QUICK EQUITY w/ note sale & restructure? - Posted by Crissie C. Luckey, J.D.

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 :wink:

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

QUICK EQUITY w/ note sale & restructure? - Posted by Crissie C. Luckey, J.D.

Posted by Crissie C. Luckey, J.D. on July 10, 2001 at 05:10:02:

Hello to all your note experts out there:


I am the payor of $320k wrap at 10% for 25 yrs.
(pymt. = 2907.84/mo). The payee is willing to sell the note for a significant discount for cash.

Proposal: To sell note for about 240k (14% yield), then, immediately AFTER note sale, restructure note so that the face amount is reduced to 240k payable at 14% interest.

The restructured note could have a 5-yr. lockout period precluding refinancing for that time, or a hefty prepayment penalty to insure the investor that the note would not be refinanced right away, and s/he would get an adequate yield on his/her money.

Has anyone heard of this type of transaction? It seems to me to be a way to create significant equity, because the face amount of my indebtedness would be reduced from $320k to $240k – without any increase in monthly payments! :slight_smile:

Let me know.


Why not “tweak” another way - Posted by Michael Morrongiello

Posted by Michael Morrongiello on July 11, 2001 at 01:12:44:

We might be a “taker” for your proposal, all things being favorable.

However it very well may also be possible to modify the terms of repayment on your existing note so that they are MORE favorable than they currently are (lower the interest rate, lower the payment, extend out the ballon, or eliminate it all together, etc.) - Then this note can be sold so that the note holder gets their $240K +/- cash. In this way you are still perserving some of the “integrity” of the intial seller financed transaction, and although you may not pick up additional “equity” in the property, by virtue of the enhance repayment terms on the note obligation you have added “value” to the property, perhaps cash flow, and better financing.

Just a thought…

Michael Morrongiello

Re: QUICK EQUITY w/ note sale & restructure? - Posted by David Butler

Posted by David Butler on July 10, 2001 at 13:00:21:

Hello Crissie,

The problem I see in this proposal is twofold… in the note markets, this type of modification would likely pierce the “seller’s exemption” with regard to usury and disclosure rules… subject to whatever rules apply in the state where the property is located. Closely related is the likelihood that even if usury caps wouldn’t kick in in your state… the restructuring activities you are discussing here would likely be construed as “ostensible” lending acts, requiring mortgage licensure for the note buyer, and full disclosure according to state and federal requirements.
In addition, you have the title work and possible exposure produced in any loan modification agreement.

That’s a whole lot of unnecessary effort and risk exposure to the average note buyer. Much better for you and the noteholder to have all of this restructuring done before hand, thoroughly documented and checked for legality in the controlling state, and at least one new payment made on the restructured agreement… before attempting to sell it out in the private secondary marketplace.

Another consideration would be any state regulations that might apply with regard to lock-out and prepayment penalties. No question that these clauses will enhance the viability of the note, so long as they meet the legal requirements of the controlling state. If so, you would want them incorporated ahead of time, as part of that restructuring effort.

As to the acceptable yield for a note buyer? That will depend on the grading parameters applicable to that particular property, the Payor, and the rate and terms of the note itself. Some concise information related to those items is presented by Mike Morrongiello, right below here at:

Hope this points you in the right direction, and best wishes for your success in restructuring your note!

David P. Butler

Re: Why not “tweak” another way - Posted by Crissie C. Luckey, J.D.

Posted by Crissie C. Luckey, J.D. on July 11, 2001 at 07:42:44:


Thanks for your reply. Where did you get the idea that there was a balloon involved? There is no balloon in the current wrap note. It is a straight 25-year amortized loan.

As it stands now, I would be more interested in getting the increased equity position in the property rather than more favorable terms of the note.

I’d like to discuss this with you further. Please forward your phone number ASAP.


Re: QUICK EQUITY w/ note sale & restructure? - Posted by Crissie C. Luckey, J.D.

Posted by Crissie C. Luckey, J.D. on July 11, 2001 at 24:46:49:

I think your idea of restructurig the note with the current payee might be a good one. I’m pretty sure that the 14% interest rate and a prepay penalty of up to 5% are not illegal in my state. (don’t know about a lock-out clause, though).

I read about note buyers approaching the payors and restructuring notes all the time, so I don’t see why there is such a concern about legalities. Oh well …
I’ll check with the payee and see what she says. The only issue I’m concerned with is: how would restructuring the note prior to sale affect its later marketability should she decide to sell?