All Forum Posts by: Dion DePaoli

@Rich Baer do you want to clarify the "absolutely"?  He can find a private lender and borrow money from them.  He can not make a loan to himself and not deliver the lender's consideration in the contract and then try and take that contract to the secondary market as legit to sell it to another investor.  That contract arrangement would be void.  Peddling the note would be fraud.  

What you are asking is to borrow money.  What you are confusing that with is lending money, memorialized in a promissory note secured by your property and selling that note to obtain the desired cash.  You can not lend yourself money and not actually fund the loan.  That is fraud.  

The issue that you have OP is that when you apply an equal interest amount to each period the interest rate is no longer 4%.  

Interest due per period is a computation of the amount of outstanding principal.  If you fix the amount of interest being paid the loan interest will at first be less than 4% but around year 15-17 the amount of interest being paid will exceed 4%.  

Example:
Fixed Interest idea annual interest:  $3,234
Interest due in Year 1 = $5,356 ($2,123 less than 4%)
Interest due in Year 18 = $3,047 ($187 more than 4%)

Interest surplus paid in Year 17 to Year 30 = $19,805

That bell curve does zero itself out.  The reduced payments in the begining equal the surplus in the end.

HOWEVER, when we apply the principal reduction by way of a fixed principal portion of payment obviously the repayment of principal goes faster.  This causes the actual interest being paid to increase steadily.  Since interest is paid in arrears on the "outstanding" balance.  

OP idea of Outstanding balance in Beginning of Year 2 = $130,500
Correct Outstanding balance = $132,623
OP Year 6 Begin = $108,000
Correct = $122,104
OP Year 25 = $27,000
Correct = $34,996

So the rate of interest actually exceeds 4.0% after year 12 when the principal reduction is applied and goes all the way up to 71.87% in year 30.

Year 30 OP principal due $4,500.  Interest due $3,234.  

In most cases then you would knock on the door of usury by year 22.  

"Could" you make a loan like this? I suppose so. Disclosure of each year's APR would be required since each year causes a different APR. It is probably not a stretch to think someone looking at that disclosure who sees the rate of interest exceeding the pegged rate (for no better words to describe it) would simply refinance the loan which would mean the lender makes less than the pegged rate at the end of the day. In summary, a bunch of extra confusing work for no reward.

Now, there are fixed principal payment amortization loans, however interest is calculated normally on those at 1/12 the interest rate on the outstanding balance.  This causes the payments to be higher than a fixed payment amortization in the beginning and lesser at the end.  

That said, if you want your principal back faster the best method is probably just make a shorter term loan.  Exotic plans will likely never work out in your favor.  

@Anh N. yes surplus would pass through to the borrower if not other junior interests to you and senior to the borrower are present.  

A mortgagee is not entitled to ownership of the real property.  We always have to say that to make sure misunderstandings do not arise.  

Yes, you can go to the auction and bid on the sale.  When the property is set for sale you will define a reserve price.  As a mortgagee you can go to the auction and tender a "credit bid" which is a bid you would pay by way of the amounts due you under the note.  In the event you tender a full credit bid which is a bid equal to the total amounts due under your note you may alienate other strategies of collection such as claims on rents and insurance.  Since you paid yourself in full.

In addition, if you exceed your full credit bid you will have to deliver the cash for the surplus which you are not entitled to.  You are only entitled to the total amount due on the note, surpluses will go to the other interest parties in succession of interest in the property.  As I mentioned, full credit bid, if delivered, is a full satisfaction for what you are owed and is all you are owed.  

Also be aware, all interested parties can redeem the property.  

Last, if you are the successful bidder and gain ownership your obligations to the first lien are not simply periodic payments.  The first position has a right to call the entire loan balance due and if payment is not made in full to satisfy that amount they can foreclosure your ownership out.  A first lien lender does not have to accept monthly payments from you at all.  You have a right to redeem the property.  You do not have a right to step into the borrower's shoes.  

Fair enough.  The moderators drew the line.  LOL. 

Jeff, you can post in the marketplace here on BP for responses from folks on BP that would have interest.  

I will be a bit more of a pessimist here.  $20k is not enough to begin investing in notes.  You are new and not familiar with the asset class.  So you will begin your learning curve already situated into either (a) a riskier asset than other more experienced folks might find (b) with lower valued collateral which will typically cost more money to disposition (c) being taken advantage of your lack of knowledge in the asset class overall. 

Even purchasing a "performing" first lien you run the risk of that loan falling into default since all loans have a risk of default.  As a loan goes from current to delinquent to default servicing costs more money.  Default servicing can cost around $75 to $100 per month.  Generally, lower level investors try to preserve their costs by entering into limited servicing arrangements which will be a barrier to delinquency and recovery as delinquency and default notices are typically add-on costs to the servicing plan.  Some attempt to self service which is a whole other issue.  

In addition, it is not uncommon for those level of notes to require advances to preserve and protect the mortgagee's interest in the real property.  It wouldn't be uncommon to have to advance for many months of insurance and taxes.  Often times that is needed coming right out of the gate.  

I think what commonly gets overlooked by newbies and is generally not overly pointed out on the boards here is that the notes that many are investing in are "distressed" loans NOT prime loans.  They are loans with issues already in them albeit recovering from or dealing with them.  For that matter, prime loans are not a safe haven either, but a discussion for another time. You really should not be entertaining into notes as an investment idea unless you have enough capital to work through the default potential of the loan.

