FAQ re Condo Mortgages

Any Qualified Investor seriously considering the Condo Mortgage should contact us for the Disclosure Document regarding this opportunity.

However the questions below have been asked by Investors who have reviewed the Disclosure Document and responded with questions. The questions have been edited somewhat because they were originally in the context of e-mail threads that gave context. In each case the Question is in Red and the Answer in Blue.

From Jim Dahle, M.D., TheWhiteCoatInvestor.com

That’s an interesting investment opportunity.  It’s a little like the Peer to Peer Lending Crowd.  While it is hard for me to imagine taking out a 10% mortgage (or 20% p2p loan), I suppose there are people out there who consider that a good deal.

I agree that it is like the P2P lending (or crowd funding) but I hope that the difference is that the underlying business transaction is more rigorous. I prefer to call it private placements which have a longer history.

There are actually two 10% rate loans here.

The first is the Land Contract buyers 10% loan to purchase. This loan is a little odd, however, because the rate is basically irrelevant. A higher rate here actually HELPS the borrower. The number that gets negotiated first in this transaction is the monthly payment. The sales price on the condo is the Present Value of that payment for 30 years at a 10% discount rate. Oddly enough this buyer would prefer to pay a HIGHER rate because doing so would lower the Present Value (purchase price) of the condo (given a fixed payment and term) and make it possible to refinance later for a lower rate more easily. Unfortunately for them the Dodd-Frank act prohibits me from charging them a higher rate. The reason this is a good deal for the LC buyer is that the alternative would be to have the same monthly payment as a rental figure, building no equity and living in a less desirable location. As a price-per-month for a place to live this is a good value proposition for them.

The second loan is my mortgage to the investor– 10% rate, 5 year amortization. Here the rate has to be high enough to entice the investor to this “alternative” product. I think 10% is appropriate given the risk level and the learning-curve hurdle since this is not something most people have seen before.

From Phillip Davis, PHD

Precisely how does a would-be investor participate in this opportunity? What does he/she need to do?

Simply “contact us” above. We can forward the basic documents (a Note and Mortgage) for the investor and/or his attorney or other advisers to review. 

Next the investor must determine which unit(s) they wish to invest in. Title reports are pulled to show that Blackhall has clear title.

Finally we schedule a closing and the investor wire-transfers money to the title company, Blackhall executes the Note and Mortgage (which the title company records), the payment stream is directed to whatever account the Investor designates and the title company releases the funds to Blackhall.

After the appropriate payments are made the Investor will execute a release of mortgage simultaneously with the final payment.  

From Phillip Davis, PHD

Does the investor have to participate in the whole 30 year cash flow?

From Jim Dahle, M.D., TheWhiteCoatInvestor.com

I’m also a little unclear as to why you’re splitting up the investment after 5 years.  Why not sell it to the investor as a 30 year deal? 

No, the investor ONLY participates in the first few years of the cash flow via his first mortgage loan.

There are three reasons for this

 1) in the marketplace for investors people who are looking for 30 year products are rare. The ones that are out there tend to want a pretty steep discount rate (more than the 10% rate we are talking about) with the result my profits are limited

 2) while the odds of these loans performing like an annuity for 5 years are pretty good the odds of them acting like that for the full 30 years is actually pretty slim. Somewhere along the line the Land Contract buyers are going to want to prepay, (whether they want to refinance or sell or need to move because of work changes, etc) or are going to default or are going to die or something. At that time you need a real estate guy to be involved to deal with all the many possible alternatives. So I think my skill set is needed on the back end someplace. If I need to be there to deal with the unexpected I might as well participate in the profits at that point. 

 3) The way present values are calculated the present value of $1 received in 5 years is about 50 cents. By the end of 30 years of discount the present value of $1 received in 30 years is about 4 cents.  So by selling the first 5 years I get enough money to cover my acquisition and sales costs then I reap the cash flow for the next 25 years having recovered my costs. As a sum of the payments the total payments for the $80,000 condo is $252,000. I am perfectly happy to forgo the first $42,000 of those payments (repaying a $33,000 loan) in order to reap the other $210,000.

From Jim Dahle, M.D., TheWhiteCoatInvestor.com

If you stop paying me for whatever reason, what is the recourse to me, especially if the person living in the condo has trashed it or its value has gone down for whatever reason. 

First, I could not stop paying you– the accounting firm collects from the Land Contract buyer and pays you. If the land contract buyer were to stop paying  the accounting firm would do two things- pay you from the reserve account established at the time we did the loan and notify me that the buyer was in default. I would then take appropriate actions to either collect from the buyer or reclaim the unit (i.e. evict the current buyer) and re-sell it. Meanwhile you would continue to be paid from the reserve. Upon regaining possession I would then re-sell it on another Land Contract to another Land Contract buyer. It is, of course, possible that all the reserves would be exhausted but to do so would require a default rate in the range of 40 to 50% of all the units every  year– an extremely unlikely situation. 

 

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