All Forum Posts by: Eric Jones

Hello,

I'm currently doing due diligence on a non-performing junior lien that has gone unpaid for about 5 years. I know the unpaid principal balance, interest rate, and monthly payment but the arrearages and payoff amount have not been provided... So I'm trying to calculate them. Here are the numbers:

Original Balance = $73,200

UPB = $64,000

Payoff Amount = ?

Arrearages = ?

Rate = 13.75%

Monthly PMT = $867.18

Late Fee = 2% of "overdue payment of principal + interest" <== Does this mean 2% of $867.18 is the monthly late fee?

Also, does negative amortization occur when the loan isn't being paid? If so, I'm thinking it would look something like this:

UPB @ last payment = $64,000

Payoff after first missed payment = $64,000 UPB + ($64,000 * 13.75%/12) Interest + $17.34 Late Fee = $64,751?

Or is there no negative amortization and your new payoff is just the UPB + late fees?

Is this the correct way to think about/calculate late fees, arrearages, and payoff amount?

Thanks in advance!

@Shawn Wilson 

You may want to contact a local real estate attorney and have them help you write up a solid lease to own contract. Or, try putting up another post on the forums here asking about how to setup and structure a lease to own contract. I've never done one, so I'm not the best person to answer that. 

From my understanding, you advertise the property as a rental property, with a lease to own option. Then, limit your tenant search to only those tenants that are interested in renting for a period of time, and then purchasing the property from you. Once you find tenants who are interested in a lease to own, they tenants sign all the paperwork, and pay you the non-refundable option deposit. This is essentially just an up front down payment on the property, should they purchase it. If they end up not purchasing the property within the agreed upon time frame, the lease option agreement is terminated and you get to keep the deposit. Generally, the tenant/buyer has a two year time frame in which to obtain traditional financing to pay you off in full. This is beneficial for people who need time to save for a down payment, or need a year or two to improve their credit to obtain traditional financing. 

@Eva Croasdale - Fairport Savings Bank in Rochester NY is currently offering first lien HELOCs > $50K for Prime + 0... so 3.5%! I have a mortgage and heloc with them and they are great. I can provide a reference there if you're interested. 

@Shawn Wilson

Thanks for your response.

So using the numbers you provided we get:

Rent: $1750

Mortgage PMT : -$690

Taxes: -$500

Maintenance, Repairs, and Vacancy: -$350 (I like to be conservative and assume 20% of gross rent. This number should embody ALL of the costs over the long term, so things like roof, driveway, furnace, etc... But feel free to adjust using your own number.. 10%, 15%, etc)

Total Cashflow: $210/month

Or, using the 50% rule we get:

($1750 Rent * 50%) - $690 Mortgage Payment = $185 per month in cashflow

As another poster said, the problem here is that you have about $115K in equity that is locked up in the property, and in return you are only getting about $185 - $210 per month in cashflow. So you're not utilizing your equity in the most efficient way possible. 

What I'd do is I'd try to sell it rent to own. You collect a non-refundable down payment up front, at a sale price that is agreed upon up front, and avoids the 6% realtor fee. You could probably sell it 5-10% over the market value as a rent to own sale. I'd also write into the contract that any maintenance or repairs are the renter's responsibility, since the house will be theirs. So that gets rid of the 20% costs that I estimated above, and your cash flows go up to $560 per month during the rental term. The majority of rent to own contracts never go through to completion, so odds are good that after a couple years you'd be back to square one, and you can then do another rent to own agreement. If the tenant does actually follow through to purchase the house, then you get back all that equity and made better cash flow in the process. Then use that cash to put a minimum down payment on one or more rentals, or buy one free and clear that has strong cash flow. If you buy one free and clear, you could always do a cash out refi down the road. 

The cashflows for rent to own would look like this:

Rent: $1750

Mortgage PMT : -$690

Taxes: -$500

Maintenance, Repairs, and Vacancy: $0 

Monthly cashflow: $560

Assume that you sell the property two years into the rent to own contract for $267K (about 5% above market value). You get a 5% down payment of ~$13K, that is non-refundable. Your loan in 2 years will be at about $132K. So you payoff the loan and have $135K profit + ($560/month cashflow for 24 months) = ~$148K profit. These are all rough numbers, but I think they make a strong case for selling via rent to own. You get a higher sale price, a non-refundable down payment, higher cash flows due to no maintenance costs, and don't have to pay a realtor. 

