Real Estate Transaction On Steroids

Hava Knote wanted to purchase a prime buildable lot to build the “dream-house” he had promised his wife. Realtor Deal Whiz had listed such a lot for $50,000, and the lot was perfect for Knote's plans. But Knote was having trouble getting his new home/land package financed, due to a shortage of cash. However, his financial statement included some rental properties, and a $ 132,000 commercial real estate note.

Spotting the note, Whiz suggested that Knote should sell that paper to raise cash. Knote said he wouldn't take less than $105,000 for the note, but nobody was willing to pay him that much. But Whiz was persistent. He inquired about the particulars, and learned it was 2nd position paper that Knote had carried back from the sale of an apartment complex six months earlier.

Knote had sold the apartments for $400,000, receiving $20,000 cash down. There was a $248,000 senior loan in front of Knote's note, amortizing over 20 years at 8%, with 18 years left. Knote carried the balance with a 2nd position note for $132,000, payable monthly, interest only at 8%, with 18 years left. Knote carried the balance with a 2nd position note for $132,000, payable monthly, interest only at 8%. The balance was due in 34 months. The first was now paid down to $244,000, and the 2nd was due to pay off in 28 months. Whiz also learned that the apartments had a marginal debt coverage ratio of 1.1 and the rent history wasn't yet stabilized.

Whiz contacted a cash flow consultant, FastCashFunding.com, to learn what might be done with Knote's note. Looking over the particulars, and the shaky property history, FastCashFunding.com told Whiz that an appraisal would be needed to make any decisions. As luck would have it, Whiz discovered that Knote had obtained a full blown appraisal two years earlier. He sent it to FastCashFunding.com. Though supporting the sales price; the appraisal also indicated problems that were still ongoing, as demonstrated by the continuing unstable rental history. This made the 2nd note a high risk, and certainly no chance of selling for $105,000. But Hava Knote only needed $50,000 to purchase the prime building lot, and then he could put up that free and clear lot as down payment he needed to complete his construction plans.

FastCashFunding.com offered Knote $52,000, to purchase the 28 remaining monthly, plus buy $79,000 out of the $132,000 balloon payment. Knote would keep the remaining $53,000 share of the balloon. Knote got the cash he needed to buy the lot and get construction financing- and a total of $105,000 for his note; FastCashFunding.com received a nice investment with much less risk exposure; and Deal Whiz sold his lot and made a nice little commission for himself! The partial purchase agreement turned paper into gold- and allowed everyone to solve their problems!

The Right Stuff

All real estate notes are evaluated in relation to primary qualifications, used in evaluating the risk/yield acceptance levels of the individual real estate note:
Property Value
Loan to Value (Note Balance vs. Property Value)
Payer's Hard Equity (Down Payment)
Payer's Credit Rating
Payer's Income History
Real Estate Note Seasoning
Account History of the Real Estate Note

2nd Position Real Estate Notes bring several more factors to the table:
Ratio between the first mortgage and the 2nd mortgage?
Rate and Terms of the Senior debt?
Are there any Balloon Payments on the first that are due before the 2nd is payed off?
Are there any artificial terms on the senior debt that camouflage potential risk to the 2nd?

What about second position real estate notes secured by commercial real estate?
Operating history of the property
Debt coverage ratio of the property (does the property “carry itself” or carry enough income to more than cover the debt service regardless of what happens with the payer)?
The preferred ratio of income to debt ratio to net operating income is 1.3 to 1.5 for senior loans, depending on the property type. This ratio should also provide for coverage on the debt service for the second, with no negative cash flow.

Commercial 2nds are generally not too attractive to note buyers because of other circumstances in the transaction, and the Payer's down payment will usually be a very critical in a potential note buyer's decision. More real estate note information is available at Fastcashfunding.com.

2nds- More Than One Helping!

