Note for sale - what's a fair price? - Posted by Joshua Martino

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Posted by Michael Morrongiello on August 06, 2008 at 07:06:39:

Joshua:
Looks like something “funny” has gone on here…

Not sure WHEN this investor acquired the property and for how much? (but I suspect it was for FAR< less than the sales price he is or did sell the property for recently and create “terms” or seller financing)

What makes a “good” note…

Well they come in all forms, shapes, sizes, property types, etc. - so your parameter are just a start to look at. In my 25+ years of buying, brokeing, investing, in seller financed “paper” - there is one CARDINAL RULE we continue to harp back to;

DON’T BUY THE NOTE (at any price) - IF YOU ARE NOT COMFORTABLE WITH OWNING THE PROPERTY…

So, either through discounting, yield, or some other creative approach to buying the seller financed Note (like structuring a PARTIAL purchase of just a stream of some of the installment payments to keep ones ITV- Investment to value down to a comfortable level)- remember that if the Note stops performing down the road you may end up owning that collateral.

So - ask yourself if you invested $19K and had to then fund some additional “headache” expenses for attorneys fees, court costs, frustation, of taking back this property in this area of town, etc. - are YOU OK with that?

Balancing your answer with the YIELD should help guide you.

Michael Morrongiello
www.sunvestinc.com

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Note for sale - what’s a fair price? - Posted by Joshua Martino

Posted by Joshua Martino on August 05, 2008 at 08:45:24:

I noticed the following note up for auction and I’d like to use it as an exercise to learn how to evaluate what’s a fair price, what’s a good deal.

http://www.bid4assets.com/auction/index.cfm?auctionid=390021

Loan Information
Current Balance $39,400
Rate 8%
Payment Amount $300
Number of Original Payments 314
Number of Payments Remaining 314
Next Payment Due Date 08/01/08

Min Bid is at $19k. Given the last sale, I wouldn’t consider the last county assessed value ($89.6k) as too relevant.

zillow.com shows the most recent sale 8/30/07 for $48k - http://www.zillow.com/HomeDetails.htm?zprop=1103965

Other than $39.4k/$48k leaving about 18% equity I have no relevant info on the payor at the moment.

Quickly going over the note details with my calculator, the monthly payment should be exactly $299.89, so it checks out.

Let’s say I’d like to buy this with 18% discount (is that the right terminology?). If I pay $19,806.49 I should have exactly 18%.

Since the min bid is $19k, let’s say I’d get it at that price - it’d be @ 18.80%.

Thoughts? Are my numbers correct?
What questions (other than the payor’s payment history) would be relevant to ask of the note seller that would help with this decision?

Regards, Joshua

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Pluses Vs Minuses… what are they? - Posted by Michael Morrongiello

Posted by Michael Morrongiello on August 05, 2008 at 12:29:29:

Joshua:
IF the ORIGINAL # of payments was 314 and there are still 314 payments remaining it appears that this Note has now payment history associated with it.

Without more details about WHAT type of sale price the prperty SOLD for, the amount of cash down from the buyer, etc. - there is more RISK associated with such an unproven Note.

Regarding your calculations; if you choose a YTM - YIELD TO MATURITY requirement of 18% then that would discount the note down to $19,813.49

N= 314
I = 18%
PV= - 19,813.49
PMT = $300.00
FV= 0

The $19,813.49 you would fund for the purchase represents 50% of the oustanding current balance of $39,400.00

Your “ITV” investment to value will depend on the actual FMV -fair market value of the home. E.G. Lets say the home is valued at $48,000.00. Then the $19,813.49 / divided into the $48K FMV = 41% ITV

Credit, occupancy, condition, “pride of ownership”, etc. - all are issues to have addressed in addition to READING and reviewing the relevant documents.

Now, lets say this home was sold with NO MONEY DOWN, to borrowers who are non owner occupant investors, who also are not personally liable to repay this debt, where the home is still vacant, is located in a marginal area and needs additioal fix up work, etc.

Without some “spin” or input on these cumulative issues- its hard to say whether investing $19K to buy this Note is a good deal or not or even “Fair”

Best to your success;
Michael Morrongiello
Paper Practioner
www.sunvestinc.com
Author of the following home study courses;

Paper Into Cash - The Convertible Currency - How to Effectively Create Marketable Real Estate Notes
&
The Unity of Real Estate & “Paper” - Advanced techniques for both the acquisition and disposition of properties using Real Estate “paper”

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County assessor info sheds some more light on this - Posted by Joshua Martino

Posted by Joshua Martino on August 06, 2008 at 01:33:40:

Thank you for your time Michael.

I was curious and looked into this a bit further.
County assessor’s office (notice the adjustment between 2005 and 2006 - post Reassessment value):
http://cms.indygov.org/MyAssessedValue/Result.aspx?Parcel=1068050

The owner is likely an investor (TYTEN Properties LLC)

Given this information, the note doesn’t look too good even at $19k, does it.

Just for the sake of argument, could you define some minimum requirements (for the payor/property/equity) where you’d consider this note to be a decent deal for $19k?

Would owner occupied, 10% down, $45k FMV, owner 630+ credit score be sufficient?