All Forum Posts by: Marco Bario

I'm glad you asked, as this is one of my favorite topics...

Money today is worth more than money tomorrow. 

Let's say a seller loans $100,000 at 8% for 15 years (180 payments). The monthly payment will be $955.65.

Before receiving any payments, the seller immediately sells their ENTIRE loan to an investor who wants a 12% yield. The sale price would be $79,626.52. That's a 20% haircut and a reduction of over $20,000. Over the next 15 years, the buyer of the loan will receive payments totaling $172,017. Not bad.

But, let say the note holder sells the first 60 payments and retains their right to receive the remaining 120 payments. The investor wants 12% so he pays $42,961.38 for the next 60 payments. If he'd purchased them at par (8%) he'd have paid $47,131.26. The purchase discount is less than 9% and the price reduction is about $4,200. That's a lot less than 20% and $20,000.

What just happened? Presumably, the note holder received a cash down payment when he sold the property, plus $42,961.38 for selling 60 payments. In 5 years the note holder could sell another partial, sell all remaining payments, or sit back and let you pay him/her $114,678 over the next 10 years. Win/Win? 

You say your seller isn't note savvy, so I'd bring an investor to the table who plans to purchase the partial and has input into how it's structured. 

See how much fun banks and Wall Street have been having all these years? This is why I love notes and seller financing. 

PLEASE NOTE: The above is for educational purposes only. I am not an attorney, financial advisor, or mortgage loan originator. It's always recommended you seek input from licensed professionals. 

- Marco Bario

A view upstream... inner workings of a hedge fund:

1) Bidding, performing diligence, assessing risk, and taking down large pools

2) Large scale asset management: Identifying low hanging fruit, where to focus resources, ROI targets, when to cut bait on an asset, KPIs, ...

3) Servicing: When my servicer tells me what I need will take extra time because of three huge pools landing all at once, I wonder what the process of onboarding at scale and continued collaboration between the fund and the servicer looks like. Also interested in self-servicing and sub-servicing.

4) Managing Capital: Funding sources, holding reserves, tax planning, investor returns. 

I love seller financing because there are almost as many options as your creative mind can imagine. 

First, a question: Is your goal to generate a broker fee in 5 years, to acquire property via seller financing, or both? 

In the scenario you imagined, the note holder would hold an asset (a promissory note and mortgage/trust deed) which he'd be entitled to sell at any time. That is unless language in the note limited his/her scope in selling. 

Three other options:

1. The note could be sold to a pre-identified investor immediately. Best for the seller if you provide a good down payment and/or an interest rate where the note can be sold at or near par. 
2. Create a 1st and a 2nd. The seller can sell the 1st and hold the 2nd for continued cash flow. Other ways to mix this scenario up also.
3. Create a note, sell a partial. If the note were structured for 180 payments, the first 60, the last 120, or other combinations could be sold at any time for lump sum cash to the seller.  Partials can limit the discount taken by a seller as well. 

I could go on, but drilling into what each party wants and needs becomes the key to finding the best solution.

- Marco

Hi @Joy Runzel -

Maybe avoid institutional lenders (i.e. banks or large companies like Quicken Loans). To them your situation isn't personal, either they are going to be selling the loan to an organizations such as Fannie Mae or Freddie Mac meaning it needs to fit neatly into the buyer's parameters, or they simply have internally mandated underwriting parameters which aren't flexible. 

Here are my thoughts: 

1) Approach potential home sellers and ask if they'd be open to seller financing. Offer a good downpayment so they have protective equity to feel secure. Seller financed interest rates are generally 3% - 4% higher than banks, but everything's negotiable. For many reasons I'm a big fan of seller financing. Happy to provide additional input in this area. 

2) Approach credit unions and local banks. Many times they will provide loans where otherts won't

3) The large downpayment idea may open doors. Protective equity... if you were to default the lender has greater protection, and it's assumed the more skin you have in the deal the more motivated you are to make payments. If you want to take caqsh out of your house down the road you'd be able to as your credit profile turns around.

Hope this helps.

- Marco Bario

Using my financial calculator I get:

Monthly principal & interest payment: $421.93

Balloon after 60 payments: $38,004.55

I'm assuming a $50K loan amortized over 15 years, ballon after 5 years, 6% interest

@James Peluso - Ask your seller if they're interested in financing the purchase (seller financing). Any potential buyer they encouter would have the same issue obtaining a sub $50K loan. 

When I was starting out, my first move was to buy a performing note. 

That experience took me through analyzing returns, due diligence, purchasing "paper," collateral review, recording an assignment, and having my loan serviced by a 3rd party.

I still own it, and the payments arrive each month like clockwork. Pays me 8%, which isn't huge in some investors eyes, but allowed me to learn while I earn.

@Scott Smith - Interesting article on DSTs Scott. I plan to investigate further. Thank you.

About two years ago I began rolling funds from a brokerage IRA to a Solo 401K (similar to a self directed IRA). I started slow, but as I learned more about real esate investing and uncertainty about the market has continued to grow, I've moved more and more from the stock market. My retirement funds are about 50% in syndications - some of which are in what I feel to be recession resistant asset classes such as moble home communities, self storage facilities and senior housing. The other approx 50% portion of my solo 401K is invested in notes with good equity protection.

Other than my children's 529 plans, I have very little remaining in the stock market, or any type of "Wall Street" investment for that matter.

@Farzan Setayesh -

I'm invested in several syndications. My first two were through the Realty Mogul platform and my experience with them has been positive. The others have been sourced through networking or listening to podcasts, where either the guests or hosts are sponsors. I won't name names here, but I do highly recommend the Cash Flow Connections podcast which focuses on commercial investing. The quality of guests and the information is excellent. 

My syndicated investments include the following asset classes: mobile home communities, self-storage facilities, multi-family, senior housing, and ATM machines. 

Happy to share more about my experiences. Hope this is helpful.

Marco Bario