Pasadena, CA

It’s hard to keep covered against the chill winds of the market sometimes. Perhaps it’s possible to get a nice, thick sheepskin warming the front half of your body, but investors, builders and developers are increasingly finding their backsides completely exposed to the elements . . . brrrr!

If you’re a real estate investor, investing in shorts sales and REO’s, how can you keep clothes on both sides of your body simultaneously? Is there a way around the seasoning issues that hang these deals up?

What in the heck am I talking about?

Here’s a typical scenario:

Investor buys REO bank foreclosure for 50 cents on the dollar or less. They get a great price (that’s the sheepskin in the front), but they’ve used hard money at 12% with a 1 year balloon, so they need a quick exit strategy.

That’s where they start to feel a bit naked, because it’s harder and harder to pull off a quick exit for full asking price these days. Investors/rehabbers are often left exposed on the backside because they can’t flip the property around in a timely manner due to seasoning issues with conventional lenders. This lag time eats heavily into profits.

This leads to a flash of inspiration. The investor thinks to himself:

“Ah hah! I’ll buy cheap with all cash, and just use seller financing to sell this property quickly for the highest possible price, and then I’ll simply turn around and immediately sell the note to a trust deed investor, grab my profits and be out of the deal.”

It’s just that simultaneous clothes aren’t as fashionable as they used to be. There just aren’t a lot of investors lined up to buy these types of notes any more, and the ones who’ll buy them want steep discounts.

Seasoning is an issue. In general, note buyers want to see that either,

1. the seller owned the property 12 months before selling it, or
2. he has received at least 12 months’ worth of payments from the buyer before trying to sell the note
   

So is the ‘simultaneous close’ really dead?

Yes and no . . . there’s a niche product that circumvents the traditional seasoning issues and acts as a true simultaneous close, paying .85 cents on the dollar.

How can they possibly do this? Most note buyers are only paying 70 to 80 cents on the dollar, starting with a note that is no more than 80% loan-to-value (LTV).

They underwrite the deal from the very beginning.

The prospective buyer fills out a 1003 (loan application) and pays for a credit report, and the investor reviews the file. Some buyers will qualify (FICO 600+) for the program, some won’t (credit scores below 600 are not impossible, but will require some seasoning before the note can be sold).

If they do qualify, here is a sample of what an average deal might look like:

• Only offered on owner occupied SFR’s (no mobiles or row homes)
• 5% cash down payment
• Seller carries a 15% second
• Seller creates and immediately sells an 80% first at .85 cents on the dollar
• Face interest rate on the 1st note will be somewhere between 8.5% - 10%

So, here’s what the numbers look like:

• Purchase Price: $100,000
• Down Payment: $5,000
• Seller Carry 2nd: $15,000
• Seller Carry 1st: $80,000
• Proceeds From Selling 1st to Note Buyer: $68,000

The seller/investor/builder walks away with $73,000 ($5K + $68K) cash and a note for $15,000 that will get paid off when the buyers refinance, so they snag $88,000 total for their $100,000 property.

It’s not a golden hammer and won’t make sense for everyone, but it is an option that’s out there if the seller can absorb the 15% discount and wait for the 2nd to pay off down the road.

And even though the buyer will have what sounds like a high interest rate, most of the time they still come out ahead owning instead of renting on an ‘after tax’ basis, and it’s a way for them to get around the cracks of conventional financing that some buyers fall into.

When the financing machine is rusty, we need to look for ways to lubricate the system and get those creaky parts moving. Buyers need to buy and sellers need to sell.

The simultaneous clothes is just another way to dress it up.

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• Check out this page for more info on the ’simo’

I recently received this email:

“Dear Dawn,

I saw your recommendations in the Tribune article on waiting for Recovery. My question to you is should we sell our home now or next year?

We bought this home 7/2007 for $950,000. We have spent $150,000 plus. The last project is to have the outside of the house painted, which is scheduled for July.

We have been told that we could probably sell for $950,000.
The lot is about ¾ acre, the house is about 2500 sq feet.

We realize we are losing money and our proposition 60 taxes. But the lot has proven too much for us. We would expect to buy a replacement home for about $850,000.

Our property taxes will increase ($6,000 to about $11,000 a year). We will look for the same size house, but a smaller piece of property in the same city.

If we wait, replacement house prices could rise and the property taxes could also rise. We do not have a mortgage. We are retired.

Thanks so much for any help you can give us.”

First off, it’s encouraging that they have a realistic view of the market and the value of their home. Too many sellers these days would insist that the value of their home is $950K + $150K = $1,100,000.

This couple seems to understand that the market doesn’t care how much you put into it. The market is just the market. A stock is worth what Mr. Market says it is, whether you’re making money or losing it.

