Note Seasoning - Posted by Lee

Real Estate Investing Notes
1

Posted by Michael Morrongiello on April 19, 2010 at 22:55:01:

Lee- there are a few “wrinkles” in your thinking.

  1. Your SELLING the home for $30K (that is typically the value we will use for the home NOT the alleged $50K value- now after 12 months of timely payments we can consider the enhanced value but not right away)

  2. Your selling the home to an INVESTOR (non owner occupant) Versus a homeowner user (investor payors are looked upon with more RISK than a person actually living in the home as their primary dwelling)

  3. Your selling the home with a VERY light cash down payment (not even 10% cash down)- we like to see far more cash down on newer unseasoned “paper” deals. This is the “skin in the game” philosiphy which has become so important these days…

  4. Your selling to an investor with MARGINAL credit and credit scores. These days most loans are geared to investors with 680+ credit scores.

Now where are the Positives here? - There aren’t too many except for the 6 payments paid.

  1. In 6 Months the UPB - unpaid balance due on the Note will be $26,721.99…this leaves 114 installments left to run and amortize the Note balance

A 19% YTM- Yield to Maturity funds $19,275.59

The return appears strong but it is the FUNDING EXPOSURE which is risky.

Given the # of negative weak factors above the pricing on this type of deal will be funding exposure driven (forget about yield!).

Remember the old cliche’; “Return OF your Capital is far more important than the Return ON your Capital…”

This deal will price either as a PARTIAL sale of the Note or somewhere around $15,000.00 to $16,000.00 for a FULL BUYOUT of this Risky note.

This is the mindset of most astute paper investors in todays market where on newer, unproven, or limited seasoning “paper” the emphasis continues to be on STRONG EQUITY and CREDIT.

Continued 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”

2

Note Seasoning - Posted by Lee

Posted by Lee on April 09, 2010 at 07:31:03:

How long should a note be seasoned before it is sellable?

3

Depends on the structure… - Posted by Michael Morrongiello

Posted by Michael Morrongiello on April 16, 2010 at 22:33:44:

Lee:
While in today’s economy many investors want to see a seller carryback loan seasoned for several months to established a track record of payments often if the deal is structure strong enought the “paper” can be sold with as little as (1) ONE months seasoning.

Let me give you an example;

We recently were involved helping a builder sell on of his unsold expensive custom homes. After reducing the asking price a # of times from $580K to, $550K, to $500K and so forth with NO buyers- FINALLY a buyer came along willing to pay $450K for the home.

This buyer was putting down $325,000.00 CASH towards that $450,000.00 purchase price- thats right $325K CASH DOWN! -shockingly the buyer who had a 670 middle credit score could not obtain a traditional bank loan, or any loan for that matter at any type of a decent interest rate.

The main reason it seems was the buyer was SELF employed and oculd not fully verify or document their income.

So the builder agreed to take back a purchase money 1st lien mortgage for the remaining amount due of $125,000.00

The Seller held note was set up with 9% interest and amortized over 360 Months with a 60 month balloon payment.

The parties CLOSED the sale, the documents were RECORDED and then one month went by where the 1st payment was paid on the seller held note.

We then came in and completed the purchase of the 1st lien seller held mortgage Note provinding cash to the builder so he could move on down the road.

Discounted pay price was around 83% of the balance due on the note.

It was the STRUCTURE and STRONG CASH DOWN PAYMENT which allowed us to come in and buy that Note without requiring it seasoned 6 months or longer.

Warmly,
Michael Morrongiello
www.sunvestinc.com

4

Re: Note Seasoning - Posted by SolidReturns

Posted by SolidReturns on April 09, 2010 at 13:45:29:

Most buyers, private or institutional, will want a minimum of 6 months of on-time payments.

5

Re: Depends on the structure… - Posted by Lee

Posted by Lee on April 30, 2010 at 15:03:43:

One Real Estate Guru is selling a course where you make a low cash offer to a bank on a foreclosure and then instead of wholeselling it for a $3000 markup you seller finance it to an investor or homebuyer as a handyman special for 30k. The tax appraisal on the house is $50k.

The guru said then you could discount and sell the note the next day for 15k.

The note selling part of this is the only problem that I see with this type of deal. I wanted to know how viable that this exit strategy is.

6

Sample Deal - Posted by Lee

Posted by Lee on April 19, 2010 at 22:21:34:

Michael,

Here would be the scenario.

House is Appraised at $50,000

I Wholesale the house to a landlord buyer for $30,000

The Buyer puts down $1500 and his credit score is 600
or higher.

