Note as Collateral: Sunday Morning Thoughts 10 February 2013

It’s no surprise that a note is collateral for its face value.  When considering becoming a private lender one would wonder do they have to wait for the maturity date of the loan agreement to receive a return on investment?  The short answer, no.

For arguments sake, let’s say you are a private lender who has a note with a face value of $100,000.  Granted you cannot use the note as if it was an ATM, but you can put it to more use than just sitting and waiting for the maturity date of the loan agreement to realize a return on investment.  A note can be used as collateral to purchase something else or you can sell the loan at face value or at a discount, or even option a portion of the note to someone else.

If you think that you do not have the right to sell the note, take a look at lending papers from large institutions, in the fine print, they have a clause with the equivalent of ‘and or assigns’, which gives them the right to resell your contract to another entity.

With the $100,000 note in hand you can borrow against the note to lend again, for a lessor amount but the note is an instrument of collateral.  Collateral is defined as:

a : of, relating to, or being collateral used as security (as for payment of a debt or performance of a contract)

b : secured by collateral.

Many private lenders resell their notes at a discount once the loan has matured.  A note is considered matured when it is at least 3 to 6 months old.  Often times, the investor, the lender has created a note for, will refinance the project with conventional lending after the maturity of the loan to pay off the private lender.

But what if the investor defaults on the loan payment?  Then the private lender can sell the note as a non-performing asset or do a foreclosure, whichever suits the lenders preference for a return on investment.

A private lender may also hold a first and a second on a property, but may only wish to sell either the first or second position.  The choice is that of the lender.  Many banking institutions can lose money in the second position, mainly due to not monitoring the payments of the borrower.  A borrower, when financial trouble hits will almost always default on the second mortgage payments long before they allow the first mortgage to default.

The second position is not necessarily a losing position.  If a borrower were to default on the second loan, the second can start a foreclosure and once the foreclosure is complete begin making payments to the first.

This is only an overview of what a private lender can do with a note, other than waiting for the maturity date to realize a return on investment.  Thinking outside of a conventional box may prove to be more profitable.  Conventional thought is to wait for maturity, the unconventional is to sell part or all interest in the note, use the note as collateral, or option the note.  Just remember consult with an attorney for the legal uses of a note before making a final decision.

Related articles

• Usury versus Reality (orthosphere.org)

Residential and Commercial Real Estate Investing: Sunday Morning Thoughts 5 August 2012

Loan (Photo credit: Philip Taylor PT)

In our previous posts we shared an overview of the A, B, C’s of commercial and residential real estate investing, and the pitfalls of alligator investments.

Our next look is residential and commercial real estate investing, not versus each other, which means a real estate holdings portfolio would be more stable in any market, buyer, seller, or flat if both types of investments are included.

Currently residential real estate, in certain markets, is seeing some improvement, but with more foreclosures on the horizon, that may change in the very near future.

Commercial real estate is also seeing fluctuations which will benefit commercial investors.  The factors are, but not limited to:

Maturing loans

Mismanagement of the asset and its negative effects on NOI

Insolvency

An underwater mortgage, owing more than 100% of property value

So how does a private lender take advantage of all these factors?

By investing in purchase loans, bridge loans, rehab loans, construction loans new and completion, and/ or become a second mortgage holder, or investing non-performing and performing notes.

Whichever strategy is your preference being the lender in today’s real estate market is a safe bet to increase the rate of return on your investment.

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Related articles

• Angelo Gordon to Start Mortgage Fund for Property Recovery Bet – Bloomberg (bloomberg.com)
• California Real Estate Professionals Receive Training to Help Investors Take Advantage of Today’s Housing Market (prweb.com)

Home Sales Up Foreclosures Going Up: Sunday Morning Thoughts 22 January 2012

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Home sales ended 2011 with an overall gain.  Mostly due to lower affordable prices, low-interest rates and a better outlook on the foreseeable job market.  It looks as though a real estate recovery is underway.