[But wouldn’t it be great if the government would step in and make sure we don’t lose money in the stock market any more? Maybe they could set up a special fund and buy GM shares at $30 a pop for anyone who paid that much or more for them . . . it’s only fair]

And then those property taxes . . . it makes my stomach churn to think of this couple losing their Proposition 60 base year value transfer.

If they could somehow manage to become ’severely and permanently disabled’ they could transfer the tax basis one more time . . . but, um, that’s probably going a little too far.

The market is not going to be better next year. Of course, I could be excruciatingly wrong, but I don’t buy the ‘green shoots of recovery’ story.

If you can wait 7-10 years, maybe, but in a year we’ll still be unwinding, and things could be the same . . . and they could be much worse.

What happens if interest rates have a sudden change of heart? Jumbo loans are already difficult for many people to qualify for.

So back to the couple at hand.

Because they own their property free and clear, they have more options than the average seller. If they are willing to offer terms, they could get top dollar regardless of market conditions.

My guess is that they could easily inch up to $1mil if they agreed to finance a buyer who just couldn’t qualify for a conventional loan for some reason.

They could:

• take a $250K down payment,
• carry a $750K first at 7.5%,
• due in 5, for a
• monthly cash flow of $5,244.11

(If they wanted to preclude the possibility of foreclosure, they could put the property in a land trust first. This would also preserve the existing tax basis on the property just in case they ever got it back again).

And if they have other cash reserves to buy their replacement property outright, then they’re set, because cash is king, and they should be able to get the lowest possible pricing.

But what if they don’t have $600,000 sitting around to polish off the cost of their new home?

What if they could find someone with a nice 5.5% fixed and ask them to leave it in place?

• Purchase price $850K,
• Down payment $250K,
• Take over the existing financing at $600K (or less), for a
• Monthly liability of $3,406.73 plus taxes and insurance, so $4,000 (for an overall positive cash flow of about $1,200 per month).

If the replacement property is also in a land trust, then the existing loan cannot be accelerated by the lender, and the existing tax basis (probably lower . . . $6,000?) could also be preserved to give this couple the equivalent of their Prop 60 base year value transfer.

I call the title holding (land) trust “Seller Financing on Steroids.” Especially in the jumbo markets, this strategy is empowering buyers and sellers and putting deals together where they otherwise wouldn’t be possible.

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Yes! It’s very common for business owners to carry a portion of the sale when selling a business, and frequently, the note can be sold after 6 months of seasoning (this can be less in certain circumstances).

People selling business notes need to understand that typically, there are significant discounts involved, so if you’re not prepared for a 20%-50% discount (depending on all factors involved), then you’d be better off waiting out the term.

To set up your note and transaction ahead of time so you have a note worth as much as possible, you’ll want to consider hiring me to help you put your deal together.

The basic info I’ll need to start working on your business note:

• type of business
• location (city & state)
• sale date
• how note created (seller carryback?)
• sale price
• down payment
• original note balance
• interest rate
• term
• payment amount
• lien position
• payor onwership structure
• payor credit rating (D&B if applicable)
• personal guarantees
• value of hard asset collateral (tangible and intangible)
• value of intangible ’soft’ asset collateral
• goodwill value
• if real estate included (zoning factors, usage, operation history including NOI past 5 years, any other liens and their rate/term/balance, debt coverage ratio)

These are the documents I generally need to get started and that help me put together the above:

• copy of the note (front and back, or allonges) - be sure you keep the original note handy
• copy of the security agreement - you’ll need the original
• copy of the purchase agreement if purchase-money note
• copy of the bill of sale
• copy of closing statements related to creation of the note
• copy of the appraisal, if any
• copy of the payor’s original credit application and credit report
• documentation of payment history

Additional documentation requirements before closing (where applicable):

• copy of the UCC-1 financing statement
• copy of any UCC search done by Buyer prior to sale of note
• lease (or assignment of lease) documentation as well as landlord approved sale and landlord verification rent is current
• fire/hazard or EPA liability insurance policy Declaration page showing you as “Loss Payee”
• evidence of down payment (must be cash out of pocket, not financed)
• bill of sale, covenant not to compete, bulk sales compliance or waiver
• business/corporation/liquor/gambling license(s) and proof sales tax was paid
• franchise agreements, if applicable, and proof that fees are current
• payor’s operating banking information including bank name, address and account number
• copy of the check from a past payment
• financial information (financial statement) on payor and description of payor’s previous experience in this type of business
• if note seller is a corporation, Certificate of Secretary of Corporation showing that the person signing the documents is/are duly qualified to act on behalf of the corporation
• copy of Dept of Corporations Certificate of Status showing the corporation is in good standing
• note seller’s books, corporate or proprietorship tax returns for 2 years prior to sale
• note seller’s operating bank name, address and account # (if a simultaneous closing)
• social security numbers for note seller and payor, or tax ID# if corporations
• pictures of business and location map
• any previous names of the business when note seller owned it
• equipment leases, if any, plus name and address of lessor on any open leases
• authorization from note holder (note seller) to pull credit or D&B report on their behalf
• names, addresses, phone numbers, fax numbers, account number of: seller, payor, landlord, franchisor, escrow agent who closed the sales of the business, underlying lien holder(s) to be paid, insurance agent, appraiser of business, account servicing agent)

