Guys,
I have been pondering what Brian from Columbus pointed to during his presentation on lonnie deals. Namely, that a good way to sell your notes is to personally guarantee them and then you can sell them at face value.
I went back and read the posting that he pointed to…look up “Standard Protocol” on www.creonline.com mobile home forum to read up on it.
It appears to be a way to create note, sell the note for full price, my a couple more homes, sell those notes at full price, etc. Basically, you are churning your notes for cash without discounts.
Does anyone do this? It seems like a great strategy, my only concern is in servicing the note and making sure the investor gets paid no matter what>
What say you?
Thanks
John - IA
Hi John,
I would not want to sell every note like this with a personal guarantee, unless you have adequate cash reserves to cover missing payments, etc. Alternatively, you could sell every-other note or some percentage of your notes as you create them, to provide you lump sums of cash, while the notes you keep provide cash flow to cushion the outflow you will need to make when notes go bad.
My personal feeling on selling notes with a personal guarantee is a bit different than most. If I am guaranteeing the loan, what is the point of having the home and note as collateral? What I mean is, I’d rather just borrow money with my signature (at a much lower rate) and not have to worry about if the buyer pays or not, and all the extra hassle involved with tying the borrowed money to one of my notes. Maybe I am just lazy?
Jeff
Jeff, I had much the same thoughts that you described but have had a real change of heart on the matter. While I, as do you currently have the ability to borrow at lower rates from banks than the rates to a point, it is precisely because of there being such a limit that makes the hypothecation strategy a useful one to use. The point at which your bank will cut me or you off is at the value of my/ your collateral, in spite of my/your capacity and demonstrated propensity to repay. As Doc Whisler stated there are no limits with the hypothecation method.
Basically, to hypothecate the cash flow from the notes makes liquid an otherwise illiquid asset. And since I am still in the business of creating more of such notes, for me to repo and resell, or just replace the non-performing note with a performing note shouldn
Shawn, I understand, and agree with your position. I should clarify. I was advocating the use of private money (not banks), just as you are, but without the hypothecation of the note. The reason being, especially in my market, the MH is worthless without a system and trustworthy individual to remarket it, should there be a need.
So, model is just to borrow money privately on my own signature, paying reasonable rates, and not tying that debt to specific homes. Because in the end, these people are loaning me the money, not the homes.
Jeff
Ok,
I think I’m more in line with what Jeff is saying here.
I have yet to sell a note. Why not just borrow private money at whatever rate you are comfortable with and keep the note. You’ve got to guarantee it anyway (this is what you are saying Jeff, right?) Your note yields should be so good that you can pay exorbitant interest rates (if you have to) and still be raking it in. Private money in the MoHo industry is really money lent on your credibility.
I can see that borrowing $$ from a bank has its upsides in lower interest rates. Particularly, if you are buying higher dollar homes to fill your park. It will be a long time before you get your cash return on the home, meanwhile lot rent is coming in…the main goal of the park.
Shawn, I think your model has to be different because your goals as a park owner are necessarily different. You are maintaining your asset(s) long-term, whereas a typical Lonnie Dealer’s asset is done in 18 to 84 months.
Besides, I’m just not interested in the hassle when private money is available to me 4-24 hrs after my request (this did not happen when I was a newbie). No lengthy application, no financial statement, I get a one page loan document and a certified check.
Steve
“You’ve got to guarantee it anyway (this is what you are saying Jeff, right?”.
Exactly right. What is the point of hypothecating one note, when my personal guarantee in fact hypotecates ALL notes owned by me?
BTW, I do not pay exorbitant interest rates. The last note I did (since paid off) with personal guarantee was at 8%.
Jeff
I prefer not to pay exorbitant rates but I will to catch a deal.
My recent note I just signed for was 8% too!
Steve
Hey Jeff,
I think you are confusing hypothecation (securing a loan by an underlying note) versus security. You are securing your loan with all your notes if you give a personal guarantee.
You only hypothecate a note if you specifically secure it with an underlying note (from a payor to you), as opposed to, for instance, securing it with the personal property.
I never sell my notes, although I’ve recently gotten an offer for some of them. I’m like you and Shawn and Steve, looking to borrow money to buy the homes for my own enrichment.
(not trying to be note-picky, just wanted to help out anyone who might be confused)
Anne
Hi Anne,
I understand the difference between hypothecation and security. I was only making the point that the “personal guarantee” renders the difference null, because in a personal guarantee situation, all your assets become collateral subject to the loan. So the fact you have pledged a specific asset as collateral (hypothecate) but still guarantee the note means that the hypothecation itself is meaningless, as you intend to keep the note performing regardless. This is all assuming the personal guarantee has value, as it would in most of our cases.
On the other hand, I have sold notes (with YTM for investor around ~20-25% without the personal guarantee). In these cases we have a sliding scale that enables me to participate in the upside of any re-sale, depending how long the note has performed. ie if a default occurs in the first year, I resell with no fee. Second year, $500 fee, and it goes up from there. The idea being, if the investor gets the home back with only a few months left (and all his basis recovered) we both share in the upside.
Jeff
Hi Guys,
I thought I’d jump in here (since I started the conversation after all) after a nice week of vacation in SC to recharge the batteries. Fo the record, I don’t sell all my notes on a guarantee, but I do sell a few “guaranteed” notes at 18% Full recourse and 25% for non-recourse “non-guaranteed”. So far, the notes I’ve sold have been for full recourse with a 10% monthly loan servicing fee. In the deal, I have 90 days to cure a default or I have to pay the piper. I had one person go belly up after 3 months of paying and I re-sold the home in less than a month under similar terms. There were no out of pocket cost for me since it was all conducted within the 90 cure period.
It has worked out well for all parties involved so far, but I am sure there will be bumps down the road. Its obvious borrowing money works too, but I just haven’t been down that road, yet. I tried to copy the formula posted by Doc and think it offers a way to make huge returns on these deals. Granted, you will continue to be on the hook for the term of the note, so if you are not in it for the long haul this may not be the route you want to take.
Unfortunately, the new lending laws that are coming on line in OH are now forcing me to re-evaluate the way I conduct all of my operations.
Brian
“Just another day of The MAN trying to keep me down…”
John,
I am even more reseverved than Jeff when it comes to guaranteeing notes. I don’t sell my notes, mainly because I look at the liability of guaranteeing a note the same as I do taking on debt. I don’t like it. I already guarantee lot rent so the additional liability of guaranteeing a note falls way outside of my comfort zone. IMO sellling a note with your guarantee, limits your exit strategy on a home, especailly if you sell the note for more than you can get out of the home in a CASH sale. AND we know that ain’t much on most of these homes. Very easy to overleverage IMO. If I have a home go vacant, I want to have the option of selling it off if need be. And to that I would argue the exact opposite of Shawn. For me, I think selling a note makes a liquid asset otherwise illiquid if a cash sale of the MH is not sufficient to pay off the investor. Now granted Shawn is a park owner and I am not (yet!) so his view will be different than mine, and I would agree with his views as a park owner. Neither one right or wrong just both sides of the fence.
Keith
Post Edited (10-13-09 17:56)