In the private note industry, we routinely see real estate notes that are referred to as seconds. The term “2nds” refers to real estate notes that are in lien position, or in other words “junior” to an existing senior loan where both loans are secured by the same collateral. The senior lien note (“first”) has a priority claim over the second loan against the collateral in the event of Payor default. Behind one or more senior loans in the chain of title means that 2nd position real estate notes have less total equity to insure that there will be sufficient collateral available to satisfy the payment of the real estate note, and preserve the invested capital, in the event of default. This also means that 2nd position note holders have to absorb liability for existing senior real estate notes, in order to protect their own interests in the event of default.

Due to this potential liability, the holder of a second note must have more liquid reserve capital available to cover his/her position in the event of default. The need to maintain sufficient liquid reserves to protect a second position note, poses an “opportunity cost” to the investor in terms of not having that money available for higher yielding investments. All things being equal, a senior position real estate note is more desirable than a second position real estate note. Because of the risk factors intrinsic to “2nds”, some types of second position real estate notes are not viable in the private cash flow markets.

For example, senior position notes secured by freestanding manufactured homes known as mobile homes, and business notes, already have somewhat limited markets, due to the risks and default rates associated with these sectors. “2nds” secured by such assets are virtually impossible to sell in most instances except when there is a large down payment, good credit, and decent collateral. Still the private cash flow industry has long been a source for second position real estate notes. However, it is important to understand that “real estate note” is not the whole picture in describing a note investment.

There are real estate notes that are secured by single-family homes and condos. There are commercial real estate notes that are secured by income producing property which includes multi-family housing of more than four units, retail properties, gas stations, office buildings, hotel/motel buildings, restaurant properties, industrial properties, and agricultural land operations as well. Also, there are land notes, which include prime building lots, semi-improved lots or parcels less than 15 acres such as vacation properties, commercial lots or development parcels, raw land that are unimproved or parcels, acreage over 15 acres, agricultural land.

Each of these has their own set of risk factors. It is helpful to understand that “2nds” on many condos, commercial properties, and land notes, often are not viable for the same reasons that business notes and mobile home notes are not attractive as they carry to much risk, as there is not enough equity. Like all investing, it is a question of two basic facts that drive investors to purchase any note, which is yield and the degree of risk to obtain that yield. Another important factor in the private cash flow industry is driven by investment value rather than fair market value. Investment value defines the value of an investment to a particular investor, or class of investors as distinguished from fair market value, which represents an impersonal and over all detached marketplace.

Essentially, “investment value is based on an individual investor's investment requirements. It reflects the subjective relationship between a particular investor, and a given investment, which in turn makes the private cash flow industry such a thriving marketplace. It means investor flexibility that doesn't have a tightly defined structuring norm that gives the privately owned paper asset side of financial markets a greater degree of latitude and attitude that can be found in conventional lending markets. But it is also important to recognize that the flexibility of the private cash flow markets makes it very difficult to simply provide a generic answer to how much is my real estate or other note is worth? As no two notes are the same, and no two real estate note or other cash flow buyers are the same. All real estate notes or other cash flows have to be carefully scrutinized individually in order to provide a truly thorough answer to this question.

Though buyers for “2nds” inherently require higher discounts and yield spreads to justify the risk of purchasing this type of paper, the availability of this resource, and the ability to creatively structure real estate note purchases, serves as a lifesaver for your clients who have a pressing need for liquid cash now. Fell free to contact me if you need more information on how to solve your clients problems by selling any second position notes they are holding.

Manufactured or Modular?

The origins of manufactured homes can be traced back to the 1930's. Originally, all manufactured homes were known as trailers, and they were 8 feet wide. By the 1950's, the width on most models had grown to 10 ft; by 1962 the width expanded to 12 ft, which at this point trailers became known as mobile homes. What's the difference between a mobile home, a manufactured home, and a modular home? For the most part, it all depends on how the home is built. Since 1976, all manufactured homes must comply with the National Manufactured Home Construction and Safety Standards, administered by HUD.

The federal legislation greatly improved the quality and the overall government intervention of manufactured home construction and design, including fire resistance, energy efficiency, and durability. If built to these HUD standards, which includes retaining the chassis, it's a manufactured home (still commonly referred to as a mobile home). If a home is built in the factory to meet state or local building codes, it is a modular housing or prefab housing, that technically built to higher standards. In reality, however, most of the major manufactured home builders produce both types of homes with relatively few differences with regard to superstructure and infrastructure.