Potential fees that the note seller MAY be required to pay in order to sell:

• UCC search fees
• credit report fees
• appraisal cost
• corporate records search fee
• legal research cost
• background investigation cost
• field research cost

Let’s get started! I’d love to work with you to ensure that you get the best price and the best service with someone you can trust. You can email or fax documents to (626)451-0454.

And don’t worry . . . the documentation requirements can seem overwhelming, but my associates and I will be here to help you every step of the way.

Model Home Staging A Pasadena Townhome

A couple of weeks ago, I was contacted by a very upset Pasadena builder. It seems the home staging company they had hired earlier, had sent them an email that they would not be able to stage the builder's model the following week. She asked if I would be able to stage a model home in time for the scheduled open house and do it within their budget. Of course I said yes!

Read more: Home Staging a Pasadena Townhome

Southern California home staging company Moving Mountains Design offers vacant home staging, occupied home staging, model home staging and home staging consultations in Los Angeles, Pasadena, Arcadia, Encino, Long Beach and throughout Los Angeles County. Contact us via email or by telephone (626)441-8975 to learn how we can help you prepare your home for a faster sale.

I recently consulted with a couple who are renting a home in Pasadena. They own a home in Tujunga, but instead of selling it when they moved last year, they decided to rent it out, even though it represented a negative cash flow of $500/month.

Why not wait to sell until the market ‘recovers?’

Their loan broker referred them to me when he realized what they were trying to accomplish would be impossible through conventional means.

Given the economy, and the fact that his wife was struggling to build a new business for herself, they wanted to refinance the home (now investment property) so they could pull out $20,000 to put in savings for a rainy day. It would also help subsidize the negative monthly cash flow.

They bought the home for $250,000 and refinanced to a loan amount of $315,000 when the value exceeded $600,000 at the top of the market.

Loans can be hard enough to get for owner occupied dwellings, but investment property cash outs are even harder. And, of paramount importance is the fact that the value had dropped to $450,000 . . . or so they told me.

When I did the comps, I came out with a market value of $350,000 . . . oops. Yes, there was one new construction that sold for $450K, but several REOs and individually owned properties were selling between $320K - $365,000.

If they put it on the market and sold at $350,000, they’d probably be able to pocket $10,000 and eradicate the $500 a month soak from their bank account.

But, ouch . . . selling at a ‘loss’ is hard to swallow, isn’t it? Wait, but they bought for $250K, so they’re actually up a hundred grand, right?

Nope, that’s not how they see it. In their minds, the property ’should’ be worth $600K, so selling at $350K, they’d actually be taking a $250K ‘loss,’ which, of course, is unacceptable.

I ran some numbers and showed them how they could possibly inch the purchase price closer to $400K if they were willing to offer terms to the next buyer by leaving their (very attractive) existing financing in place.

Using that strategy, they could have pocketed the $20,000 they wanted, and they would have had a positive cash flow of $500 per month. They could also have created an equity sharing agreement that would have let them participate in any appreciation down the road.

In my mind, it made a lot of sense. Most people shouldn’t sustain unnecessary negative cash flow when they’re moving into uncertain economic times, personally and globally.

Ultimately, they decided to do nothing, partly because if they put the house on the market, the tenant might move out a month too early and cost them $1,700 in lost rent.

Hmmm . . . I must be bad at math.

And partly because they, like so many others, are determined to ride the market out until it ‘recovers’ so they don’t have to suffer the humiliation of a loss.

But let me ask you something . . .

When you’ve ‘recovered’ from a hangover after having too much to drink the night before, do you feel all tipsy and high, or do you just feel normal again?

Recovery is not the same thing as re-inflated bubble.

It’s highly probable that some time in the next 3 years this couple will find themselves under water, and not have any exit strategy (save a short sale) if they run out of money to subsidize their ‘investment.’ Bummer.

And even if the price comes back up to $450K, it’ll most likely be the result of inflation and won’t represent real appreciation, because by then they’ll be paying $19.50 for a cappuccino.

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