Doing Due Diligence
So I thought I had 2 good prospects this past month, and one turned out to be a complete dud, while the other is beginning to smell like a stinker as well.
Note #1
SFR located in Las Vegas, that sold in December 2009 for $89,000 (seems reasonable for post-2008 housing crash).
Buyer came in with $20,000 down (that's good). $69,000 seller carry back for 20 years, 8% interest. Not a "bad" note, I'm already thinking ahead that I can work with that and possibly restructure to increase my yield.
Buyer is retired, with 2 forms in income totaling $2700/month (not bad).
Buyer had sub-620 credit during time of purchase (bad, but offset to a certain extent by her decent down payment).
Over the phone with the seller, we agree to a price that puts me at a 15% yield, SUBJECT TO:
- 1. Credit
- 2. Appraisal
- 3. Title
- 4. Estoppel signed by the payor, including an agreement to have taxes and insurance impounded
Well, the appraisal came back at $40,000. So, the question becomes, "what is the ugliest part of the deal?"
- a. > 150% LTV
- b. > 100% ITV
- c. the poor (retired) buyer who bought a house post housing market crash and is underwater?
I will write about the other note as new developments arise, but I hope this is helpful in seeing what goes on behind the scenes for a note buyer.
Bill Menacrow, of "The Paper Source" wrote a while back that he now asks for a $500 deposit from the NOTE SELLER upfront, so that he doesn't waste his time and money on things like a time-bomb of an appraisal, credit-score, etc. I think I will start implementing this rule.
Comments (5)
My grandmother always used to say, "what doesn't come out in thw wash will come out in the wringer!"
Marc Faulkner, over 12 years ago
The Zillow Zestimate came in at $50,800.
Loc R., over 12 years ago
Pat Lowry an estoppel is basically a statement that the payor signs, acknowledging that their current UPB is X, and that they're still obligated to make X payments of $X dollars for X years and that they are aware that the note is being sold and that the only thing that changes is where the payments are sent. That way, they can't give you the (BS) excuse of "I didn't know where I was sending payments" or "I thought I only had Y number of payments left."
Loc R., over 12 years ago
Loc, These are great, not to mention entertaining. Keep them coming. I choose c. as being the ugliest part because a. and b. can be avoided by not investing in this note. Can you talk a little more about what the Estopple is for us newbies? Also, why would the note holder ever sell this note now given these facts? Seems the note seller should also have had an idea the property value tanked prior to trying to sell it, but I guess not always. Caveat Emptor (not sure of spelling). Maybe one thing on the due dilligence list should be always taking a quick look at one of the on line services (Zillow, etc.) or talking to RE agent in area? I would be curious what those values came in at versus the appraisal. $500 deposit is excellent idea.
Pat Lowry, over 12 years ago
D. all of the above. Great case study Loc! Sorry the deal turned out to be a dud.
Kevin Kaczmarek, over 12 years ago