Would you buy this note?

Question

I had a thought after talking with a note broker locally. Can I create and sell a note to finance a flip?! It would look like this:

9% APR on $120,000 secured by a property currently assessed for $145,000. 12 month call, 6 months of payments held in escrow for note holder's security, 6 months payments available in bank.

I'm making payments and either refi-ing out in 12 months or selling.

What do you note moguls think?

Dave Van Horn · Answer

Hi Derrick,

You had asked me to chime in the other day, so I've been thinking of something new to add to the thread. To start bluntly, no I would not buy this note. The return isn't high enough and it's too short term for me personally, plus the LTV isn't too enticing either. But then again, I'm a note mogul haha ;)

In all honesty though, I agree with everyone above. Hard or Private Money for your flip is what you're really looking for. Notes are another animal. The trick is to play to the strengths of each investment strategy depending on the scenario, and to use them  as if they were a tool in your tool belt. There are plenty of other opportunities to utilize notes to help fund deals/recapitalize such as completing a collateral assignment of note and mortgage or by selling a partial note. Outside of that, I find the best ways to make a profit with notes are by buying and holding notes for cashflow, flipping notes (whether you broker or take title), rehabbing the paper (i.e. making a non-performing note into a  re-performing one again), and/or foreclosing to obtain the property (not my favorite option because I'd rather manage the paper rather than manage the property).

Hope this answer can give you some clarity and give you more ideas for the future.

Best,

Dave

Don Konipol · Answer

You can create a note with any terms that a note investor/lender will agree to.

Other than getting a private loan from an uncle who wants to help you out, or a naïve newbie, the interest rate, points and fees will be reflective of the perceived risk.

In you example, let's assume $145k is the as is value.  This is an LTV of 80%+, a very high LTV in the private mortgage world.  Further, assuming you are structuring this deal with little or none of your own money, the risk is increased exponentially.

A 9% rate, with say 2 points, would USUALLY apply to a 50% LTV loan with a 20% capital contribution from the borrower

I would think that to interest a SOPHISTICATED lender with 80%+ LTV and no down payment, one would be looking at 18% interest, if he can get the deal done at all.

Borrowing to finance a real estate deal creates a new note, which significantly differs from a SEASONED note and from a NON PERFORMING note.  Don't make the mistake of trying to extrapolate information as to market value of existing notes to a new note.  They are different animals.

Note investors/lenders can invest through intermediaries in vetted deals and earn 10 - 14% interest, with 12% being the go to default rate.  So this is what you are up against.

Marc Faulkner · Answer

It sounds like you are really looking for a loan against the property you are rehabbing / not creating and selling a note here.  Notes are sold at a discount, so regardless of what the note broker is telling you, I don't see this working.

Mike Hartzog · Answer

You bet.  This is what hard/private money lenders do.  You may not be able to get the specific terms you called out, but borrowing money to fund flips is done all the time.

David Oldenburg · Answer

@Derrick S.  I would not buy this NOTE, but have an idea of what you can do.  I am guessing you don't have the capital to buy the flip, so you have this great idea to create your own NOTE to yourself and then sell it.  In theory, it's a great idea.  However, as mentioned above, the high LTV, no downpayment, and low return, it is just not attractive.  Again, people like me with our own money, have people calling us every day willing to pay 10% to 15% with 2-4 points, and sometimes lower LTV's.  So, here is my thought of how you get this done...

You have a property worth $145,000 and I am guessing it is owned free and clear.  It also sounds like you need $120,000, evidenced by the size of the NOTE you are wanting to sell.  It is very easy to get a 70% LTV Hard Money Loan (HML), at say 10% with 2 points.  There are also private investors who will do a 70% LTV loan on a flip, especially if it will be worth more after rehab.

If you only need 30% of $120,000, that is $36,000.  The problem you had before is that you were offering a high LTV loan, with a lower interest rate.  Have an investor from BP's or any other location, loan you $36,000 on a 1st Deed of Trust, at a rate of at least 10%, for a 12-month period.  That is a 25% LTV based on your value of $145,000, and exceptionally low risk.  Good Luck!

Derrick S. · Answer

@Don K. Thank you very much for the concise run down, and benefit of experience. It's good to know what I'm up against.

@Mike H. That's my intention, to find yet another funding source. It does sound to me very much like a HML situation, but approached backwards.

I'm interested in all your answers for these reasons: Notes are perceived to have less risk, and seem to be a more attractive investment to those investing an IRA - since they're so defined and cleanly bought.

I am meeting with a note broker, local to me, to see about creating this note and selling it to his network. After hearing a brief synopsis of the deal he said it "could be do-able."

If it works I'm afraid I'll have treat him like an excellent tailor, and keep him a secret while never speaking his name above a whisper.

Please keep the opinions and insights rolling in?

Mike Hartzog · Answer

I should have mentioned that you want to connect directly with the lenders, not note broker.

Would you buy this note?

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