All Forum Posts by: Alfred Bell

Marc:
Thanks for the full explanation. Improves my understanding. I also have a better understanding of why you are doing this (in part, to give everyone in the forum a real life experience to learn from... I think that is cool... and smart). As I wrote earlier, I'm willing to do the research. I'll get it done. (If I have a clear understanding and a clear purpose, I do the required work.)

I'm also glad that I wrote these posts today because I feel that you have a fuller grasp of my situation now, due to the details and opinions I've given, and your advice and instructions will really parallel the reality here.

Is it possible, you could give me questions to ask these lenders? Could we collaborate and write up the scenario to give them and the questions? I'll submit my version to you as my next post.

I'm way up in the mountains and it takes an hour for me to get to Palm Desert. It winds up being a 3-4 hour trip total when I go there for most purposes. Bit of a hassle because I assist my wife with her new business on a daily basis and she has a lot going on and just pulled in a huge client.

My plan is to get on the internet and locate all the local small banks in the area and call their loan officers and give them the scenario and ask the key questions. Ok if I do it that way?

Been busy and at it since 7am this morning. This will be my last post for the day. Need a walk and wind down before bed.

Thanks. Talk tomorrow.

If you don't mind, first I would like to outline the administrative or preparatory requirements regarding doing an owner financing sale (NOT the structuring of the note itself). What is mandatory? What is unnecessary? What would enhance the value of the note? I'd like to clarify these past points first. There was debate and disagreement on some of these points earlier. I want to ensure that nothing exists that would make me decide that doing an owner financing action is NOT the right way to go. Can we clarify these points below?

1.
Is it most optimal/vital that the loan be originated by a licensed loan broker? If so, why?
2.
It would not be smart for me to hammer out an agreement with the condo buyer and then create the promissory note myself and execute the loan through escrow (basically the same question as #1)? If so, why?
3.
Is it a must that the potential condo buyer fill out a Form 1003?
4.
Is it most optimal/vital that the note is administered by a loan servicer? If so, why?
5.
I understand that this is negotiable but is it normal or reasonable to have the condo buyer pay the setup fee and monthly servicing for a loan servicer?
6.
Should impound accounts be set up for property tax and insurance or just a requirement that documentation is submitted regularly by the condo buyer to ensure these are being paid?
7.
Definitely want this done through escrow—as escrow instructions, certified copy of HUD 1, proof of down payment, a credit app, credit reports, notarized note and trust deed, etc. etc. will supply me with a nice package to show to a future note buyer to validate the authenticity of the original transaction and note. Correct?
8.
Is it really necessary to have an appraisal in this transaction? Won't Mr. Condo Buyer's agent run comps and tell him whether it is a FMV price or not? (I figure that anyone who buys this condo is going to lose equity over the next 2-3 years. I agree with Shiller that—based on the economy, demographics, the foreclosure inventory currently existing, and the 3-5M more foreclosures coming— we are not at the bottom and prices can go down another 10-20%. We just don't know if it will happen slowly over the next 2-5 years or in rapid drops. As the note holder why would I be responsible if Mr. Condo Buyer goes underwater on his loan? Would he really have any grounds for seeking recourse?). Maybe it would be smart to create a disclosure or a clause in the note that states that Mr. Condo Buyer understands that residential home prices may move downwards and will not hold the condo seller liable or responsible for this? Could I really be hit for "predatory lending"?
9.
It seems obvious that Mr. Condo Buyer will have some impairment or barrier to getting bank financing which should be to both our advantages. Like you said... a BK, a divorce, a foreclosure that hasn't been wiped off his credit report yet, etc. BUT he would have to have strong fundamentals such as the cash to make a substantial DP; a very high paying secure job, a successful business that he owns and runs, assets and/or passive income from assets, savings or nest egg in a brokerage acct, a 401k, etc. which actually would make him low risk because he truly shows the means for being able to service his mortgage debt. Correct?
10.
I'm justified in wanting a higher interest rate as this person would still be considered a risk by an institutional lender. Correct?
11.
I think per Calif law a mortgage loan must be 5 years or longer and 10% is the maximum interest rate per usury guidelines. I'll find out for sure but I'm pretty certain this is correct. So the shortest term I can give is 5 years with a balloon, and that is a good term and Mr. Condo Buyer will understand that it can't be any shorter due to the law.

Again, I appreciate your time and input in assisting me with this. It is not as easy as I thought it would be!!

Ok Marc. I'll do this if necessary. Yet... don't we already know that institutional lenders as well a mortgage companies are not lending now and have very strict guidelines. They would rather not lend to a homeowner when they can borrow cheaply and put their money into treasuries/bonds and safely make some money. They want to recapitalize and build up cash and hoard the cash that they have because they know... they are in trouble, their balance sheets are a mess, they are going to get killed by more residential foreclosures, defaulting commercial loans, bad derivative investments and other mal-investments, etc.