The real differences materialize is in the quality of the interior finish work, plumbing fixtures, flooring, appliances, cabinetry, and other similar amenities. A high end manufactured home (mobile home), will often present a durable, spacious, comfortable, and richly appointed living area, whereas a low end modular home will be smaller and more reminiscent of a basic small tract site built home, with very limited features. If you are currently selling a mobile home or single family real estate note, please go to Fastcashfunding.com, as we are buyers of both including business notes.

Business Notes Bust or Bonanza!

The practice of “hiding” income is commonplace in the world of small business, but off the books income will not add to the sales price or worth of the business. In fact, most likely it will have an adverse affect and decrease the value of a business. As potential buyers for the business are going to be wary of a business seller who insists that an unverifiable income will be included. As you can see income verification can become a double-edged sword, whereas if the buyer is not willing to be above board with Uncle Sam, then most likely s/he will not be honest with a potential buyer as well. And the potential buyer could blow the whistle on the Seller, therefore creating havoc on the whole transaction.

It would be better for the seller to simply learn about the multitude of various tax advantages that are now available to the small business owner, so that s/he can shelter their income in a verifiable and legal way. Even more problematic are the instances where sellers fail to properly account for the tangible assets of the business, and the appropriate value of those assets. Far too many business sellers have not accurately kept good records, as some tangible assets may have been “expensed out” in the same year as the purchase under favorable tax guidelines, rather than capitalized. These assets are frequently overlooked. And intangible assets are not normally recorded on a company's books unless they were purchased from outside the company.

Those that were generated internally by the existing owner do not show up on the balance sheet, including identifiable tangible assets. Chances are high that your client purchased a preexisting business, and again, when it was resold the parties involved all took the easy way out by simply lumping all the intangible assets together into everything else and classifying it as “goodwill” rather than carefully segregating those discrete intangible assets that could have been expensed out, depreciated, or amortized, and properly valued accordingly.

Intangible assets often represent the largest component of economic value of a small business or professional practice. Note investors are very interested in making sure these asset values have been properly accounted for, particularly if some of these intangible assets have collateral value as hard assets, which will usually increase the viability of the note. But what if you are coming late to the party? Or what if your client already sold his business and now is holding a business note and now needs cash? What if the note is a little wrinkled around the edges? No question, that could pose a problem... but thankfully, in many instances, these poorly crafted deals can be salvaged. For more information, go to fastcashfunding.com.

Manufactured Housing On The Rise!

Welcome to part 2 of my blog on Manufactured Housing. Fortunately, the private paper investment markets have slowly gravitated toward the seller and dealer financed carry back notes secured by used manufactured homes in parks. It is important to recognize that real estate note buyers are not lenders. Real estate note investors purchase existing loan notes to hold as alternative investments, comparable to what they can get with a well managed stock portfolio or real estate investment. Where lenders traditionally look to bond market returns as a benchmark, working on thinner yield spreads on higher volume and discount points. Naturally real estate note buyers demand higher yield structures for their mobile home note investments.

Another important distinction is risk management. Though the private investors who will purchase these real estate notes are much more risk tolerant than traditional lenders due to the well documented default factors in manufactured housing, knowledgeable investors purchasing notes secured by mobile homes, require a deeper equity cushion to protect their investment. This in turn causes these types of notes to have a steeper discount structure than real estate notes do. It is helpful to understand that the manufactured home industry's research through the latter half of the 1990's, indicated that lender's loss recovery rate on defaulted loans was only 82.5 cents on the dollar and that was in a market that was thriving!! Real estate note buyers will not accept that type of loss exposure. They demand 100% on the dollar recovery on any defaulted notes. Subsequently, a note buyer for mobile homes will purchase an existing mobile home note at a deep discount if necessary, to preserve the necessity equity cushion.

