Indianapolis Real Estate Note - Yield Calculations

[Ben G.]

I'm not the greatest at Math so if anyone can help me calculate the yield on this deal it would be greatly appreciated.  To me it looks like a good deal.  Clause in contract makes Tenant buyer responsible for maintenance, repairs, taxes, utilities, and insurance. You will see in the contract that they are paying $604.40 per month.

The seller sold the property to the tenant buyers on Land Contract.  The details are below.  He is willing to sell to me for $18,500.   If I were to purchase this at $18,500 what would be my yield? Also, what is the formula I would use to calculate my yield so that I can learn something new!  Also, does the community see this as a good deal?  It is in a C neighborhood/ blue collar in Indianapolis.

Maybe a creative finance guru such as @Aaron Mazzrillo would be willing to lend his expert opinion?

[Dion DePaoli]

Here is what I see:

Original Loan Amount:  $29,000
Unpaid Principal Balance (As of June 1)**:  $22,997.86
Balloon Due At Maturity:  $9,676.17 (Off by -$1,857.22)
IRR***: 24.81%

**UPB - UPB assumes the period payments have been all made on time and applied properly.
***IRR: - Assumes all future payments, including balloon, are paid on time and applied properly.

The note rate is set at 6% as of October 2013.  That would be around 2.0% higher than a conforming conventional borrower at around 4.0%.  The note is priced moderately well, seemingly.  Additional interest has been added to the prevailing market rate to offset the risk of default by the borrower.  There is zero information about how the borrower was qualified for this agreement (loan), so we can not properly judge if the risk to interest idea is proper, above or below what it should be.   

In general, the Seller collected around $6,002.14 in payments (principal and interest). So, total gross profit for Seller is $24,502.14 (includes OP $18.5k). The discount here is 19.55% (to UPB). Not out of line with what we would expect for Seller Financing, but I am guessing the security instrument here is probably not correctly completed. Is the CFD recorded and what type of deed will the OP get upon purchase? Other terms within the CFD will also need to be looked.

The OP does not mention what the underlying collateral FMV is either by report (BPO or Appraisal) or even a pencil search. That is important to understand. The agreement is in the state of Indiana and a contract for deed can not be used as a circumvention of the buyers equity, or the idea of foreclosure, if you will, unless the property becomes abandoned and in one other setting, more complex than needed here for now. Essentially, the point is, the Vendee (Borrower) is afforded a right to redeem which makes the process look more like a foreclosure (judicial at that). The idea of forfeiture would not apply, so the Vendor (Owner/OP) could not simply evict. Moral of the story, there is risk, more than what is likely being sold by the OP's Seller or understood by the OP on his own merit.

Is this a good deal?  My gut says most likely not.  

The balloon would require the Vendee (Borrower) to come up with a large sum of money.  The loan balance will not be high enough to obtain a conventional mortgage.  So there is a barrier to exit.  The reasonable expectation would be the Vendor expects to stay in this loan until it is paid in full through monthly periodic payments.  This means the contract will need to be remade, which will then cause it to be an extension of new credit, which could also cause it to come under fire of new regulations.  

The OP sounds/seems like they are either being sold on the 'Yield', whether by the current Vendor or themselves.  There does not seem to be a proper risk evaluation for the asset nor the costs of defending a breach of contract.  So, considering that, the only one who wins is the current Vendor/Seller who gets to walk away.  

Be curious to know why the Seller/Vendor is selling?  Do they do this often?  

There have been many Contract For Deed threads here on BP.  Land Contracts and Contract for Deeds (same thing) are a dying instrument and really truly should not be used anymore, IMO and opinions of many others who understand them.  I have reviewed a lot in recent months and they have 98% of the time been done improperly.  They will continue to be used so long as there are investors who purchase them and do not demand a higher standard of instrument such as a mortgage or deed of trust properly executed, recorded and maintained.  The point of those who tend to deploy them is to circumvent the ideas that are go with mortgages and deeds of trust.  That is a false notion.  Courts of laws in most states treat them the same and due to their innate flaws, the owner/holder ends up on the short end of the stick, lesser to those rights and enforcement afforded in a proper mortgage or deed of trust.