I create a note for $27,500, 11%, 10 Year, $378.81 Pmt

Would it be reasonable for me to sell the note for
around $20k after about 6 months of seasoning? This
would make the yield around 19%.

7

Gurus of what… - Posted by Michael Morrongiello

Posted by Michael Morrongiello on April 30, 2010 at 15:31:52:

Lee:
This “Guru” I suspect is a Book & CD/Tape selling “guru” and not IN the actual business of buying or selling much seller financed Paper.

Currently there are VERY few instituional investors (and even private money sources) who will buy new, or relatively new unproven or “green” seller financed deals where there is little track record of payments established.

On occasion we (Sunvest) continue to play in that arena but our focus when buying a relatively new seller financed Note deal is;

A) To Avoid quick flip deals (rapid appreciation)

B) Require VERY strong credit on the payors

C) Want to see a VERY strong commitment or down payment (equity) into the property by the buyers/payors.

The scenario you decribed above seems to not fit or meet into any of those parameters.

We are regularly seeing self proclaimed “Guru” Promoters trying to entice Investor folks to buy these REO’s around the country (mostly in the midwestern states, or other areas hard hit with foreclosures) for low cash prices and then telling them exactly what you stated above. That they can easily sell them with owner financed terms. Which is True - they can…

Selling the just acquired home at a LARGE mark up with very little cash down to marginal credit payors who cannot obtain financing elsewhere is very possible.

Ths is often done where very little or NO fix up or renovations are being done to these homes.

However as you correctly assessed - when it comes time to sell or divest yourself of this “paper” - where you are wantingo to CONVERT the seller financed “paper” back into a lump cash sum- the market for seller financed paper created under these circumstances is VERY fragmented and virtually non existent UNTIL:

  1. Payments are paid - establishing a track record
    (typically 6-12 months or longer)

  2. Discounts of 50% or More off the unpaid balances due on the sale of the “paper” is the norm.

  3. Pride of ownership or upkeep is evident in the properties that exists

Hope this helps…

Continued 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”

8

A Sample Value… American Pickers? - Posted by David Butler

Posted by David Butler on April 22, 2010 at 14:41:51:

Hello Lee,

Michael’s two excellent replies in this thread really don’t leave any ground to cover. But for other readers too, I really want to pound home the point about the property value - as we encounter this angle on practically every single note deal I’ve seen over the past 30 years.

While there is some likelihood that people can make a great deal on real estate from time-to-time, the purpose of making a great deal would not exist if everybody could do it all the time, right? All the great deals would simply reset the market - making most of them average deals, at the end of the day.

And even in a market such as we are working in right now, we aren’t seeing many great deals. In fact, one could say that the government and the banking industry are doing all the can to stall the clearing process. So many investors diving in right now are more likely to “overpay”, rather than to make a “great deal”.

Not knowing what your situation is, it is difficult to accurately evaluate your perspective here. But still, you can look at the deal points from the perspective of two fundamental textbook values - “transactional value” vs. “cash equivalent value”, and see the issues that come into play here:

House is Appraised at $50,000. You are selling house for $30,000 (a 40% discount) with only $1,500 (3%) down, and very soft terms, and possibly a weak credit buyer??? (BTW… shouldn’t the face amount of the note be $28,500?). Can you see the problem with the valuation here?

An ALL CASH purchase for the property might help support the possibility of the higher value you indicated, if you are in a market where nobody can get decent bank financing to provide the equivalent of an all cash deal (the dominant cash-to-new-loan structure of the typical house purchase scenario), and seller-financing rules the day. And in such a market, seller-financing, particularly in combination with a low down payment, would tend to result in a “contract price” (i.e. “transaction value”), that is slightly higher than the property value.

But here, not only are you selling the property at a very stiff discount, you are offering significant concessions in the financing. The only marker of the risk/value in the deal is the 11% interest rate you set for the note.

But as Michael pointed out - “Return OF your Capital is far more important than the Return ON your Capital…”. In a default situation, it doesn’t matter what the nominal note rate is. The test is the collateral value of the real estate.

Given the sample deal structure you’ve outlined here, on the surface, an investor with any level of working knowledge has to begin on the assumption that the property value is likely going to be closer to $25,000 than it is to the $50,000 shown.

That’s a high hurdle to overcome. Something to keep in mind. And best wishes for your success one way or another.

David P. Butler
Nascent Equity &
Hotspur Investment Group