@Shawn Wilson

Hi Shawn, 

Can you give the breakdown on the monthly payment of $1188 - how much of that is mortgage and how much is tax?

Not sure if you've come across the 50% rule yet, but it's a common rule of thumb for rental properties. It says to take your monthly rent, multiply it by 50%, then subtract out the mortgage payment, and what is left is your monthly cash flow. The 50% is a ballpark number that accounts for costs like taxes, insurance, maintenance, vacancy, etc, but does not include the mortgage payment. So once we know the breakdown of the $1188, we can better understand how well your house will cash flow as a rental. 

Also, I'm not familiar with the housing or rental market in your area... is this an upscale suburb? A lot of the time the places that are really nice to live and raise a family aren't the best rental areas due to high taxes (at least here in upstate NY). In those cases it can make sense to sell the house in an affluent suburb and buy one or two cheaper houses in a more middle class/blue collar suburb. City properties can have even higher cash flows, but the trade off is more vacancy, turnover, lower caliber tenants, crime, etc. So it's all a trade off, but you want to make sure that you're cash flowing nicely to make a profit and cover all your costs. 

@Pari Thiagasundaram -I had the exact same problem and called them as well. But no luck, so I just gave up on purchasing notes through loanmarket.net. 

Thank you! I'll check them out.

Hello,

I'm interested in purchasing non-performing 2nd's and have found a few different online sellers/brokers as well as a hedge fund that sells them. The hedge fund sent me a tape with 800+ notes, but has a minimum purchase size of $100K. Since I am looking to start with two or three notes to learn the process (for a total investment of $15-25K) this isn't a viable option at this point. My plan is to focus on 2nd's with a performing first, with some equity above the first, but not necessarily fully covered.The primary sources I've found are:

1.) FCI - appears to have decent selection. Have heard Gordon Moss refer to FCI (and others) as an "online joker broker" which makes me wary.

2.) Note Marketplace - doesn't seem to be the safest/most legit source 

3.) Loan Market - decent selection of firsts, but few 2nds, and prices seem high across the board

4.) PPR - pricing looks pretty good. Current selection of 2nd's doesn't look great (not many with current firsts or any equity above the first), but have heard good things about PPR. Could wait it out for better selection...

5.) Watermark 

6.) Dreambuilder Investments - very large selection and good pricing, but minimum purchase of $100K 

For those experienced with non-performing 2nd's, how would you recommend getting started and where would you purchase them? I've heard that it's about relationships, but I don't know anyone who invests in this space so I'm not sure how to build the relationships. I'm open to all options as I'm motivated to learn this niche, but first I need to know where to find the notes and the other investors!

@Rhondalette W. - if they are proposing that you use a "debt weapon" like a bank account, I'd stay away from it. Instead just apply your excess cash directly to the loan as a prepayment. It might take a while, but reading through this thread might be valuable for you.

@David Dachtera

So in scenario 1, all the debt (HELOC + Loan) is paid off at month 210. Under a normal repayment scenario, Scenario 2, the loan would still be at about $79K. But before you walk away excited, notice how much you paid in the 210 months in payments. Yes, you paid off Scenario 1 first, but you paid $192k in 210 months, while in Scenario 2 you only paid $133k.

So, as I and others have said, it's better just to prepay the loan directly, since that pays off in 205 months. 

So this really settles this whole debate and hopefully clarifies it to you. The ONLY reason you're paying it off quicker in Scenario 1 is because you are throwing a lot more of your money at debt each month. And you can see in Scenario 3 that if you want to rapidly payoff a loan, prepayment directly to the loan is the safest and most efficiency form of debt payoff, unless you're talking about transferring to a lower interest rate loan.

As I said, you've been misunderstanding all of us for a while. We were talking about a non-prepayment scenario. How you missed that in all of this dialogue is beyond me, but hopefully now it makes sense to you. I'd be happy to send you the excel file if you'd like.