Don't we already know that they want 20% down, an 800 FICO, high paying steady employment for at least the last 5 years, super low debt to income ratio, proof of funds that they have their own cash for the DP (can't borrow it), etc. etc. And that if someone could actually qualify for a 30 year fixed it would be @ 3.5-4%.

Most people know the above so Mr. Condo Buyer knows that he is going to pay a premium for a loan from me if he wants to avoid having to qualify with a bank (and knows that he probably wouldn't qualify anyway). And he'll go along with my administrative requirements to get the loan (Form 1003, credit check, etc.). He'll pay 5-6% figuring that he has anywhere from 1-3 years to refinance into a lower interest rate when he feels he'd be able to qualify.

I don't have a problem with seeing what a bank would want to finance a 200k+ loan on a condo, but please explain a bit further as to why I should do so?

(Also, I've never done this so I don't know whether a lender would give me this info and how hard or easy it would be to get it. Maybe it will just take some phone calls to some loan officers at Wells Fargo, B/A, and some local Palm Desert banks.)

Ok, I need to address some issues and points. The first thing that I should do is give you some key details and then fully clarify my goal. This will comprise my first new post.

DETAILS:

1.
We have about 275k into this condo.
2.
There is a glut of inventory in Palm Desert (over 180 condos available). Lots of REOs, short sales and distressed buyers are unloading = valuations are being depressed further.
3.
The most recent BPO I got from a Realtor was 240k to 280k. I believe that our condo is at the top of this range (maybe a bit higher) because of some key features (and most realtors have agreed with this). Realtors know that the very close proximity to El Paseo is a plus point, the full very upscale remodel is a plus point, and the 3rd bedroom/study is a plus point (even if it can't be called a 3rd bedroom because it wasn't permitted and isn't listed in the assessor's profile as a 3 bedroom).

Note: I didn't create the 3rd bedroom. It was done two or three owners ago. All I did was push a wall back to make it bigger and add a closet and run and AC vent into it. I just enhanced what was already there. If an inspector investigated it he would see that it is beyond being up to code and is fine. I would never have the county/city inspect it anyway because I know government bureaucrats and agents can be a headache and someone could easily say "didn't have a permit, don't care how well built it is, tear it down, get a permit and do it over".

Note: There is not and will not be a problem with the HOA regarding this 3rd bedroom. They are very laid back and non-invasive, plus, you own everything inside the walls. They are only concerned with the exterior. You can do almost anything that you want to the interior and they have no say in the matter.
Start painting the exterior with unauthorized colors, planting gardens, putting up fences, changing the window frame colors, etc. and then you'll have a problem.
4.
My money partner is pretty laid back. He's considered holding it as a rental. (I convinced him that that is a bad idea. I don't want him tied to a property that is going down in value (and may continue to go down in value for the next 1-5 years for all I know) and I don't want him to have exposure to liability, and I don't want him to suffer damage from an earthquake (which happen regularly around here), and I don't want him to hassle with the possibility of bad property management or any chance of being bothered by tenants, trash and toilets.
5.
I suggested the idea of carrying the paper as possibly the most workable strategy, and the least exposure to liability and future potential problems, and he is in agreement with doing it.
6.
My money partner is even considering the idea of holding the note for a long time and likes the idea of a 5-9% return on his capital.
7.
My money partner does not want to trade for anything (motorcycles, boats, etc.) just wants to stay with cash.
8.
We think that "owner carry" is the best strategy to get out of this jamb with the least amount of a loss (altho there could be a break even or maybe even a profit if this is done correctly).
9.
The basic strategy is to sell the condo with owner financing and get the best price we can... hold the note for 6 months or so to season it... then put it up for sale -- probably to non-professional buyers so don't have to discount it like we might have to for a professional note investor (eg. a retiree looking for a good return on his cash because treasuries, CDs and money markets aren't working for him any more)... continue to hold the note until we find someone willing to pay an acceptable amount for it... hold it for 6 months, 1 year, 2 years or whatever it takes to sell it off at an acceptable price... meanwhile my money partner is collecting interest which he will be very happy about. His money is working for him again. This is great for him because before this condo investment his money was in treasury bills yielding him .25% per annum or some such.
10.
We figure with the cash from a down payment, plus the interest over a year or two, he has a good chance of not only breaking even in the long run but maybe even making a little profit. He is totally ok with this.
11.
Lastly, we don't intend to do any more remodel/resells. We don't live in a good market area for this and we don't want the liability and hassles. We are going into private lending which I am studying up on now and will do this through a licensed hard money lender to be totally legal. He has other capital and this will enable me to help him make profits that will offset this bad condo investment.

Sorry for being so long winded but we can't converse productively if you don't know the specifics of my situation.

So what is most important to me is laying out a detailed plan of how to sell this condo with owner financing... ensuring that everything is totally legal about it... knowing what the ideal points are that make a note a valuable/desireable asset... and as a result of that having an ideal to negotiate towards when I have a prospective buyer. I know that everything is negotiable regarding how a note is structured (within the existing legal parameters) but having the ideal structure for sale on the secondary market gives me something to work towards when negotiating.

