Acceptable Discount On A 2nd Note.
I am working on a deal involving a 6 plex. It has a 94K first and a privately held 38K second. Appraisal is 170K (I think 150 might be closer) The current owner is 2 months behind in their payments I am interested in a Sub To blend. I have written the note holder that I would like to buy his note for cash. I have heard that seconds, especially ones that are delinquent are usually discounted 70% 50% would be great for me.
What is the norm in this instance so that I have a measure to go by, I am thinking of offering 10K cash.
Randall
[addsig]
As you know there is no norm in creative RE investing. I offered $5000 for a $30,000 note and I'm thinking that I'll need to go up to about $7500 or $8000 to get the deal done. This is the first time I have dealt with private notes but I would think that it would be easier to deal with an individual rather than a big corporation. Individuals have more needs and more wants so if you can appeal to them that way, you'll have a better chance than simply being logical and explaining the time value of money.
Just my thoughts
It comes down to two things.
Is the note holder in a panic about what is going on, or will they be willing to be the bad guy.
What is the average % of value that properties bring at the sale.
Lets say that at the sale the property will normally bring 80% of present value. 150 X .8 = 120
Fist note 94 plus some lawer fees lets say 5 or a total of 99.
So the property sales for 120 first gets paid 99 second gets paid 21. Thats 55% and they have to wait untill the sale to get it.
So it comes down to what the note holder is thinking and what that expect to get paid.
I will get a chance to assess their motivation next week. I am hoping to get the 38K down to 10-15 as I want the propertyand this will improve cash flow. I am sure that the property would bring less than 80% at auction and since it is a 6 plex won't qualify for conventional financing.