Private money

[sandra]

Hi all,

I have a friend who work for mortgage company specialize in private money present me a deal that he is currently working on. He`s looking for $37000 to place as 2nd mortgage with the rate of return is 22% and will be paid every 3 months. Term of loan is 1 year.

Appraised value of property is $567,500. 1st mortgage $395,000

With the return rate of return is way up there. I am thinking about the risk involved.
I am curious to know what you think

Thanks for all replies.

Sandra Le

 

[Thomas Beyer]

QUOTE (sandra @ Dec 21 2009, 01:06 PM) Appraised value of property is $567,500. 1st mortgage $395,000. With the return rate of return is way up there. I am thinking about the risk involved.
Risk is a function of
1) TRUE property value,
2) location,
3) rentability of asset in case of foreclosure or owner not paying,
d) and creditworthiness of the borrower

.. all not disclosed in this post thus hard to judge if 22% is adequate !

 

[bizaro86]

QUOTE (sandra @ Dec 21 2009, 01:06 PM) Hi all,

I have a friend who work for mortgage company specialize in private money present me a deal that he is currently working on. He`s looking for $37000 to place as 2nd mortgage with the rate of return is 22% and will be paid every 3 months. Term of loan is 1 year.

Appraised value of property is $567,500. 1st mortgage $395,000

With the return rate of return is way up there. I am thinking about the risk involved.
I am curious to know what you think

Thanks for all replies.

Sandra Le

Would you buy this property for $432,000? Which is the total of the first and second mortgages? Would it be a screaming good deal? Because if you have to foreclose, that is exactly what you are doing.

Actually, you probably need a higher "good deal" price on this property, because if you have to foreclose on it, you`ll spend $$ on legals, etc, and the property won`t be in as good condition as it is now, likely.

22% is only great if it gets paid. Evaluate the alternative situation, where it doesn`t get paid. Who would do the foreclosure? What would you do with the property after that? I personally wouldn`t put much value in the "appraisal" number, I`d want to evaluate the property myself.

Why are they offering such a high rate?

My two cents,

Michael

 

[Rickson9]

What is the MPAC assessment value?

 

[llee]

QUOTE (sandra @ Dec 21 2009, 01:06 PM) I have a friend who work for mortgage company specialize in private money present me a deal that he is currently working on. He`s looking for $37000 to place as 2nd mortgage with the rate of return is 22% and will be paid every 3 months. Term of loan is 1 year.

Appraised value of property is $567,500. 1st mortgage $395,000

What part of town is it in? Are houses in the same neighbor of similar price range? Do you have recent sales comparables?

Do you have a credit report of the borrower? What is the fund for (debt consolidation?)? Is the borrower cashflowing OK?

 

[invst4profit]

MPAC. Municipal Property Assessment Corporation.

They set property values for tax purposes. They do a very poor job in my opinion and therefor the assessed value they place on any given property is rarely accurate in the real world.

 

[rforgiel]

Sandra,

The key issue here is if you trust the appraisal. To do this type of deal you need to be absolutely certain of the value of the property.
You also need to understand what they need the money for. Do they need it for another investment or are they falling into trouble. You will be sitting behind a fairly large 1st mortgage. If this deal goes sideways or falls apart you will need to step up to buy out the 1st mortgage to protect your investment. If the 1st mortgage holder takes over the property by the time they sell it off and deduct their fees there will be nothing left over for you.

I am assuming the face value return on this investment is 22%. Usually you get a lenders fee and a monthly interest payment as well as early payout fees. Taking all these returns into account your overall return is probably 22%. The normal monthly interest rate for this type of mortgage is 10-12%. If the quoted monthly interest rate is 22% you are in risky territory.

You can get payments every 3 months or even a balloon payment at the end of the term. Most people doing this do it for income so look for monthly payments. When I invest in 2nd mortgages I like getting monthly payments. As long as the payments are coming in I know everything is on track. If a payment is going to be missed I want to know within a month so I can snap into action.

In summary if you want to do this deal:
1. Make sure you have the ready cash to buy out the 1st mortgage holder if necessary
2. Find out how they got into this position and their ability to get out of it
3. Have a plan for getting rid of the property if you have to take it over. Understand what it will sell for in a quick sale. This may not necessarily be the appraised value.

You really need to see the property and look into the whites of the borrows eyes to access the risk. I like 2nd mortgages but it is a different game then how the banks have their set formulas and tick off their boxes. You need to dig deeper for these types of returns.

Feel free to contact me with any questions.