There are plenty of sharks in the market who will sell you an asset and not think twice about any potential capitalization issues you may have in the future.  To some extent you can already see what happens by way of the limited capital.  Exotic suggests start to come out of the woodwork.  Board post suggestions are great but the details of the risk profile of the suggestions don't commonly arise.  
Investing is not gambling.  A prudent investor will make money by minimizing their risk.  Risks that you do not fully understand and are not familiar with because the asset class is not familiar.  Risks elevate the further you get away from a whole loan in first position and lower than median RE value as collateral.  Remember many of the success stories you hear are only the stories that folks brag about not too many folks spend a bunch of time talking about the investments they made and lost all of their investment.  Kudos, to Patrick in pointing his first loss out.  If that was the OP she would be left with $0.00.  Unless you can survive such an event, it is probably best to wait a bit and build up some more capital and consider taking a plunge when you get closer to $50k or more.  

Loans are great when they are great but they are not great all the time.  Cavet Emptor.  

@Jennifer Handlin

It is possible to clean this up.  You would need to inquire about obtaining title insurance from a company and ensure that you can do as one removed from the tax sale with minimal issue.  Whatever that cost is, is the cost to clean up title.  

The terms of the LC are not in the thread so we can't comment on those.  If those needed to be amended then, they can be with agreement from the Vendee.  Of course the Vendee doesn't have to commit to change anything that is not in their favor.  

To originate any new contract, beit mortgage or land contract, you would need to have a license as a mortgage broker or live in the subject property as your primary residence or second home or inherited the property.  In other words, the property cannot be for investment purposes.  The state of Michigan doesn't grant any other exemptions to licensure.  You can find a properly licensed mortgage broker working at a properly licensed brokerage and they could assist you.  

Using other entities such as your IRA or another company or whatever doesn't relieve you of the license requirements.

Your attorney is correct, in a Land Contract you are still the legal owner of the property and as such have a liability as the owner of the property.  You can enforce a clause, if present, in the LC that the Vendee obtain and hold proper insurance but you would still want a policy of your own.  It is your property until they pay the amount of the LC in full at which time you would deliver a deed to them conveying the property to them in full.  

You make safe and compliant deals by following the rules.  Currently that rule is you may not extend credit related to residential real property for primary use without a license.  

You are currently on the best website out there to understand more about real estate.  You can search the forums and find tons of information on an array of topics.  

Good luck.

"Notes" are any debt instrument which obligates repayment at a set interest rate over a set period of time.  They are prevalent worldwide and are a primary instrument of finance.  Notes can be unsecured, secured and convertible.  

If what you are asking is do other countries have secondary mortgage markets - yes they do.  That said, real property law and regulations are obviously not the same in other countries, so their markets will be different than what the US's secondary market looks like, allows and acts like.  

Ah, an oldie but goodie thread. Oddly enough CFD's were a much larger part of a licensing course I took recently. I found that interesting.

@Jennifer Handlin to address your questions, a contract for deed or land contract or bond for deed all being an installment contract for the purchase of real property are contracts where the Vendee (buyer) pays the agreed upon purchase price plus interest over time to the Vendor (Seller).  The vendee gains an equitable interest in the real property and the vendor retains legal interest.  In layman's terms this means the buyer can enjoy and possess the property but the seller retains full and perfected ownership merely granting the equitable interest to the buyer.  The seller looks more like a landlord and the buyer looks more like a tenant.  That's not overkill, that is an important detail to understand as it sets the stage for the relationship with the Vendee and the property itself. 

So in order to transact both the legal interest in the property must be granted to you along with the beneficial interest in the contract for deed. They are two separate things. As to the property conveyance your party has mentioned they will convey using a Quit Claim Deed as opposed to a Special Warranty Deed or Warranty Deed. Quit Claims offer the least protection to the new owner from previous defects or claims. If they are willing to do either of the other two, that is something you should pursue.

The probable explanation for their use of a QCD is they did not seek to quite title from the tax payer who lost the property. As such, they likely don’t have title insurance currently. Even if they did, they could not transfer it to you. That is something you would need to obtain for yourself.

You are aware of the hurdle to obtain title insurance and the need to file a Quiet Title action in the county of the subject property. If you want clear title either the seller or you will have to file the suit. Prior to your purchase, if you choose to follow through, you should check with legal counsel to make sure you will receive all you need for this action if you plan to file it yourself after purchase.

In regards to changing the CFD/LC after you buy it – "NO" you may not unilaterally change the contract. You must honor what was written in full. The existing contract will be assigned to you through an assignment instrument and should be recorded after the deed is recorded. As a side note, the actual contract for deed/land contract should already be of record. Any amendment to the contract has to be in writing and agreed to by the Vendee.

As such, it is important to read the actual installment contract and be aware of the terms to which you will be bound as the new property owner. If the contract calls for you to provide clear and marketable title any defects not resolved by you or the current seller will be your burden down the road. To that extent, there is no real template for these installment contracts.

In general, like most contracts, it should contain an offer, acceptance, some form of consideration, all parties are of sound mind and the terms for the financing should be clearly spelled out including loan amount, interest, payment and term. Then it also needs to deal with what your obligations and duties are as the Vendor including what you may or may not be able to do (such as mortgage the property or sell it) and their obligations to the property such as maintenance, taxes, insurance and any future conveyance requiring payment in full. If there is default language in the contact pay attention as that is how you will have to proceed with delinquency and defaults, if they occur.

As you are not familiar with the instrument you will probably want to have legal counsel review it to make sure it is properly structured. In addition, and I can’t stress this enough, that you can live up to the obligations set forth in the future as the Vendor. Such as delivering a specific deed and/or title being insurable. Or even, the obligation of the Vendor to hold insurable title during the term of the contract – which would already be a breach.

As mentioned above, these instruments have risen in frequency and that means less than adequate instruments could be in use. This can pose a risk to a buyer if they do not properly understand the instrument and/or get all the documents and transaction properly reviewed. Good luck.