Homes sales were up but real estate prices were down and with the foreclosure crisis reigniting itself prices are due to go to new lows.  Many of the current sales for homes have been from foreclosures.   Short sales, once the dreaded enemy of many impatient investors is now the vehicle by which many real estate assets have been purchased and at hefty discounted prices for the more savvy investors.

So has flipping properties become a thing of the past?

Not at all flipping in a depressed market is still alive and well, and a well used strategy for many investors.  Only change has been the rules by which a flip can be done, but flipping nonetheless is still a viable practice.  Not all of the would-be homeowners will be able to negotiate with banks for a foreclosure let alone negotiate a short sale.

With more banks heating up the foreclosure pot, inventory is set to rise, more and more real estate deals will be sourced and made by savvy investors and home buyers alike.

But most foreclosures are sold by realtors.

Not all realtors can move foreclose properties, if the area is inundated with foreclosures a confused buyer may fall out of escrow on a few properties before finally deciding which property to close on.

So although the bleakness seems to be disappearing in some real estate markets, it is a matter of time before another cooling period will begin.

The Return of Foreclosures: Sunday Morning Thoughts 15 January 2012

Foreclosure is back and in a big way.

Many lenders took a lot of flack for the robo-signing of foreclosures.  But now with all the waiting and re evaluating period coming to an end, the banks will be stepping up the pace of foreclosures, thus creating a bigger real estate surplus.  All types of real estate from residential to underdeveloped land and everything between.

How will it all impact housing, buying, selling of real estate, and an investor’s bottom line in real estate?

The current buyers market will continue, but the heating up of the market will still be in the distant future due to the stricter changes in lending.

A new bottom may develop in some areas with more foreclosures due to enter the real estate market.

What is a possible strategy for buying properties in this weird market?

Being flexible.

Flexibility in your thinking of purchasing and owning real estate will be a necessity.  Buying and holding, leasing, and renting are all standards in real estate, but now the implementation of those standards will have to be examined.

Start thinking out of the box, because frankly, the box is an ever-changing structure and the rules are temporarily set in stone as we await the other shoe falling in our global economy.

But there is another question on the horizon, “What is going to happen with Fannie Mae and Freddie Mac?”

Minimizing Investment Risk with Options: Sunday Morning Thoughts 18 December 2011

Options are a great way to limit risk when entering into a market.  Stock options are similar to options in real estate, in that it is a way to minimize risk while maximizing your return on investment.

In simple terms, an option is a financial derivative that represents a contract sold by one party to another party.  The contract offers the buyer the right, but not the obligation, to buy a security or other financial asset at an agreed upon price during a certain period of time or on a specific date.

With stock options, there is a more detailed explanation for put and call options, each is its own strategy with a given stock during a given market for said stock.  For the purpose of this post we will not go into great detail of call and put option strategies.

A real estate option, in simple terms is the right to buy a property by the end of the option period.  If the property goes down in price by the end of the option period, the only investment at risk was the money put down for the option to purchase.  So if the deal goes south then you can walk away with losing a small amount versus owning the property and losing a substantial amount of an investment.

This is a similar type of risk minimizing strategy as with buying a stock option (whether a call or a put) and selling the option prior to its expiration versus buying and owning a stock.

The general strategy is to minimize risk while maximizing potential profit.

One difference with a stock option and a real estate option is the measure of volatility.  Real estate values do fluctuate a lot less than stock values during the same period of time.

A stock can be purchased at the opening bell, and then can have a change in value for better or worse by 20% or more within a few minutes.  Real estate values change at a slower pace, it is not likely for a home owner to go to sleep in a home worth $100,000 then find out by morning the price of the home has plummeted to $80,000.

Although a drastic change in value may happen in a quarter, it is not likely to change too significantly in one day; foreclosure areas are a good example of this.

As areas began experiencing a rise in foreclosures, the home prices began falling.  If a homeowner, not in distress, wanted to sell their property, the time to sell would be when the distressed neighbors are in pre-foreclosure, or when the area had little to no foreclosures.  Once the foreclosed property hits the market, the lender would first attempt to sell the property at market value, and then would begin entertaining reasonable lower offers on the property.

