How to Structure a Note for Highest Resale value

Question

Hello BP!

So this is the short version, I purchased a property at a sheriff auction a week ago due to a HOA lien, which was in second place to a very small first mortgage in good standing. Through all my due diligence, I was confident the property was vacant. Turns out its occupied by the loveliest woman who wants nothing more than to stay in her home. I've been trying to help her refi, to redeem her property, but its not going to work through a regular bank, so I'm going to seller-carry it back to her.

IM looking to carry a 80k note on a property worth 265, in its current condition, or 290k totally remodeled. Ive researched the Dodd Frank, and was surprised to find the 30 amortization requirements because I know several investors in my area are not following this rule, Does anyone know how other investors are getting around this? I would think a shorter time frame would make the note more desirable?

Im looking to keep her monthly payment for principal and interest around 800. Would I be better off, in the resale note market, having a higher interest rate over more time or visa versa? How much does a note buyer care about the credit of the debtor, as hers is great; or is LTV more important?

I Am willing to carry this but will have to do it personally as the current structure and restrictions of my LLC do not allow me to hold notes, and want to set it up to get the best return, should I need to sell it later on.

Not buyers: What are the top few things you look for in buying a note, and what kind of a discount off of face value are you looking for based on the criteria of an individual situation? (best/worst case Discount)?

Will Fraser · Answer

I love the redemptive and solution-mindset you have here, @Brooke Templeton! The caveat is this: you bought the property at sheriff's sale . . . i.e. this owner has already not performed on her obligations and lost their house to a foreclosure. That would mean that you're selling a note with a relatively high risk from the debtor's side. Then when you consider how to fix the payment at $800 you are going to HAVE to keep it unrenovated . . . which means that your total value is suppressed here.Perhaps this is one you can carry personally for whatever season it is needed and then pull the "highest profit" lever and position it for the note to be of maximum value when you're not trying to keep payments at a certain level?

Bob E. · Answer

Note investors look at several things. Property condition and value (In case they have to FC)Borrower's ability to repay (Using an RMLO will help with this)Payment historySeasoning (How long has the borrower been making on time payments.Clear chin of title ( you might want to get a title policy to back up that sheriffs deed)The note itself, Rate, Term, Escrows etc.I would recommend structuring the note to Require escrows for Taxes, insurance and HOA.Have an interest rate between 8 and 10%Have the borrower pay the servicing fee (Usually between $18.50 and $35 a monthI would then place the note with a servicer, there are a lot to pick from Allied, Madison, FCI, etc. My experience has been that FCI costs more but the borrower gets a full monthly statement. Allied is cheaper but only gives your borrower a sheet of payment coupons.If you are selling the note most investors want to see a on time payment history although having an 80k balance on a 260k house will be enough for some. You can either sell the whole note and be done or sell a series of payments. For example, 80k at 9% for 360 months gives a payment of $643.70. An investor buying 10 years of payments from that note would yield an up front payment of 50.8k and you can do that again at year 10.

Brooke T. · Answer

Thank You! Your feedback was so helpful and on point! Im also in AZ! Would you mind connecting with me so we can talk more? @Bob E.

Chris Seveney · Answer

@Brooke TempletonI like to structure the loans around 9-9.9% over 10 years. That provides a lower discount for a note investorConfirm with your attorney there are no usury laws on interest rates. As mentioned I recommend getting a mortgage loan originator to underwrite the loan. To get max value getting a title policy on the loan is also increase value

Brooke T. · Answer

Thanks! also the first mortgage is being extinguished through the excess proceeds of the sale so this note will be in first position.. @ Will, makes sense, thank you!

Chad U. · Answer

Note buyers typically look at the highest yield they can obtain and price it accordingly. Therefore the higher the interest rate the better. However in this scenario since this will be a second there is inherently more risk, so will command a higher discount. the creditworthiness of the borrower comes into play as well. I would also highly advise using an RMLO to underwrite this for you, to ensure that it is Dodd-Frank compliant.