Alternatively, we will use a safe structured purchase agreement such as a partial purchase, or a split funded purchases, when necessary, to achieve the necessary equity protection. These structured purchase agreements can be deal savers in situations where the seller is not able or willing to discount deeply enough to satisfy the note buyer's equity protection requirements. If you have clients who are holding manufactured home notes and are looking for ways to get needed cash, feel free to give me a call. I'll be happy to explore their options with you.

Manufactured Housing On The Rise!

Despite an history of severe up and down cycles, the manufactured housing industry is booming throughout the United States. It is estimated that close to 10 million American households now live in manufactured housing, including almost two million new manufactured home sales over the past few years, which represent one out of every three total new home sales. Contrary to the “trailer trash” stereotype of the people who inhabit them, manufactured homes have evolved in an acceptable alternative to site-built homes, condos, and apartment housing. These new generation mobile homes aren't the same as the mobile homes that our parents or grand parents may have lived in. As the construction of mobile homes have dramatically improved since 1976, so too have the demographics of the people who purchase them.

The driving force behind the mobile homes has been the affordable price, as the average sales price of a new stick built home cost on the average 3 to 4 times more than a similar quality manufactured home (not counting the cost of the land). And at the same time, improvements in construction quality have led to an average useful life of 55.8 years, while also providing a distinct advantage in the cost effectiveness of owning and maintaining a manufactured home, further enhancing the growing broad based appeal among current home buyers.

The growth in manufactured housing has also spawned corresponding growth in several related industries as well to include; dealerships, park owners, and manufactured housing rehab/remodeling specialists. However, many of these businessmen, as well as the many manufactured home owners themselves, have had to contend with a major problem over the years. The manufactured housing market place has historically been a stepchild in the traditional institutional lending arena long under served by a fragmented funding pipeline. For “freestanding” mobile home parks, finding purchase money hasn't been a difficult proposition when buying a new home- but refinancing, and finding the funds to purchase an existing resale manufactured home, are almost impossible!

Consequently, over the past 10 years, owner financing has facilitated an estimated 46% of all mobile home resales. Creating an average of approximately 430,000 new notes every year, these seller held paper assets are estimated to represent $6 billion annually of owner financed debt and $ 30 billion dollars of total assets in just the past five years alone! For many of these note holders, this paper is an albatross, weighing down their present circumstances. For manufactured home dealers, holding this paper on their used homes resales may be drying their ability to obtain needed “floor plan” financing to maintain their sales inventory. Look for my next blog for more information on mobile homes. In the meantime, should you have a mobile home note you want to sell or you are looking for more information, please contact us.

Grease The Wheels

Manufactured housing industry estimates indicate that approximately 800,000 to 900,000 used manufactured homes change hands throughout the U.S. In the average year! Although some real estate offices specialize in mobile home sales, and some have incorporated mobile home sales into their inventory on a case by case basis, the “freestanding” mobile home brokerage industry has never been strong. Part of the reason is no doubt due to the fact that mobile home prices are generally much less, so the average commission per sale is a lot less motivating on a time/cost basis.

A more obvious problem, however is that there is no strong lending pipeline in place, to provide the financing necessary to grease the wheels of a sale for used mobile homes! In fact, industry studies indicate that the major market for mobile home financing lies in resales. When there is no structure for financing in a cash deficient marketplace, there is no liquidity creating a vacuum that inhibits normal business activity!

Brokers need financing to make sales without this financing, the distribution channel breaks down, and many mobile home owners are faced with going it alone! Subsequently, these private homeowners either wind up selling their manufactured homes for much less than they are worth, in order to get the cash they need or they wind up with owner financing themselves, in order to make the sale. Historically, about 46% of these sales are owner-financed. If this much owner financing is going to happen anyway, how can the secondary private paper marketplace help the manufactured home broker, and his homeowner client?

The primary advantage is the provision of a new source of fluid funding options and additional liquidity. Understanding how to work in this environment allows the creative broker to increase his inventory of “bread and butter” commission sales; and also provides a back door for converting mobile home note holders into customers for the purchase of new homes or other properties. If you or your client have a mobile home note or real estate note that you would like to fund, contact us or call us toll free 866-841-2420.

Tin Cans To Gold Pans!

