When You Can’t Sell Your Note, Do a Little Rain Dance - Published in the Temple City Tribune
July 16th, 2009 categories: Note Business, Selling Your Note, Temple City Tribune
As a note broker, I’ve had my share of notes that I simply couldn’t do anything with. Here’s one I was presented with recently:
A delinquent seller carry back note secured by commercial property in West Palm Beach, Florida.
The original deal looked like this:
- Purchase price: $510,000
- Down payment: $76,500
- 1st TD: $433,500
- Interest rate: 7.5%
- I/O monthly payment: $2,709.38
- Due in: 60
The seller/note holder had received payments like clockwork for 2.5 years, and then, the tenant of the 3,000 sqft warehouse started defaulting on his lease. In the interim, the property buyer/owner had lost her job, so she had no way of making the payments on the note.
The note holder no longer lives in Florida, she lives in Southern California. This was a headache she just wanted out of . . . if she could get at least 50% of the loan balance.
Most commercial property is heading toward a world of hurt. Even assuming that once the defaulting tenant was evicted, another tenant paying $3,000 a month could quickly be placed, the maximum value of the property at a 12 cap was something like $300,000.
So, I told the note holder that she would be very lucky to get 50% of the value of the property, or $150,000, and asked if she still wanted me to keep working on finding a buyer. She said ‘yes.’
I sent the note profile out to several buyers, and got virtually no response. No one wanted a commercial note in Florida that was in default.
So, I decided to give up . . . NOT.
I started thinking about other ways that the problem could be solved. If the seller would be willing to put the property on the market and sell, I could negotiate a short sale on behalf of my client, the note holder, and she would walk away with more than she could possibly hope for on the secondary trust deed market.
So, I posted a referral on Active Rain (a social networking site for real estate professionals). I communicated with 3 or 4 agents in West Palm Beach, and told them about the situation. As it turned out, one of them happened to know the owner personally.
They went to their friend about putting the property on the market, with a guaranteed short sale approval that would leave some money on the table for her. Nope . . . she wouldn’t do it.
Somehow, without personal or rental income, she was going to find a way to keep the property. Hmmm.
OK, let’s go with the flow . . . what if I could find a private lender that would give the owner a hard money loan? Then I would simply negotiate a short refinance (say around $150,000?), and still get my client what she wanted, leaving the owner in possession of her precious commercial property.
I don’t have the final word on this deal yet . . . I’m still waiting for the story to play out, but it’s fun to realize how many different ways there can be to create a solution. Note brokers and real estate brokers can often help each other out.
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A Note from Jerry …
July 12th, 2009 categories: Jerry's Notes
You can wait …
For the right government leadership, reduced taxes, calorie-free lasagna, and your lousy boss to retire, or …
You can go to work on YOU!
When YOU get better … it all gets better.
“Sometimes you just have to create what you want to be a part of.” - Geri Weitzman
How inspired is your creation today?
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Simultaneous Clothes - the Simultaneous Note Sale for Real Estate Investors - Published in the Pasadena Independent, etc.
July 9th, 2009 categories: Seller Financing, Selling Your Note, Thursday Weeklies
It’s hard to keep covered against the chill winds of the market sometimes. Perhaps it’s possible to get a nice, thick sheepskin warming the front half of your body, but investors, builders and developers are increasingly finding their backsides completely exposed to the elements . . . brrrr!
If you’re a real estate investor, investing in shorts sales and REO’s, how can you keep clothes on both sides of your body simultaneously? Is there a way around the seasoning issues that hang these deals up?
What in the heck am I talking about?
Here’s a typical scenario:
Investor buys REO bank foreclosure for 50 cents on the dollar or less. They get a great price (that’s the sheepskin in the front), but they’ve used hard money at 12% with a 1 year balloon, so they need a quick exit strategy.
That’s where they start to feel a bit naked, because it’s harder and harder to pull off a quick exit for full asking price these days. Investors/rehabbers are often left exposed on the backside because they can’t flip the property around in a timely manner due to seasoning issues with conventional lenders. This lag time eats heavily into profits.
This leads to a flash of inspiration. The investor thinks to himself:
“Ah hah! I’ll buy cheap with all cash, and just use seller financing to sell this property quickly for the highest possible price, and then I’ll simply turn around and immediately sell the note to a trust deed investor, grab my profits and be out of the deal.”
It’s just that simultaneous clothes aren’t as fashionable as they used to be. There just aren’t a lot of investors lined up to buy these types of notes any more, and the ones who’ll buy them want steep discounts.
Seasoning is an issue. In general, note buyers want to see that either,
- the seller owned the property 12 months before selling it, or
- he has received at least 12 months’ worth of payments from the buyer before trying to sell the note
So is the ‘simultaneous close’ really dead?
Yes and no . . . there’s a niche product that circumvents the traditional seasoning issues and acts as a true simultaneous close, paying .85 cents on the dollar.
How can they possibly do this? Most note buyers are only paying 70 to 80 cents on the dollar, starting with a note that is no more than 80% loan-to-value (LTV).
They underwrite the deal from the very beginning.
The prospective buyer fills out a 1003 (loan application) and pays for a credit report, and the investor reviews the file. Some buyers will qualify (FICO 600+) for the program, some won’t (credit scores below 600 are not impossible, but will require some seasoning before the note can be sold).
If they do qualify, here is a sample of what an average deal might look like:
• Only offered on owner occupied SFR’s (no mobiles or row homes)
• 5% cash down payment
• Seller carries a 15% second
• Seller creates and immediately sells an 80% first at .85 cents on the dollar
• Face interest rate on the 1st note will be somewhere between 8.5% - 10%
So, here’s what the numbers look like:
• Purchase Price: $100,000
• Down Payment: $5,000
• Seller Carry 2nd: $15,000
• Seller Carry 1st: $80,000
• Proceeds From Selling 1st to Note Buyer: $68,000
The seller/investor/builder walks away with $73,000 ($5K + $68K) cash and a note for $15,000 that will get paid off when the buyers refinance, so they snag $88,000 total for their $100,000 property.
It’s not a golden hammer and won’t make sense for everyone, but it is an option that’s out there if the seller can absorb the 15% discount and wait for the 2nd to pay off down the road.
And even though the buyer will have what sounds like a high interest rate, most of the time they still come out ahead owning instead of renting on an ‘after tax’ basis, and it’s a way for them to get around the cracks of conventional financing that some buyers fall into.
When the financing machine is rusty, we need to look for ways to lubricate the system and get those creaky parts moving. Buyers need to buy and sellers need to sell.
The simultaneous clothes is just another way to dress it up.
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- Check out this page for more info on the ’simo’
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