Re: JBehle . . . what’s your take? - Posted by John Behle
Posted by John Behle on May 26, 2002 at 03:03:15:
Most people view them as “throw away seconds”. I always try to look for the deal and alternative uses. Possibilities from a buyer’s point of view include:
1- Buy them real cheap and go with the odds. To me that is speculation, but it depends on what you buy them for. I’m not much into speculation.
2- Use partials. You or an investor might be comfortable up to 85 or 90% ITV. So, that means the buyer could look at an offer of 25-50% of face. Is that going to fly with a seller? Not too often at the lower discounts. So, try and offer of “Staged Funding” for safety and incentive reasons. Maybe advance 20-25% of face and a little more each year as it pays timely. If it pays well, the seller gets more and you are safer. If it doesn’t, you’re covered and the seller essentially got what the note was worth. On high risk notes, many times you can have the seller keep some of the risk. Of course, in foreclosure or early payoff, it is structured so that you get your profit first.
3- Add or substitute Collateral. It may be that the buyer has some other collateral they could put up if given the right incentive. In some cases the note seller can add additional or alternative collateral. I’ve had sellers of notes put up their own homes as collateral for a bad note they want to sell. Remember, sometimes their need isn’t a sale as much as it is cash.
4- Use them in trade. Just as they may be the “icing” to you, they may be passed on in a similar manner. I’ve used them in paper trade offers and in the purchase of properties with seller financing. An anxious, flexible or deperate seller may take a high leverage note for a sale. You then end up turning the note into equity in a property. In paper trade deals, we do “lemonading”. The offer might contain 6 notes, where 5 are good LTV’s payment records, etc, but 1 is a higher LTV less desirable one. The 5 are the sugar, the 1 is the lemon.
As far as being on the receiving end of these notes:
1- Sell for cash. Find or create a buyer that is willing to deal with these notes and the higher risk. You probably won’t get much - unless you sell partials and maybe structure it as a “rolling partial” where you have X amount funded each year.
2- Use them in trades, etc. as mentioned.
3- Qualify the buyers very carefully. The demand will be high as it is such an easily doable deal. Good qualification - more than for a tenant - can help.
If keeping the notes, in many areas a wrap would be preferable. You have better control of the first and in some cases quicker and easier foreclosure. In most states an “All Inclusive Trust Deed” is the best form, but in some others, a contract for deed can actually be best. In most states, you would never want to buy on contract and in many you wouldn’t want to sell on contract either, but in some the contract can be best as a seller.
The time period, costs and ease of foreclosure varies greatly and just might not make a high leverage second position feasable, but in other states you can protect your investment much better.
Hope that addressed the question. It’s late and I might have missed it entirely.