All Forum Posts by: Alfred Bell

Hey guys. Hoping for a rapid response from you on this.
Update: I had a few potential buyers (unrepresented buyers) on the line for this condo. Held out on putting it on the MLS to save the expense and hopefully benefit from not having to pay a commission. There were delays and negotiations dragged on and there were some ups and down but in the end the potential buyers didn't work out. (I thought I had it sold for certain but the buyer had to drop out due to a family crisis... brother hospitalized with cancer... and he had to drop out because he needed to return to Chicago to deal with this unfortunate event). So I finally put the condo on the MLS last Friday. An offer just came in and there are a few other interested prospects that will be looking at condo in the next day or so that might make an offer.

Question that I need answered:

I was told on this thread that "interest only" is an unacceptable term to have in my note. I don't understand the reasons for this. Please explain.

Reason I ask... this offer that just came in is willing to have a 2 year interest guarantee/prepayment penalty, but is requesting the term is changed from 8 to 10 years, has an option for extension, and is "interest only". They want a lower DP and lower monthly payment (the reason for this is because they are an investment group that wants to acquire the condo as an investment/rental property).

So what's wrong with interest only.

Rapid response would be much appreciated.

Thanks, Alfred

I'm in motion now. Property is being marketed as "FSBO/No agents please" to avoid commissions. Already have interested buyers and appointments for showing. I've created my ideal note structure and terms from which to negotiate from to fit the specific buyer. If no buyer in the next week or two, I will then put it on the MLS for maximum exposure and take the hit of paying a 3% commission in order to get a sale.

I'll post the outcome and details on this thread once this is over.

Thanks again everyone for your help.
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Spoke with a few attorneys today. An experienced RE attorney today told me that his qualifying of my buyer/borrower and creating the note will have no benefit to me in making the note "stronger, or more legitimate". He said no institutional buyer would ever buy this note anyway and that I should be prepared to hold it to maturity (5 years), but the possibility exists that I could sell it to an individual investor or retiree for a small to medium discount. He said there is nothing to worry about in that millions of people have done seller carry backs themselves with escrow handling all the paperwork. As long as I have a valid note, recorded first trust deed and a lender's policy, I'll be fine.

I'm going over this once more with my money partner to apprise him of all the risks and that he might have to hold to maturity. He can also consider holding and renting it or doing a lease option.

If he wants to do the seller carry option I'm just going to do it myself through escrow. This is the way I'm going with this. If I get tied up in any more advice or debate I'll never get this condo sold.

Well, this was a long journey and I've sure learned a lot. Thanks to all concerned. I'll let you know when the condo is sold and how it all turned out.

Marc you understand why the prepayment penalty (interest guarantee)! It is the key part of this strategy (owner carry is what is allowing us to reduce our asking price from 290k, the interest from the note allows us to recoup). We are going to lose money on this sale (asking 270k when we've already got 275k into it). A few years of payments will make my money partner whole again and THEN he can sell the note, or keep it if he chooses. (I already laid this out in detail in an earlier post how after 2 years my money partner would have gotten all his initial capital back plus a small profit... which he says would make him very happy. I know this thread has gotten pretty long... 10 pages now! and people are starting to forget the earlier posts.

Not true. I've heard from two direct lenders in the area now that people are paying up to 40-45% DP. It's happening all the time. The main reason given is because they obviously doctor their tax returns to show low income and those returns wouldn't cut it with an institutional lender. I was told I'd have no problem with 20% down but I should go for 30-40 minimum. I'm going for 30%.

5-7 year term is fine. To me, the longer the term = longer time for borrower to get their act together to refi = we weren't predatory in our loan structure.

I've reached out for a RE attorney with some experience with lending to qualify and draft the note for me. Once I've got an attorney set up for this I'm ready to clean the condo and put an ad in the paper and in craig's list and start interviewing my buyer/borrower prospects. I'm almost there.

Oops! That was a typo. Meant to write 5 year amortized at 30, not 40. All along on this thread we've been talking about structuring an 8 year term, amortized at 30. The idea I was just given is that 5 years is long enough for a borrower to get their act together to refi and wouldn't be considered preditory lending, 8 years is too long of a term if we want to sell the note in 2 years. Also the larger the DP the better for selling to a note investor (more equity).

Seems like whatever I come up with on this thread, as far as a note structure goes, someone is going to disagree with it. This will go on forever. I attribute this to the facts that... each investor has their own parameters and ideas of what makes a strong note... each investor has been taught differently... and, no one knows what the going loan rates/terms are in the Coachella Valley where this condo is.

Obviously it would be best for me to meet, or undercut a bit, what the current private lending structures are in this area.

I need and want to sell this condo as soon as I can. if I'm going to make a sale happen... I will have to negotiate with my prospective buyer/borrower based on their circumstances and needs. I'll need to start somewhere with an ideal structure to negoitate down from.

