I was wondering if anybody ever bought properties at a discount, put buyers in them that can’t get 100% loans otherwise and then sell the note.
ie. I buy foreclosure for 65k. put 15k in. appraises 120k. I owner finance for 120k. sell the note for 100% (some note buyers claim they will pay up to 100%) and make 40k. I avoid paying a realtor fee and also am able to move the property quick. You can generally move an owner finance property pretty quick. I guess there are other factors involved as for if you can actually sell the note for 100% of face though…?
That is pretty much what I tried to do, but all the note buyers I talked to required 10% down and 600 FICO score from my buyer. I can get them 100% financed if they had 600 FICO score and not have to take a discount.
Let me preface this with I am by no means an expert. I think you would be very hard pressed to find an investor to give you 120K check without seasoning and without discounting for the investors yield. In many cases, the less seasoning there is, the higher the risk, and the higher the discount. Also, the note business is driven by the time value of money and required and expected yields. But back to your 100% scenario. I actually used this scenario in a paper I wrote in Grad School several years ago.
A typical scenario “An existing note with a balance of $65,828.39, monthly payments of $513.64 interest rate of 8% with 290 remaining payments. A full purchase at an investor yield of 9.25%, less 3K broker commission, would net the seller of the note $56,446.65”.
However in a Multi-stage payout the investor would purchase the next 80 payments, less 3K broker commission for $32,913.89. Beginning with payment 81 the investor would purchase the remaining 210 payments for $32,955. This nets a total amount to the seller of $65,869. So as can be seen the seller of the note gets his 100% but it took almost 7 years.
When comparing offers to purchase notes you have to bring everything back to present value, otherwise you can get fooled by the gross numbers. In the multi-stage payout example above you’re not getting 100% of the note value. You’re getting $32,913 on day one and $32,955 at the end of 80 months. Discounting the second payment back to present at 9.25% results in a present value of about $17,600, adding that to the $32,913 in hand gives you a net present value of $50,513. Now the deal doesn’t look so attractive.