What would this note be worth?

Question

I am trying to sell an 8-unit apartment building that needs a little work. I am willing to do owner financing since I own it free and clear. The problem is, I would like to get the cash rather than hold the note long term. So, I'd like to create the note, let it season then resell it.

I have an investor interested, but they want to do a no money down deal. I am not crazy about that, but they do have a point that they will be putting money into the building and making the asset worth more. Here are the terms:

Purchase price: $180,000

$0 down payment

6% interest with 30 year amortization, due in 10 years

Payments would be $1,080

So, after all of that, what kind of discount would I expect if I sold the note? How long would the note need to season? I haven't done any due diligence on the buyer, so I am not sure of their credit yet. I will definitely vet them before moving forward, but I want to see if its even worth moving forward.

Scott Arpan · Answer

Austin,

With nothing down and the property needing work, IMO you would not find takers for the note until your buyer was finished with repairs and at least 7 units were occupied.

Even then, an investor would likely only want to purchase enough of the note to be in no more than 30% of real market value. If all payments were made timely for 2 years, they might buy more payments so their total investment went up to 40% of market value. I don’t think you will have any investing more than 50% of the property’s value at any point in time. This assumes the property sold for market value and the sale price was not inflated by financing the sale. Most note investors won’t touch the note if the property is upside down.  Better to keep the sale price low and bump up the interest rate.

As for a discounted yield, 14 to 18% would be in the ball park. Your buyer’s experience renovating and managing apartments will have bearing on what note investors ultimately offer.

When you sell payments from your note, your position will be subordinate to the note investor who will hold all the cards in case of foreclosure. If in default, you would likely have an option to buy-out his position if you have the cash.

Mike Hartzog · Answer

Hi Austin,

If you sell the note, you will need to discount into double-digit yield territory, so a higher rate will help reduce the discount.  Most note investors are looking for ITV of 70% or less so you should think about this as well if you plan to sell the note.  If you want to be cashed out for the full principal amount , perhaps the better route to take here is to make a loan with a balloon payment at the point where you need them to refinance and cash you out.  Give them time to rehab, lease out, and refi.

In any case, I would avoid a zero-down scenario here.  If your borrower fails to perform, you will need to cover foreclosure expenses and holding costs over the foreclosure period. The down payment should at minimum cover these and any origination costs you are covering yourself.  With zero down they have no skin in the game so they can walk away, lose nothing, and leave you holding the bag.

Bob E. · Answer

With Zero down most note sellers are not going to be comfortable an will probably discount it to $144,000 just to get to an 80% LTV.

How much cash do you need out of the deal?  There are a couple of strategies.

A better strategy would be to write two notes, a 1st and a second for 75% / 25% respectively, then you can sell the first note without having to discount to get a lower LTV and hold the second.

Alternatively you could sell just some Front end payments, that would also keep the LTV down for the buyer as well.

Jay Hinrichs · Answer

Account Closed

HUGE discount... you could sell a partial and that would probably be tolerable .

Account Closed · Answer

Thanks for the feedback @Scott Arpan

That certainly paints a less than desirable picture of the situation. I'm hoping it will turn out better than that. The required repairs are all minor (mostly cosmetic updating). The majority of the work is going to be getting the placed turned around in terms of management. The property actually appraised for $200k back in 2009, so I think with a little work they can get it back to that.

Ideally, I'd like to sell the note after about 6 months, but if that doesn't work out I will be fine receiving payments for longer.

Account Closed · Answer

@Jon Klaus

The property needing some work and needing a bit of a turn around  makes it a bit of a tough sell. It would be hard for a bank to finance it with the current situation. So, owner financing seems like a must in this case. I would take much less if a cash offer came along.

Account Closed · Answer

Great. Thanks Mike!

Account Closed · Answer

Very good points @Mike Hartzog . Any idea how much the foreclosure process costs in NC?

Account Closed · Answer

That is what I was afraid of @Jay Hinrichs

@Bob E.

Writing 2 notes is a great idea! What I really need right now is about $100k cash, so selling the first and keeping the second note would be a good option. If I went with a 75% first, how much would I have to discount it to sell to a note buyer?

Jon Klaus · Answer

Why don't you sell it out right, Austin? What would it bring if you were not offering financing?

What would this note be worth?

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