Nice transaction…done dozens of these over the years. Your questions regarding what to do is a bit misleading in that if you have already completed this transaction, unless your mortgagee agrees to amend the mortgage, you cannot add a balloon payment in 36 months. The time to get that agreed upon is before the closing, not after. It might take a reward to your buyer to convince them to balloon/refinance within 36 months. That reward could be an offer to discount to entice them to do something like go through another underwriting process for refinancing.
Regarding selling the note, you might want to consider doing this. Not knowing what you have in the property, it is difficult to advise you. But, in my experience, you are best NOT to sell the entire mortgage, only the front part of the mortgage. Here is an example:
Assuming you can sell this 1st mortgage at a discount to yield your investor/buyer 12%, look at the numbers for Present Value (PV), Number of Payments (N), Amount of Payment (PMT), interest or yield on investment (i/y).
360 PMT 9.9% i/y $391.59 PMT $45,000 PV
360 12 391.59 38,069.33
240 35,563.61
180 32,627.59
So, you can see that if you have a buyer who agrees to purchase the note at 12%, the difference in selling the whole note vs. a partial such as 240 or 180 payments is insignificant on the present value but can become most significant on the back end. Here is why:
- the longer your mortgagee pays, the more valueable the back end becomes due to more seasoning.
- in the event of default and you only sold partial, you get first right of refusal to take back the property and resell for another profit.
- if there is a resale on the property or a refinance, you will receive a windfall profit at the closing.
- back ends retained can be used for down payments on new deals, hypothicated to a bank for new money loans, traded for debt, and much more!
Never sell the entire note!!! Back ends seem worthless now, but it’s better than having a CD or other investment, especially if you have no money left in the deal. You can put your back ends in your IRA also, if that made sense.
IN addition, you have brought up a very astute point in ‘restructuring the note’ after the closing. It would be difficult to illustrate the benefits without knowing your total cost in this deal but I can illustrate my point with an assumed amount.
Let’s say you had a total cost in this deal of $35,000. You sold it for $50k with $5k down. Let’s see what that looks like:
360 N 9.9 i $391.59 PMT $45,000 PV
$35000 invested
-5000 down
$25,000 left in deal
360 n 18,72 i/y $391.59 PMT $25,000 PV
So your yield on these assumption are that if you kept $25k in the deal, you would earn 18.72% over 30 years of this played out for the full term. Now, let’s look at restructuring the note to a payment of $500/month and give the buyer an incentive to raise his payments. This is how to present that…If you increase your payment by just $108/month for a total of $500/month, I will reduce your interest rate to 8.5%. Let’s see how this would benefit you…(then, you hand the calculator to your customer) and say, calculate this…the original mortgage is $391.59 for 30 years…so multiply $391.59 times 360…what do you get. They punch the numbers and the answer is $95,970.93. Now calculate this $500/month times 143.76 payments…what does that equal? They punch the numbers and say $71,881.44. Then you say, which amount do you want to pay? After you close this, here is what you will find (although I would recommend you calculate your offers way before you present a restructure deal to your buyers).
143.76 N 8.5% i/y $500.00 PMT $45,000 PV
Let’s plug in your cost to see your yield prior to selling note.
143.76 N 22.3% i/y $500.00 PMT $25,000 PV
So, if you hold the note and restructure, you earn 22.3% rather than 18.72%.
Having said all that, it is a bit more difficult to find an institutional note buyer for this deal as it is a mobile home and land package and our economy has pulled in the reigns on note buying. However, if your mobile home has an FHA permanent foundation, you can get financing for your buyers up to 97% for a mobile home and land package. fyi, an FHA permanent foundation would include digging a trench between the pillars to pour footings, then add the blocks to make a contiguous foundation around the unit (vs. underpinning skirting). You can get their requirements online or by calling FHA.
If you customer is agreeable and can pay ALL creditors (that show up on their credit report) on time for 12 consecutive months, and if all other DTI and proof of income is in line, FHA will finance them even with low scores.
Hope this helps.
Rob