Industry Intrest Rate - Posted by Scott

Posted by Fred-Ohio on November 04, 2000 at 16:56:43:

Dirk, a very well done explaination. Nice job!

Industry Intrest Rate - Posted by Scott

Posted by Scott on November 04, 2000 at 10:33:53:

Why is the industry standard interest rate being charged from what I see in this MB is 12.75% and when you try selling your paper to investors they want to see a 15% or more?

Re: Industry Intrest Rate - Posted by Scott P

Posted by Scott P on November 05, 2000 at 21:09:12:

I just want to thank everyone for there input and advice. It has really put some perspective on question. Thanks again and Best Riche$.

Re: Industry Intrest Rate - Posted by Tim (Atlanta)

Posted by Tim (Atlanta) on November 04, 2000 at 18:52:36:

Since I buy MH paper on a regular basis, I thought it might be good to pipe in here. Dirk, Sean and Tony are all correct. I don’t really care about the stated interest rate on the note. So long as the rate does not violate your states’ usury laws. I am looking to make a certain yield based on the quality of the note.

It is really just that simple. If the note has a higher risk, I expect a higher return. What factors make a high risk ? Less than 10% down payment, no seasoning, bad credit on the buyer, … etc.

BTW, if you can find a MH paper buyer that will pay you face value for your notes, treat them well. Can’t say as I have ever found anyone that will do that.

Just my .02

What is your exit plan? - Posted by Tony-VA

Posted by Tony-VA on November 04, 2000 at 13:28:21:

A couple of comments. When considering the stated interested when you are selling the actual note, several thought come to mind.

Assuming you know your exit plan is to create the paper and sell it to a note buyer. Note buyers are not buying the note at face value, so the stated interest rate does not impact them they way one might perceive it to.

If for some reason #1 is wrong and your note buyer is looking for a certain stated interest rate on the note, then simply create notes with that interest rate.

From what I have learned about professionial note buyers, they value a note based upon many variables in order to determine what they are willing to pay for the note. Least of which appears to be the stated interest rate, ACCEPT that some take closer inspection to notes written at very high interest rates. Not only from a possible usury standpoint, but rather as a Red Flad that the payor was charged higher interest because they may perhaps represent a greater risk than normal. So in effect, you may hurt yourself by writing notes at 19% if your exit plan is to sell off the paper.

Remember, the note buyer makes their profit in the disc ount of the note. Since they are not buying the note a t face value, the 12.75% interest has little impact.

For what it is worth, professional note buyers (I am not one of them) that I have spoken to and learned from, rely upon statistics to determine default risk. My understanding is that notes of 13% are very desirable. Lonnie simply undercuts this rate by a slice in order to make the mobile home sale a bit more enticing.

Best Wishes. Good Question.


I agree with Dirk… - Posted by Sean

Posted by Sean on November 04, 2000 at 12:57:38:

…and I disagree with him. Yeah he’s right – the yield isn’t going to be affected that much by the interest rate. But that’s missing the point of an interest rate.

What an interest rate really accomplishes is to give your payors an incentive to pay the loan off early.

For example suppose that one of your payor’s aunts (God rest her soul) passes away tomorrow. After the shock and the grief he is left $3,000 in the will. He considers for a moment whether he should buy that new car he’s been wanting or whether he should pay off his mobile home.

Let’s suppose you’ve financed him at 0% interest. I’m thinking he’s gonna buy that new car. Or if you’ve financed him at 12.75% it’s a closer decision. If he’s at 20% interest he is much more likely to pay off the mobile home.

Admittedly there is a marketing advantage to having an interest rate that doesn’t have the word “teen” in it (that’s 12.75 vs. thirTEEN or fifTEEN). On the other hand why should a note buyer care about your marketing concerns?

A note that suddenly pays off is a great boon to the note buyer because his yield goes way up. There is nothing wrong with a prudent note buyer preferring notes with higher interest rates.

Interest is really not that important because… - Posted by Dirk Roach

Posted by Dirk Roach on November 04, 2000 at 12:03:05:

Hi Scott,
A better phrase that many of us in know would use is the “Lonnie Standard” as opposed to the “industry standard”. Because He (Lonnie) is the one who came up with the magic number of 12.75%. The logic behind the number, is that he figured 12.75% sounded better than 13%. And he is right.
But really you can charge whatever you like, providing your not breaking usury and you can actually sell it.
Here’s the thing though, and you might want to explain this to a potential note buyer/ or investor:
Interest Rates in these deals really don’t mean much at all.
I mean you are talking nickel and dime as far as profit and yield.
For example let’s crunch some numbers.
Let’s say this is the deal. You buy for 3k. You sell for 9 thousand (take a grand as a downski, carry a note for the remaining 8K) Your note looks like this:

PV 8k
INT 12.75%
Term 48 months
Payment $213.63 (month)
Yield 127.16% (remember to calculate the down payment you got so really your only into the deal for 2k)
Okay this is a typical deal, and should be no problem for you to get an investor/ or sell this note to someone who buys discounted MH Paper. Let’s say you sold this for 50 cents on the dollar. Your 2 k into it and you sell for 4 k . So you put a quick 2k into your pocket.
Okay now lets run the numbers at 0% interest, yes that’s right I said 0% interest!:
Int 0%
Term 37.45
Payment 213.63
Yield 125.05% !

Now see we are talking a matter of 2.09% Interest! Wow! See what I mean it’s nothing! However look at the term. By charging no interest we actually get paid sooner. Because we are only dealing with principal.

Now let’s run the numbers at your 15%:
Int 15%
Term 50.82 months
Payment 213.63
Yield 127.42%
Now the difference is by charging more interest you have done the following:
Well you have increased your yield by .26 Wow! and you have made it so it takes longer for you to get paid, by a couple of months.

So you see interest rates really don’t factor into the deals much at all. Of course it is sometimes valuable to charge something, for one reason alone:
People who don’t know much about finance (and often times think that they do) “feel” more comfortable, going in on the deal with you. Or buying the paper. Okay cool, so charge something, basically that’s what Lonnie said to himself. So after I’m sure of a lot of white knuckle research (insert sarcasm here) he came up with 12.75%. But as I said it is an excellent marketing strategy because the market whom he’s selling too are used to paying high interest on everything and anything they buy on terms (credit), because most often they have less than perfect credit/score.
So Lonnie (or whomever) looks like a superstar because they are charging so little. Lonnie is doing these folks a favor. He is treating them right. Will they make they’re payments, I’ll tell you this they’ll pay Lonnie before they pay Visa, because Visa has gone to NO lengths that they actually care about these people.
So anyhow I hope that clears up your question, just remember the money is made on the spread here, not the interest.