All Forum Posts by: Patrick Roberts

The points and prepays are where conventional will diverge from DSCR. Most DSCR loans will have 3+ year prepays and usually around a 0.5-1.0 more in points than a comparable conforming loan.

Yeah I basically never give any merit to what a seller estimates the ARV at. I run my own analysis and then put a range around that number for a sensitivity analysis. One of my core questions is "how far off can I be without getting into serious trouble on this?" I tend to err on the conservative side of that to have a margin of safety. The caveat though is that this kills a lot of potential deals that are marginable. I prefer quality over quantity, so Im ok with this.

 Survivorship bias is a real thing - glad that you're seeing that. You tend to only hear from the people who survived (were successful), not from the ones who tried and failed miserably. 

There will always be discomfort and fear of the unknown. If you feel that youve been thorough in your due diligence and have eliminated/mitigated as much risk as possible, then then the feelings are just discomfort that must be pushed through. 

All profit comes from risk - you will have to take risk to get anywhere, and risk implies the possibility of an unwanted outcome. If you have reduced the risk as much as practical, feel that the potential upside is sufficient for the risk that you will take, and have the ability to bear the risk/survive a bad outcome, then it's time to take a swing. If this is still too much to stomach, then it's time to find a less-risky activity. Everyone's risk tolerance is different and there is nothing wrong with that.

If you havent been as thorough as you know deep down that you should, then the fear is a self-preservation instinct and you have more work to do. 

The BR market has slowed a lot but there is still activity and decent deals. If you've got more than one viable exit strategy and a reasonable margin of safety, you'll likely be fine. 

Compliance-wise, this would not be owner occupied so a lot of Dodd Frank goes out the window. From an underwriting perspective, I wouldnt do this without a PG and a solid workup on the members/operators to understand who they are and their background. Most KYC/AML will still apply. I would also get a copy of the articles of org and operating agreement to verify that the members have authority to dispose of assets, borrow, encumber, etc. Make sure the entity is in good standing with the State - I could be wrong on this, but I believe some states have issues with allowing a UCC to be filed on an entity that is not in good standing. Also, watch the state in which the entity is domiciled - some states like NV, CA, WY, and the Dakotas can complicate matters.

Some other documents for NOO/investment properties that I would want are a collateralization of leases/rents and an affidavit of non owner occupancy. Title policies will likely be long form instead of short form, so you'll want someone knowledgeable on your side to look over the exceptions for any landmines.

I'd recommend a background check for any other entities owned by the members with a history of BK, tax liens, etc, and for any UCCs/tax liens currently filed against the entity. IRS liens/UCCs are particularly concerning. I've havent personally seen an IRS UCC foreclosure directly but have been warned by people who know their stuff that this could potentially prime the mortgage, so IRS filings for the sponsors/members, the entity, or any other correlated entities are a hard-decline for me (unless there's an installment plan and situation that makes sense). If there are any non-tax UCCs filed on the entity, make sure Title is aware/has the info (shouldnt impact the title policy, but you never know).

For the mortgage, I would be more aggressive with the covenants/agreements since this an NOO entity borrower - provisions for cross-default, financial and management performance requirements, change of entity management/ownership, minimum capitalization, etc. Depending on who you ask and the state, a confession of judgement/executory process may or may not fly. I've received conflicting advice on that. A lot of this will vary by state.

I'm not super knowledgeable when it comes to trusts, so I cant really speak to that part. 

 Just...wow. Did the lender have some idea of what was up, choosing to sell the loan rather than try to cure/foreclose?

 I have seen a local credit union finance one of these in Sumter SC, but I cant speak for your market. The deal I did see was a commercial loan with a 10% note rate, 25% down, and 15 year Am. Seller financing or private lending may be an option, but you'll have to find someone comfortable with the collateral. I personally would not lend my money on a $50k house for all of the reasons I listed above about the collateral - just too much work and risk for the small amount of yield. I dont know that a blanket/portfolio loan would solve the problem, either, as it would just amplify the inverted economy of scale - even more work for the same ROIC. 

@Chris Seveney is on the money. Also, true loan origination costs (not points), such as processing, legal, underwriting, appraisal, credit reports, etc are largely fixed. Processing a $50k loan is almost as much work as a $500k loan, so the costs passed through to the borrower are the same. Same goes for Title - while title policies may be cheaper, the recording and other fees are the same. The result is that you're going to have loan costs similar to most other loans. 

Additionally, because the loan is so small, the yield relative to the work is lower, so youre going to get hit with points up front and higher rates to make the loan profitable enough to be worthwhile. This is why so few lender go below $75k - too much squeeze for the juice.

Another issue is the collateral itself - most properties in this price range are basically niche, depreciating assets. They are difficult to liquidate and rehab/turn costs are relatively high compared to the property value if taken back as REO. Between the disproportionately high amount of work and overall risk given the yield, most lenders just avoid this range altogether.

Long story short, what youre looking for doesnt exist. Youre going to have to adjust your expectations.

Most DSCR loans will have between 0-6 months of seasoning requirements for cashout refi's on both the property and the underlying note, with 3+ being the most common. The type of underlying loan (purchase vs cashout refi) will also affect seasoning requirements for the loan - several dscr lenders will require 6-12 months seasoning on notes that were originated as a cashout refi, even if the property meets ownership seasoning requirements.

For fannie/freddie, youre looking at 12 months seasoning for a cashout refi.  

 As an LOA, you'll be basically be doing all of the legwork of a file - entering all of the data into whatever LOS is being used, processing the loan, preliminary credit analysis, reviewing all of the documents for completeness and accuracy, communicating with borrowers, etc. You'll also have a front row seat to how the lender does everything - communication, marketing, processing, etc. You'll get to see how the pie is made from the inside. 

If you can find an LOA role that offers base pay, then it's likely a good opportunity; most do not offer base, and if they do, it's usually minimum wage. Typically, you'll be licensed and will receive bps on the LO's production, as well as the ability to originate your own loans at full comp when you come across the opportunity. It's unlikely that you'll be able to be an LOA part time as it basically requires full commitment. You can possibly manage a job in evenings, like serving or bartending or whatever, but you'll be working yourself to death. That's what the cash runway is for - to cover your living expenses until you start making money.