Next thing I want to address is the administrative, legal or background points needed for putting a note together. This post will be coming up shortly.

Thanks for reading this and hanging in there with me.

Alfred

Ok, I just arrived on this thread and I'd like to finish this up. Need to start at the beginning and reread and also catch all the posts I missed earlier. Then will go over my notes and then attack this subject. This has become a lot more confusing than expected, going in a diff direction than expected, etc. But this is all good cuz I'm learning.

I'm not that concerned about the time I've just lost (had more priority business stuff to take care of) nor is my money partner. We'd rather get it right and launch with the best strategy and be successful rather than move fast and make stupid mistakes.

Mike Gulley:
Thanks for your last post. I'll consider everything you stated. Good advice and important points.

Ok. Let me reorient myself and then I'll make a post. Thanks to all for your patience and willingness to help.

Got side tracked with other business emergencies (mainly wife has a legal threat from one this first time client). Ugh.

Gotta get to bed. Getting back to this condo project tomorrow. Will review it all.

Bit confusing. Started with the idea of getting what note buyers wanted and now ending up with "it is all negotiable". Not sitting right with me. I would like to find out what the ideal features of a note are for a note buyer and then at least have that to work towards in negotiations with a potential condo buyer.

Plan to get this all sorted out tomorrow. Hopefully you'll be available Marc for a little back and forth.

Ok, let me digest this and see if I have any other questions. Thanks.

Marc Faulkner: Here is my submission for the note based on advice I've received from you and other members of this forum, as well as from a few other advisors. Below this, I've also listed administrative requirements and comments and questions. I put question marks after points I'm uncertain about.

I understand that some of the points will be mandatory (ie. 20% DP) and some will need to be negotiated with the buyer/borrower in order to facilitate a sale. I'd like to clarify which will be negotiable.

We're reducing the asking price on this condo to 290k. I believe that this is at the top range of the FMV. Our plan is to first offer this condo with owner financing on all FSBO sites and other non-realtor channels, in the hope of being able to do a transaction without realtors (saving on commissions). If unsuccessful, we will then list it on the MLS through a flat fee broker, for broader exposure, and pay the 3% commission to any realtor who brings us our buyer.

Ok, let's create the optimal note...

STRUCTURE OF PROMISSORY NOTE:

1) 20% down payment
2) 9% interest
3) 8 year term, with balloon payment?
4) Loan amortized at 30 years?
5) Principal and interest payments (not "interest only")
6) Due on sale clause
7) No prepayment penalty
8) Late charge of 6% of the payment amount if paid 10 or more days late
9) First payment due the day loan is funded
10) Am I forgetting anything?

ADMINISTRATIVE REQUIREMENTS FOR NOTE AND SALE OF CONDO:
1) Borrower fills out a Form 1003 loan app?
2) Borrower must have good credit history and FICO above 600?
3) First trust deed and promissory note required.
4) Make a large title company like Fidelity or First American the trustee on the note.
5) Have the note originated by a loan broker?
6) Have the note administered by a loan servicer.
7) Have borrower pay the setup fee and monthly servicing fee for loan servicer?
8) Have loan servicer prepare and send out the annual "interest paid" statement to borrower.
9) Instead of having loan payment made in arrears (30 days after loan is funded) have first payment made the day loan is made in order to season the note faster.
10) Use escrow office so have documents to prove this was a valid transaction (escrow instructions, certified copy of HUD 1, proof of down payment, credit app and report, etc.)
11) Am I forgetting anything?

COMMENTS AND QUESTIONS:
A) My money partner would be content to hold this note for a year or two and collect the payments. The idea is that he might post it for sale after 6 months but not sell until an acceptable offer comes along. We will probably also run ads in local papers in an attempt to sell to a lay person (eg. a retiree who wants to get their money out of a 1% CD or treasuries) as opposed to investors or professional note buyers.
B) Based on current mortgage rates, 9% just doesn't seem realistic to me. Who would pay that? (I was originally thinking 6% and thought that would be considered to be too high.)
C) How do I find a proven and reputable loan originator who will do this? And what sort of fee can I expect for this?
D) What features of the note should be open to negotiation with the borrower in order to close a sale?

Thanx,
Alfred

Sorry guys. I got derailed with other business. I'm back and I'm working on my next post. Will post tonite before going to bed. Thanx for your patience.

Ok, I've cleared my plate and I am now sitting down to outline the note structure (based upon what I've learned thus far) and then you and I Marc can whip it into shape so that it best serves my particular needs. (I understand that some of the note's features will be set in stone, based on my requirements, and some will be open to negotiation with a potential buyer/borrower in order to make a sale happen.)

Feedback from others during this process is ok with me as long as it is ok with Marc.

Note: The conversations that you experts are having between yourselves is over my head, yet, I did understand the part about being able to retire in 9 months as a result of the deals that are available. So, since I started this thread, count me in on all these fast profits as well! (Joke)