I'm going to start at 30% DP, 8 year term (amort @30), 9.5% interest rate, 2 year prepayment penalty term, and negotiate from there down until we have an agreement.

I can use this licensed originator if I wind up with a non-owner occupied buyer. I'll have to use an attorney and escrow if I wind up with an owner occupied buyer.

Soon as I get my attorney in place I'll be finally ready to go.

I found a licensed loan originator who will lightly qualify my buyer/borrower and correctly underwrite the seller carryback loan for me, do the disclosures, etc. He will do it for 2 points as the total cost.

He's been doing private and hard money loans in this area for 20 years. He said that 20% is a very aggressive DP which will bring a lot of callers. He says that the normal loans are 40-45% DP and 8.5-9.5% interest. This is the second guy who is active in the area who told me this.

He said he could only do this if this is a non-owner occupied (rental property or 2nd home or vacation home). Can't do it if condo will be buyer's primary residence. If it is owner occupied then he suggests I just do it through escrow and have an attorney qualify the buyer and draft the promissory note.

He said I won't be able to sell the note very easily with a 20% DP. Said it would be better to offer at least a 30% DP with a 5 year term amortized for 40 years. Since the usual around here is 40-45% DP he believes I'll easily get calls on my ad.

Ok, so I have both options to go with now depending on who my buyer is (escrow with licensed loan originator, escrow with attorney qualifying buyer and creating the note).

"Condo, FSBO, Owner Will Carry, Easy Qualifying, Own Rather Than Rent"

They said $1,300 lender fee and 4 points for origination fee (and said that others are charging 5-10 pts typically). Yes, the servicing would be extra at $45/month but I can go with Del Toro for $25/month who is a very reputable company here in SoCal. Don't know how long they've been in biz but I'll find out when we talk again.

These are the guys and the companies.

Jeff Mote: Broker and servicer
http://www.arenacapitallending.com/

Jarrod Leitch and Rick Remirez: Loan Originator
http://www.franklinloancenter.com/Default.aspx

Not yet. But I'll be reaching out and checking with my connections to find a proven, reputable RE attorney to do this once I'm totally clear that this is the way to go. I want to see what the end results are with these Arena Capital guys once I've explained my situation and clarified everything with them.

Ok, back to the original subject of this thread...

I just got a call from a direct lender located in Palm Desert. They are totally willing to qualify my buyer/borrower, underwrite the loan, also advise me on the loan structure for my maximum benefit, process the whole deal (they offer loan servicing as well), put it through the local crackerjack escrow company that they always use, etc.

BUT... they won't do the qualifying, underwriting, etc. and stamp their license on it for just a few hundred dollars fee. They said that I'd never be able to find someone to do this because they don't exist. They want $1,300 in lenders fees (underwriting, processing, etc.) and 4 points for origination fee. All this would be charged to my buyer/borrower.

They said it a MUST that I do this (have an NMLS licensed originator stamping his license all over my documents) if I want to be able to foreclose or sell the note down the road without any problems.

This changes the dynamics a bit, and gave me pause. I queried them as to whether charging the buyer/borrower that much would kill any chance of a deal. They said that it wouldn't and buyers are willing to pay this in order to avoid the heavy screening and all of the requirements and needed documentation that an institutional lender would require. They said there are so many people out there with money and high income that are self-employed and don't show their income on their tax returns and THAT guy is my target buyer/borrower.

They said that they do this all the time and work with lots of investors on these sort of deals. They know the types of loans that are being originated locally and said that I should be asking 9.5% and 40-45% down payment. They said if I advertise in the Desert Sun and Craig's List "owner financing with only 20% DP" that buyers will be kicking in my door to get to me.

I'm going to look into this further and try to wrap my wits around this.

Any feedback on this would be appreciated. Marc? Bill? Dion?

Dion: I don't follow you. Maybe I don't understand this fully yet but I don't see and risk if a SAM is part of the deal. It either yields or it doesn't.

Interest + a SAM is still interest. If investor/rehabber is paying me 14% for a 6 month loan and 25% of his profit (SAM). If he profits, I make 14% interest plus 25% of his profit. If he doesn't profit, or he takes a loss, I still make 14% interest. The SAM will either raise your return or it won't.
(Of course this assumes that you have excellent guidelines that you follow and you structure your deals with caution. Points like never going above 65% LTV, ensuring plenty of equity in case need to foreclose, etc.).

Am I correct, or am I missing something here?

Hi Bill. We meet again on another thread.

By trust deed investor I'm referring to a specific activity that I may want to pursue (not until I've done much study and have found a mentor to guide me)... making short term loans (for starters) backed by good RE as collateral and doing this through a licensed hard money broker. Broker gets the points and I get the interest. And, in some situations I could also get a profit share if I can structure the loan as a SAM (shared appreciation mortgage--normally something you could do with an experienced RE investor with a track record who is successfully rehabbing and selling properties. )