What do you want Mr. Notebuyer?

[Alfred Bell]

I'm going to sell a condo down in Palm Desert California that I fully remodeled. I want to sell it with owner financing to facilitate a fast sale (lot of inventory in the desert and market time is VERY slow). Asking price will be around 300k (which is at or a bit above the FMV). Then I want to sell the note. Before doing so I'd like to know exactly what notebuyers are looking for so that I know how to structure the note.
This is what I'm considering: 20% down, carry the paper on 240k; 6% interest; principle/interest loan; 8 year term/amortized for 30 years with balloon payment at the end; 2 year prepayment penalty; will season note for 6 months.

Is this desireable? Acceptable? If not, please give me your feedback so that I can create the optimum note to facilitate a quick sale.

Also would a note like this be bought at par or is a discount expected? If discount expected what would be the approximate discount required?

Thank you in advance.

Alfred

[Dion DePaoli]

We are buyers of performing, sub/re performing and non performing notes on a nationwide basis. Here is some insight from our wheel house.

It was only briefly mentioned and I want to put more of an emphasis. The collateral (real property) will be re-evaluated and a conservative value will be used. We and most of the pro's we work with use 30 day quick sale value from national BPO companies. No buyer is going to "push" the value up. The down payment on the loan is good and I would not lower it since this is a private loan.

The interest rate is pretty low for the loan being private. A common theme I see sometimes from REI folks is they think they have to compete with banks/lenders. Don't do it, your loan in its nature is riskier, you are not experienced at this and the borrower will be lesser grade more often then not. As I think Bill mentioned 9.0% is a nicer number, I would not go lower than 7.25%. You can write the loan with an interest only feature to it as well. A higher interest rate will reduce the new buyer discount in the event the borrower goes delinquent by missing a payment or two whether consecutive or in the life of your ownership.

Don't confuse yourself with a bank nor should you assume you should write a loan that looks conventional with its terms. Any borrower who can be approved for a conventional loan will just go get one. That should be fine with you, your paid in full and don't have to mess with a loan. This also provides an incentive for a borrower to look to refinance if rates persist over the next two or three years. As such, I would not put a pre-payment.

As far as credit goes. Everyone knows the better the credit the better. This also goes hand in hand with my point, a borrower with a higher credit score say 680+ should be talking to a bank/lender, not you. I would presume your borrower is more of a lower credit score. This could be "OK". We buy low FICOs all the time. Folks who recently came out of a foreclosure and need a new start or divorce or other life situations which given some time and rehabilitation should be able to get their score back up and go to a bank/lender. I would try to keep the minimum to 600+ but you never know if someone comes in and wants to put more money down or some other compensating factor. Be prepared to weigh all of the parameters.

The balloon is a tool that you need to use as safety net. I would set the balloon somewhere in the ballpark of 24 to 36 months. I think this ties back in with the borrower profile you will end up with. Help push them to get you refinanced out. This will also help keep some value in the loan if you sell later in the loan life. Some buyers will buy this for the chance of default by maturity and it should help you reduce the discount on UPB if he is performing. In example, if he is paying and you sell with 12 months left a 5.0% UPB discount on a 7.25% interest going to put a little less then 12.0% IRR on the table for an investor/buyer if he refinances out. The maturity time will attract some folks to jump in and see if he goes into default and take a gain on the foreclosure.

Regarding pricing. In general being a private loan you will most likely never see anything close to par or 100% of UPB. 6 months is probably close to 82% to 85% of UPB, 12 months plus you should be able to find 85% to 92% of UPB. (UPB = Unpaid Principal Balance) In the event he goes delinquent one or two times you can discount those numbers by an additional 5% to 10%. If he has more delinquencies or ends up in default you can expect to see a much deeper discounts. The good news is California non-performing bids tend to still be on the higher side of the rest of the nation because of the non-judicial foreclosure practice.

None of that is an offer to buy your loan or is meant to be any formal offer. It is meant to give you general market insight. As Bill mentioned, get some experienced folks on your side to help originate and not a bad idea to continue to find note investors to bounce the loan terms and structure off of as you move forward.

Good luck.