run across other note buyers and don’t end up in bidding wars. When one is involved, they end up with a blank look on their face saying “what happened?” As the note is gone before they had a chance. A broker cannot effectively compete with someone who can write a check or pay cash within a couple hours.
What I can get in the way of yield is very much dependent on creative sources of finding notes, some marketing expertise, dozens of options of buying the notes (fueled by a problem solving approach), and the ability to move quick. You snooze - you lose. “You don’t steal in slow motion”
What yields can you expect? I can’t say that without more information about your area, circumstances, education and resources.