Despite an history of severe up and down cycles, the manufactured housing industry is booming throughout the United States. It is estimated that close to 10 million American households now live in manufactured housing, including almost two million new manufactured home sales over the past few years, which represent one out of every three total new home sales. Contrary to the “trailer trash” stereotype of the people who inhabit them, manufactured homes have evolved in an acceptable alternative to site-built homes, condos, and apartment housing. These new generation mobile homes aren't the same as the mobile homes that our parents or grand parents may have lived in. As the construction of mobile homes have dramatically improved since 1976, so too have the demographics of the people who purchase them.

The driving force behind the mobile homes has been the affordable price, as the average sales price of a new stick built home cost on the average 3 to 4 times more than a similar quality manufactured home (not counting the cost of the land). And at the same time, improvements in construction quality have led to an average useful life of 55.8 years, while also providing a distinct advantage in the cost effectiveness of owning and maintaining a manufactured home, further enhancing the growing broad based appeal among current home buyers.

The growth in manufactured housing has also spawned corresponding growth in several related industries as well to include; dealerships, park owners, and manufactured housing rehab/remodeling specialists. However, many of these businessmen, as well as the many manufactured home owners themselves, have had to contend with a major problem over the years. The manufactured housing market place has historically been a stepchild in the traditional institutional lending arena long under served by a fragmented funding pipeline. For “freestanding” mobile home parks, finding purchase money hasn't been a difficult proposition when buying a new home- but refinancing, and finding the funds to purchase an existing resale manufactured home, are almost impossible!

Consequently, over the past 10 years, owner financing has facilitated an estimated 46% of all mobile home resales. Creating an average of approximately 430,000 new notes every year, these seller held paper assets are estimated to represent $6 billion annually of owner financed debt and $ 30 billion dollars of total assets in just the past five years alone! For many of these note holders, this paper is an albatross, weighing down their present circumstances. For manufactured home dealers, holding this paper on their used homes resales may be drying their ability to obtain needed “floor plan” financing to maintain their sales inventory. And for the park owners, it may tie up the funds necessary for capitol improvements, or other more attractive investment opportunities. And for real estate and mobile home brokers, it may determine whether they can get a particular property sold. As for homeowners, these paper assets can be a real nightmare to wade through in resolving new home purchases, divorce, estates, medical emergencies, retirement planning, and similar circumstances requiring liquid cash.

Fortunately, the private paper investment markets have slowly gravitated toward the seller and dealer financed carry back notes secured by used manufactured homes in parks. It is important to recognize that real estate note buyers are not lenders. Real estate note investors purchase existing loan notes to hold as alternative investments, comparable to what they can get with a well managed stock portfolio or real estate investment. Where lenders traditionally look to bond market returns as a benchmark, working on thinner yield spreads on higher volume and discount points. Naturally real estate note buyers demand higher yield structures for their mobile home note investments.

Another important distinction is risk management. Though the private investors who will purchase these real estate notes are much more risk tolerant than traditional lenders due to the well documented default factors in manufactured housing, knowledgeable investors purchasing notes secured by mobile homes, require a deeper equity cushion to protect their investment. This in turn causes these types of notes to have a steeper discount structure than real estate notes do. It is helpful to understand that the manufactured home industry's research through the latter half of the 1990's, indicated that lender's loss recovery rate on defaulted loans was only 82.5 cents on the dollar and that was in a market that was thriving!! Real estate note buyers will not accept that type of loss exposure. They demand 100% on the dollar recovery on any defaulted notes. Subsequently, a note buyer for mobile homes will purchase an existing mobile home note at a deep discount if necessary, to preserve the necessity equity cushion.

Alternatively, we will use a safe structured purchase agreement such as a partial purchase, or a split funded purchases, when necessary, to achieve the necessary equity protection. These structured purchase agreements can be deal savers in situations where the seller is not able or willing to discount deeply enough to satisfy the note buyer's equity protection requirements. If you have clients who are holding manufactured home notes and are looking for ways to get needed cash, feel free to give me a call toll free at 866-841-2420 or please visit our website. I'll be happy to explore their options with you!