In the same scenario, if a person wanted to purchase a property and real estate market values were beginning to fall, instead of out right purchasing the property they could obtain a lease with the option to purchase the property, and in so doing they would limit the risk of owning a property that would be worth less than its purchase price.  If they purchase a property which is losing value the result could be less equity, no equity, or upside on their mortgage.

With a real estate option the potential buyer could just say no to the purchase, and walk away without having to lose anything more than the option payment.

With a real estate option it is much easier to enter and exit an opportunity than stock options, were you would have to sell your option to another buyer, and if there isn’t a buyer for when you need/ want to sell then you are stuck with your option.

Time is the enemy of options traders.

For real estate options time is a factor depending on your contract.  Some contracts ask for a 30 day notice for exercising or not exercising your option to purchase.

As a private lender for a property, the retail seller (borrower) would have to do all the “heavy lifting” of finding and evaluating the buyer/ leasee.

As a private lender you would still collect interest payments on a property as agreed, regardless of the retail seller (borrower) finding a person to buy, or lease with the option to purchase the property.

Private Lender Tips If a Loan Goes Bad: Sunday Morning Thoughts 05 June 2011

Image by bobbyfiend via Flickr

The goal for many private lenders is to make a return on investment better than CD rates.  If you chose the real estate investment wisely, you could stand to make more than CD rates, which is currently 2.39% for a  5 year term offered by Ally Bank.  Also to note with the volatility of the stock market, if you continue to invest in the stock market, then you will need to have more resolve than in previous years.  But with growth comes a little pain, does it have to be that way?  Short answer, no.

A private lender, with an investment secured by realty, may realize a profitable and safe return on investment.  Safe can be accomplished by being the first lien holder or as close as you can be to being the first lien holder.

As a second or third lien holder, a default can wipe-out your investment if the first lien holder files foreclosure first.  This isn’t to say that the second and third lien holder cannot file foreclosure if they are defaulted on to protect their interest in the property.  Most defaults begin with the lesser liens than with the primary.

So if you are the second or third lien holder then you can proceed with foreclosure per the contract you have with the borrower.  The loan servicing company can help with the process of foreclosure.  After filing foreclosure on the property, as the second or third lien holder you will have to begin making payments to the first lien holder or suffer foreclosure.  If the first loan has become delinquent then you will have to negotiate to bring the first loan current.

If you are the third lien holder on a property, you still can file foreclosure and you may be able to buy out the second lien holder’s position to make your interest in the property more stable, and if you can acquire the first lien holder’s note, then that would make you investment in the property even more stable.

Being the first lien holder not only yields you a better return on investment, but can also give your investment better stability.

Foreclosure on a bad loan is not the only option.  As a private lender you can allow the borrower to have another entity assume the loan. So instead filing foreclosure, if you or the borrower can find someone else to assume the loan, and use the down payment to bring all liens current, then that would be a win—win situation without the cost of court.  Being a private lender gives the flexibility to do more than just a standard few things as long as it is agreed upon by all involved parties.

Another option as a private lender is to allow the borrower to exercise a deed-in-lieu of foreclosure.  This can also avoid costly legal fees and you can either sell the defaulted note, or property.

Quick recap on what to do if the loan goes bad

1.    Be the first lien holder or as close to being the first lien holder
2.    Use a loan servicing company
3.    Have contracts in place for the what if’s
4.   Allow the loan to be assumable
5.   Use deed-in-lieu of foreclosure over a traditional foreclosure

Covering your downside can make all the difference in having an upside in passive income.

 

Today’s Housing Slump Equals Tomorrow’s Appreciation

As a private lender the current falling property values would alarm the most seasoned investor.  Most people are saying this is not the time to invest in real estate.  This theory or rationale has been said throughout time, and has proven itself, in most cases, to be wrong.  This is where having knowledge of the history of cycles in the housing market can make it less stressful and more profitable to invest in real estate.

