Is It Worth Holding A Note?
I have a buyer who is interested in purchasing one of my properties i just recently acquired. She is willing to put down 75K and wants me to hold a note for 45K with monthly payments of 1K with interest @ 7%, with a balloon payment due the 12th month. She said she is waiting for a lawsuit settlement, the reason for the balloon payment.
The note will be put in her name as well as her 80 year old fathers name, who will be living in the house 5-6 months out of the year (Snowbird I think)
I have never held paper before, and I was wondering if anyone could tell me the pitfalls of holding a note.
If anything should happen to the father, god forbid, and he passes while I'm holding the note, how does this affect the note?
What would happen if either of them should file bankruptcy during the 1 year period?
Any feedback would be greatly appreciated.
1. Assuming the sale price is $120K and the value is really there (sale price is not inflated) the note would be well secured by the property (~38% LTV).
2. If you needed to sell the note before it was paid off the interest rate is low. It is also a balloon loan and this is less popular with note investors. Hence more illiquid.
3. If you had to sell the property at a discount to get it to move then how much of a discount would be needed. By taking the note are you getting a better price? Neither question has to do with the risks but it does go to your motivation and your total returns.
4. The father does not have to be on the title or the note. As Gail noted, even if he is you just need to make sure that each person is 100% responsible for the full debt. If you put the father on the title and note is that because of better credit or something? I am not saying you should count age against him. Just that he can legally live there and not be on the title.
5. BK is a problem. Not common compared to the number of mortgages out there. Not rare either. If the credit scores are good it is less likely to happen then if they are heading down hill fast. If there is a BK filing expect that any claim to take back the house would be slowed up. You are still protected but you would be delayed. The delay could be years if the person is a pro at stalling. Such folks normally do not put down 75K on a 120K purchase.
6. More interesting to me as a note investor is the concept that the settlement will arrive in 12 months. I would consider strongly what will happen if the settlement does not arrive in time. Is there any possibility that the lady is not going to get a settlement? What are the chances that the settlement will be late in arriving? Would you extend the loan or immediately start foreclosing? Think about it and decide before you find yourself in the heat of the moment. The problem with balloons is what happens if the borrower can not refinance or come up with the cash. 12 months is a short time.
To conclude you have to make a decision as to how you feel about being a lender. There are some attractive aspects to the proposed note (the LTV) and some negative (short term balloon with low rate).
New possibility...
You could immediately sell the note to a note buyer. If you think you might do this you really need to design the note to be something they will want to buy. You also need to consider the fact that any such sale will attract a discount. Hence you might want to bump up the price a bit to net the same amount as a cash sale today. Such a bump needs to be minor in that it has to stay within what would be the value of the place. The cash down payment will definitely attract some note buyers so that might be your better exit if you do not want to wait the 12 months.
BTW - Consider what you would be doing with the cash if you had all cash. If you are going to put it in a savings bank then 7% is pretty good. If you were forced to take the place back and you could get it for something like 40 cents on the dollar I would call it a home run. Hence you might make more if they default then if they pay on time.
Consider all angles and know your exits before you enter.
John
[addsig]