All Forum Posts by: Mike Hartzog

Quick books is what you need.

Ok got it.  With both properties securing the loan you are in good shape.  Probably makes sense to have an attorney review the ICA and tell you what your risks are.

Unless you were to subordinate your 1st lien to the 2nd your foreclosure on the 1st would wipe out the junior liens.  You would either get a full payoff or get the property back free of liens with the exception of any tax and/or municipal liens that might have been attached.  From my perspective, your two risks are the two separate loans which could potentially leave you in possession of just one of the properties in the event of default and foreclosure, and ICA language which reduces your rights as a 1st position lender to protect your financial position in the property.   

If a the 2nd position lender wants an ICA, the motivation is typically to help them protect their investment.  2nd position lenders can protect their interest by foreclosing and, if they are not paid off, either paying off the 1st lien themselves or bringing it current and making the scheduled payments.  If the 1st forecloses, they can bid at the sheriff's sale up to the combined amounts due on both 1st and 2nd to ensure they either retain the property or get a full payoff.  They can also buy the loan from the 1st lien holder, giving them more control and ability to work something out with the borrower.  An ICA which gives them the right to buy the loan with predefined terms within a certain time frame after default and avoid the foreclosure path would not be unreasonable.  Again, it boils down to ICA language.

I think it boils down to the terms of the ICA.   In the event of default, you would want to retain your ability to either get a full payoff or get both properties back.  Because the properties are more valuable together I would look at making a single loan secured by both.

In a refinance scenario, you do not need a loan mod because you will get a full payoff as part of that process.  I would agree to put FCL on hold in exchange for the borrower resuming monthly payments while the refinance is pending.  If they can't or won't do that, chances are they are using the story as a delay tactic.

I have sold on paperstac and thought it was a decent platform and user experience.  No complaints.

The notes you create are assets with a cost basis = the s amount loaned.  The interest portion of the payments you receive are straight income.  The principal parts reduce your cost basis.  When you sell the loan,  assuming you sell it at par (amount owed), there is no gain on that sale because you sold it at your cost basis.    In situations where you sell for more than your cost basis, the gain is taxes based on the capital gain rules, depending  on how long you held the asset, i.e., long or short term gain.

I second @Charles Campbell comments.  I have sat in on Tom's presentations at the Paper Source conference on several occasions.  Very entertaining and informative.  He tends to focus on performing seller finance notes, rather than defaulted institutional notes, and using partial contracts to buy and sell them profitably.  Bring your financial calculator (Excel preferably) and prepare to have your mind blown.  Takes some work to get up that learning curve but it is worth the effort.

To build on Chris Seveney's point, pulling a title report should be done prior to buying as part of your due diligence.   (http://protitleusa.com/ is a good source for these.)  This is just as important as inspecting the property itself.   You don't want own something that has significant outstanding liens on it, because you will have to pay them to clear title.  There can also be cases where you simply can't clear title without waiting out a redemption period or filing a quiet title suit, as is the case with many tax deed properties.  Do your homework first.  As long as there are no redemption period related issues, you should be able to get title insurance, even with liens attached.  (Because the insurance company will call them out in the policy as exclusions/exceptions in that case.)

@Chad U.

Yeah, I spent some time to figure this stuff our for my own business.  Fortunately I was able to get some advice and confirmation of my current practices from a note savvy accountant at the IMN conference a few years back.  One really tricky aspect comes into play with partials.  As the purchaser of a partial, there is a separate amortization schedule in the contract which differs from that of the underlying loan.  So the principal and interest breakout received from the loan servicer is not the breakout that needs to be applied in the books.  In this case we end up calculating how much of the interest should be reallocated and applied to the asset as principal, and this must be done individually for each payment received.  That reallocation is done with a GL entry and it leaves us with accurate interest income totals which agree with what the servicer reports on the 1099-INT, and correctly reduces the asset value in line with the amortization schedule in the partial contract.  (Sorry to geek out on you there but, for some reason I find this stuff interesting.)