Posted by David Butler on July 11, 2001 at 12:18:20:
Hello Crissie,
Yep… restructuring notes is one of our big advantages on the note buying side… but, a knowledgeable note investor also is very careful when going through the note modification process.
On the other hand, you are taking a seller exempt note, written at 10% - and changing it to 14%, long with adding both a lock-out clause and a prepayment clause… AFTER selling the note. I am not an attorney, and I might even be wrong… but, this type of restructuring does send up a red flag in my mind… even though the concession to the Payor with regard to the substantial discount accuring in Payor’s favor would seem to be more than fair in terms of an equitable exchange.
I personally would prefer a cleaner paper trail as the cheapest form of insurance, myself. And again, a lot depends on what state regulations might apply, where the property is located. I do believe that “lock-out” clauses are not allowed in California on 1-4 unit owner -occupied residential properties, to the best of my recollection - and a significant number of states have regulations limiting prepayment penalties (and some states don’t allow them at all).
The note itself, before or after restructuring, has basic evaluation that still applies with regard to both the property, and the Payor. No question however, that if a bona fide appraisal supports the market value you describe, and the tremendous equity “pick-up” by way of the restructuring, that equity will definitely enhance the value of the note a great deal, all other things being equal (I assume you understand that the underlying 1st mortgage would have to be paid off out of Seller’s proceeds in this instance).
By the way… your idea itself is a very sharp concept, and a simple approach to creative real estate investing. We’ve purchased several notes after the fact of similar write-downs, albeit under somewhat different terms. If done carefully and in a manner that satisfies note buyers, you stand to have a pretty sweet deal on your hands - either when you sell the property, or if you refinance… even if a new loan was written at 10% when you refinance. You pick up close to $80k either way… not to shabby for a day’s work 
Depending on your circumstances, it might even make sense for you to gain control of the note through an option agreement or letter of intent - if it grades out, you conceivably could resell the thing, and possibly earn yourself a quick $30,000 to $50,000 cash in your jeans today…
Best of luck with whichever approach gets it done!
David P. Butler
