It’s a function of supply and demand, need, cost of funds, etc - Posted by John Behle
Posted by John Behle on March 30, 1999 at 10:13:25:
If you are looking to buy for your own portfolio, then the yield depends on:
Supply and demand - What can I get - and negotiate
Cost of your funds - If it’s your capital, where is it coming from, what is the cost, what is the “opportunity cost” (what other safe rate could you invest at).
Cost of borrowed funds - If you are borrowing from an institution or an ivestor, what is the rate. I look for a minimum of a 2% spread, but in some cases I have gone for a zero spread just to get an investor involved to then make money on future deals. It’s possible to even pay an investor or institution higher than your yield on a note that you can turn or improve. Don’t speculate, it would only be on a sure deal. For example, we had an investor years ago that had a minimum yield of 18%. No way! Yet, I wanted to get him involved, so we found a way we could use his funds to buy notes at a 16% yield that we could broker (or borrow against) within a year at a 14% yield. In that case, we are dealing with the spread. It isn’t a matter of yield, it is wholesale/retail with “flooring cost”.
NEED - How much do you need to invest the funds? At times, yield can be driven by whether you have excess funds just sitting or would have to scramble to free some up. I sometimes accept short term yields as low as 21% because there are excess funds waiting for notes. 21% is not a mis-print, that is reality in today’s marketplace if you know what you are doing.
Posted by Charles - DFW on March 31, 1999 at 22:08:37:
John,
Thanks for your response.
I called on an add selling performing 1st & 2nd lein notes. He faxed me a spreadsheet of the loans he was selling.
Most of them were 2nds, at 5% LTV with a CLTV of 90-95%, and 13-14% interest. Most were 180 payments, and 6-12 months old.
I asked him what kind of yield I should be expecting and he said he normally does a little more than 18%, but because these have seasoning, it should be a little less.
I really didn’t think 6-12months seasoning was that significant. Plus isn’t a 90-95% CLTV very risky, more risk than I should take. The credit rating of the borrowers was listed as A to A- with some Bs.