First Time Working With Notes

[Sandra Ruiz]

Hello Everyone,

I am a new investor and I have a client that wants to sell a hard money loan.

The current loan amount is $180,000 and it has 120 payments left. It is currently at 12% interest and she wants 8%. She also wants an additional $40,000 cash for property upgrades, it to be a principle and interest loan (not interest only) and no balloon with a 15 year term.

I am guessing she will have to be more flexible in her wants.

How would I structure this so that it's a win-win for all parties?

[Dion DePaoli]

There are some other issues with this, even though it started off a little confusing.

Sandra Ruiz, I can only assume you are NOT a licensed Mortgage Loan Officer. You are on the fringe of acting without a license on this matter. You can not negotiate between a lender and a borrower without a license for a mortgage secured by residential real estate. The borrower needs to go out into the world and find a lender or a licensed broker who can then find her a lender. Without a license, you should not attempt to assist the borrower with this loan. This includes trying to find a new investor to originate a loan for her, that requires a license. In addition, don't take this the wrong way, but you don't seem very qualified with your knowledge to be able to really assist in this event either.

Lender licenses are state specific, so not knowing what state the subject property is located prevents a lender who can lend in that state from understanding this might be a deal for them.

The financial advice you gave to the borrower about increasing the loan amount and putting it into other investments is not sound. Your advice presumes the loan was a cash out refinance and the lender is willing to allow the cash out to be freely invested opposed to being specifically deployed in the Subject Property. Point is, even if she wanted to pull extra money out, the lender may not have let her if the money was not used on the subject property. Those terms are lender specific. If this was a purchase money mortgage, which some of your post leads me to believe it is or was, she couldn't have pulled cash out at all.

The subject property is not fully identified here. The current loan term being over 10 years is a bit long for the ordinary hard money lenders. Typically those are short maturities. Is this a residential piece of property or a commercial, what type of 'building' is it? Does the borrower reside in the Subject Property? These concepts will affect her qualifying.

It is unclear how seasoned this loan is. She has 120 payments left. Not sure if that is a balloon or maturity. We don't understand how long she has had the loan. This brings into play possible prepayment penalties. It also can bring to light credit issues or concerns if she is trying to get out of the loan a little quicker than she should.

One other phrasing correction to the OP, "I am a new investor and I have a client that wants to sell a hard money loan."

I don't have any issue with you using the term client, it does not designate you in a role. She could be your hair salon client. However, the borrower does not 'sell' their own loan. The current owner of the loan, either known as the investor or mortgagee, is the only party who can sell the loan as they are the owners. Your client is the borrower. Borrowers have no control, influence or say so regarding the sale of loan which they are the debtor.

You made this same reference in one of the later posts at the bottom of the thread too. You wrote, "So if she has 120 pymts left at $1500, she can sell them for let's say $1,200 providing her with $144k cash?" Just repeating my point above. NO. The borrower can't sell anything. The borrower makes the payments, she doesn't have cash flow to sell, she is the cash flow. The current Mortgagee could sell the loan, if they wanted to, which they have no duty to. The sale would include an entire sale or partial sale of the payments. Moral of the story, the borrower has little to do with any of that. The borrower receives zero monetary benefit from a Mortgage selling the loan or payments, that is not the borrowers money to receive, it is the borrowers money that she is require to pay.

The borrower, as it seems from the information in the thread, does not really have any ground to stand on with her wants. She is already in a hard money loan and a long term one at that. This means she had less than adequate credit and qualifications to be approved for a conventional loan at a market rate. Usually when a borrower takes out a hard money loan they put together a plan of some kind to get their credit and qualifications back on track and they refinance the hard money loan out with a conventional loan. It is unclear why she has not done so. The longer she has been in this loan, the more of a concern may arise from the same.

My spider sense is going off on this and I would guess there are some more issues under the hood that can likely been seen with a little more of a trained eye regarding this borrower and her current loan and chance of a new loan. Her new loan at $220k would be around 51% LTV, "IF" your RE Value is correct and is not chopped by a conservative appraisal or underwriting. In addition, not knowing if the borrower resides in Subject is a big deal. If she does reside in the property, she may be restricted by the new lender to 55% LTV and if they cut the value even a little, she will not get all her money. Understand, the general demand on capital is $220k, however that does not include closing costs or broker/origination fees etc. Hard Money loans usually have a point or two in them. As you add those pennies up, she could be eroding her cash out amount.

I encourage you to learn from this but I would suggest you back out of this as a player so you don't end up stressing out a friendship or a friend in need due to lack of knowledge of this asset class.