The housing bubble was going to eventually burst, but of course no one thought it would rupture along with the demise of credit and the economy.  But as with the cycle for growing areas, we have already experienced a sharp decline in property values, then there was a slight rise, and now another decline, (this is pretty much happening as we posted in a previously).  After the slight decline there will be a flat line.  A flat line will be little to no improvement in housing values.  But this will not last; people will begin buying and shrinking the foreclosure surplus, and then finally buying properties from owners not in foreclosure.  The flat line will then become a housing market increasing in property values.

Many have seen the need to be on both sides of the down turn and subsequent upswing.  Buying and holding, and waiting for appreciation will prove to be a more than viable strategy in real estate investing in this current down market.

This is not the time to wait to invest in real estate.

Increase in interest for Commercial Real Estate: Sunday Morning Thoughts 30 January 2011

If you input ‘commercial backed securities’ in a search engine you will see approximately 12.3 million results, give or take a few, and depending on which search engine you prefer to use.  Among the plethora of results- ‘Cantor prepares to debut commercial mortgage backed bonds.’

Many other institutions already have commercial backed bonds.

The commercial real estate market and SFR (single family residence) market are at most times opposing one another.  When the interest for one is up the interest for the other is down.  As everyone is running to the nearest, next and best SFR foreclosure, there also exists over valued over bloated commercial foreclosures in abundance just like houses.

Also like houses, commercial real estate is many and varied- From 5 unit multi-family, mixed use, retail commercial, business commercial, and apartments.  When home foreclosures increase, so does the demand for apartments; displaced home owners need some place to live.  The choice is either family or find a rental.

During the housing boom vacancy rates for rentals increased.  Now that so many people are becoming non homeowners, there is a shift from ownership back to renter.  This shift contributes to an increase in value for apartments.  Increasing the net operating income by $1 increases the value of the property by $100.

At this time with more foreclosures on the horizon apartments and other types of rentals will be in an increasing demand for at least another 8-10 years.  As a private lender having a note on these types of properties which normally have a maturity of 5 years is a low risk investment with a very nice yield.

Is the U.S. Housing Market Bottoming out?

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According to Mark Zandi, Moody’s economist the current data is showing that the housing market has not hit bottom yet.  As stated in our last post, the housing market in the more desirable areas will experience leveling out after hitting the bottom, then a gradual increase which will pick up momentum.

We have not hit bottom yet but we are a little closer.  New construction of homes dropped in December, coupled with the existing homes sales rising and eminent foreclosures stalling, all this can equal home prices increasing moderately.  This is actually a false positive of a housing market recovery.

The more stable recovery is to come.

Once all the foreclosure robo-signing is sorted out and no longer favoring lender nor homeowner then the market will finally be back on track for a recovery.  Remember we spiraled into our current real estate slump with the subprime lending now it’s time to right the wrongs. 

If you are thinking about investing in the real estate market visit our website.

The Robo-Foreclosure mess and the effects on Private Lending: Sunday Morning Thoughts 16 January 2011

If you read last Sunday’s post then you will understand that the robo signing scandal has become the bane of most Banks.  Judicial foreclosures have been thrown out by Judges.  The reason, there was not enough proof on the lender’s part of owning the note; seems as though the process of foreclosure is going to take even longer.

With all the shoddy paperwork, what type of impact will this have on the real estate market?

A slowing effect on foreclosures, so basically property values should see an increase in markets that are considered desirable and a leveling in values for harder hit areas where every other house is a lender owned vacancy.  The future, the harder hit areas will become popular again as home values begin improving in the desirable areas, against the lower priced harder hit areas.  New inventory will also begin to pick up but not just yet that’s on the horizon.

How will this effect private lending?

Well not the same as it is affecting large banks.  Aside [If you buy paper from any institution then you better scrutinize the paperwork to make sure they are the current note holders among a myriad of other important things.]

The upside to the robo-signing  scandal, banks maybe a little easier to work with for short sales and loan modifications.

Private lenders will find themselves in a better investment in a shorter period of time, due to the slowing of foreclosures and the appreciation of various types of property. Even the DOW is showing appreciation in the REIT’s being offered.  In the coming months and years private lending will prove it self to be a very lucrative investment strategy in this weak yet improving real estate market.

Take advantage of the wave of our near future.