All Forum Posts by: Michael Worley

 What does the Lease stipulate? Commercial contracts are bound by the language in those contracts and not usually regulated as with consumer contracts.

The idea being that business to business transactions are between two parties with adequate knowledge and skill sets. The idea behind regulating consumer contracts is the asymmetric knowledge problem between a consumer and a business.

Of course they have not accepted the transfer.

The NOTE that you pay  is NOT THE SAME as the collateral. Yes they can collect payments as long as they like because you have a contractual obligation to the lender. Part of that contractual obligation is to pay the note, part of that contract states very clearly that the collateral for that note will be a FLDT/Mortgage on the property. That lien must be satisfied before you can transfer ownership in order for you to not be in breech of contract.

As Kimberly mentioned, there seems to be some fundamental misunderstanding of the nature of the Lender/Borrower relationship by some. 

When you borrow money you make a deal with the entity that you borrowed the money from. If you decide to renege on the deal, it's not the bank's fault. The deal you sign is not just about paying the payment on time every month.

I'm just curious about where everyone seems to think interest rates are higher now than when the original loans were written? The 10 year treasury is at 1.92% today, it was 2.72% in March of 2014, 1.86% April 1st of 2013. In fact, with the exception of a few months in 2012 and a few months in 2013 interest rates TODAY are lower than they have been for the any period of the last 10 years. They are lower today than in 2014, they are lower now than in 2008, 2009, 2010, 2011, 2012, etc. You get the point.

This notion that banks are A) taking out a 3% loan to get a 7% loan on the books is not only unrealistic, but false considering the interest rate environment.

Also, someone mentioned the FED raising rates in either this thread or another thread. The FED doesn't control LONG TERM interest rates. Residential loans (which is what we're talking about here, because a commercial loan would have been in the LLC's name in the first place) are tethered to the 10 Year Treasury Note. The 10Y Treasury's interest rate is determined on the OPEN MARKET, not by some nefarious FED or rich bankers sitting in a smoke filled back room.

Getting DOS called by a bank has nothing to do with it being a performing loan or not. It has to do with the fact that the bank's risk is greatly altered by the sale of the collateral to which the NOTE is tied.

If you borrowed money from your neighbor, but gave him the keys to your car to hold in good faith as collateral AND THEN sold the car, you don't feel like the neighbor would feel uneasy about the loan he has outstanding with you? You don't feel like he'd want to get paid immediately?

By doing the repairs. The property's current value, which the appraiser gave an opinion of, is indicative of it's current state of needing repairs. Presumably you'll get equity (many call this sweat equity) from doing the repairs. You may or may not get dollar for dollar (more likely less than 70 cents on the dollar) equity for the repairs you have completed.

You can get equity on a property that doesn't need repairs by paying less than what others are paying. It sounds simplistic but you noted that the appraisal value used comparable sales (as they all do). So if the comparables in the area selling for 82k, then you get equity from paying considerably less. The question is how do you find people willing to sell to you for considerably less? Well that's the hard part. Motivated sellers are motivated by many different things. They may need to sell the property immediately so are willing to take a discount to market value. They may not want to deal with multiple offers and showing the home so they take a lower price, they may like a cash buyer over a bank financed buyer, they may be going through an event that requires liquidation of assets (divorce, etc). It could be many different things. But if the seller isn't motivated to sell, there isn't a solid reason for them to sell at a discount.

You have to define risk.

If you are paying with Cash then you have no monthly payments so the risk is whether it's worth what you paid for it, not whether the cash flow covers the note. You have no risk of being foreclosed on.

Then you have to decide if the rental income is sufficient, after you've brought the home up to rentable condition.

A real estate attorney is good to have, but not necessary. A contractor, whom you trust, is absolutely necessary if you aren't able/willing to do the necessary repairs to bring the property to that rentable condition. The accountant is nice to have, but not a necessity.

Do you have prospective renters already? If not, I'd argue that a property manager/ realtor / resource for finding tenants is more important than an accountant at this point.

I took it as, he offered 81k and that includes 4k of repair allowances. I don't know how you could expect to get a contract of 81k PLUS 4k of repair allowances through any underwriter for a mortgage. If no underwriter/lender is involved, I don't know why you'd pay for an appraisal in the first place since, as you mentioned Lynn, they usually a very closely tethered to the sales price.

If he was thinking the house was worth 85k and thought he'd be in for 4k in repairs so offered 81k and now the house appraised for 82k he's right in line with what the appraiser thinks. That is to say, if the house has 4k of deferred maintenance the appraiser knows that too and would adjust his value of the house accordingly.

An appraisal is just an opinion of value. The true value of anything is what someone is willing to pay. You are willing to pay 81k with a 4k repair adjustment. Which means that you are willing to pay 77k for the house without the repair adjustment.

The repair adjustment, carpet allowance, closing costs, etc that you roll into the loan amount is NET zero to the seller. You raise the price of the property by the adjustment and the seller agrees to fund that stipulation. If you don't get the stipulation funded, then you lower the price you agree to pay by the same amount.

It's like saying the 'real estate agent fees are paid by the seller'. They are never paid by the seller. They come out of the price of the sale, so they are paid by the buyer, 100% of the time, no exceptions. The bottom line is that the appraised value of the house in this case doesn't matter because it's A) above your committed price to purchase and B) is only an opinion of value for the purposes of establishing the deal as a market value for lenders and interested parties of the transaction.

Put another way, if the appraised value had been $120k, would it have been appropriate for the seller to come back and demand a higher selling price? Of course not.

There is zero difference between an S-Corp's tax treatment, a Partnership and a Sole Proprietors treatment of income. They are all pass through entities. So from a tax perspective having an S-Corp or having schedule E income or having Schedule C income on your taxes is exactly the same tax paid.

The only difference comes into whether it's a passive stream of income (i.e. owned by you personally,  as a non real estate professional ) or an active stream of income (i.e. you own a business that makes money buying and selling property). The passive stream is exempt from SS/Medicare taxation (lumped together as FICA).

A C-Corp has the worst tax treatment of all, if you are using a C-Corp for tax treatment you're getting double taxed on all income.

You can also use community banks for those commercial loans. Most allow 75-80% LTV on SFR 1-4 or Multi Family. Yes there will be personal guarantees, but the rates should be closer to 5% than 6%. Also, most community banks will portfolio their own loans which means the banker relationship you develop will go a long way toward selling the loan in loan committee and it means more than likely you won't have pre payment penalties. If you stabilize the property you can then get permanent take out financing through Fannie, etc. to get a 30 year amortization 4% fixed for 10 years type financing to improve your cash flow.

One has to look at financing deals with the stage of the property in mind. Fully stabilized properties are financed very differently than 'value-add' or Rehab properties.

That's exactly what the bank is asking the OP to do. Pay off the original note. A refinance is just the mechanism for funding that. The method you're describing is just a commercial real estate loan.