Valuing park with partial notes


#1

Looking at buying a park and some of the homes have notes. There have been some good posts that essentially say discount to present value using a rate of 15%-20%. Most of the notes are new like 6 mos or a year into a 6 to 8 year note. I don’t want to pay for 7 years of an 8 year $20,000 note knowing odds are the tenant will bail in two years on average. What do you suggest?

I have read a good post suggesting to buy partial notes. What happens to the part you don’t buy? If you by the first 3 years, does the note revert to the seller in the 4th year? What happens if the tenant defaults? Who gets the home or is responsible for getting rid of it?

How many years of a partial note should one buy? Just the first 2 years because they will be gone? Just the first 25% of the remaining note life or what? Buy as much as you can as long as it is less than the value of the home discounted? As an earlier post said: “I’m in the land of hell now.”


#2

Andy,

 I will start this with saying that I do not currently own a park but like you I am looking for one.  I am assuming that based on you post the homes in the park are owned by the park and he/she wants to sell them along with the park.  I would first ask who discount they would like for the notes.  If they do not want to discount them very much you could look at buying partials on the notes in installments.  Am example would be a 6 year note purchase a 2 year partial for year 1-2 with options to purchase year 3-4 and year 5-6 .  I would also have some type of agreement as far as a right to first refusal for the home in the event the buyer goes bad and the note holder wants to sell the home to someone who will move it out of the park.



 With all that said I would try my hardest just to get the best discount on the notes and control the homes and would not mess around with the partials.  Remember that the home is worth a lot more to you as a park owner due to the expense of having to replace the home should it go away.  You may want to purchase the whole note package owner financed so that the seller can get the maximum amount for the notes and you get control of the homes (most important) and you do not have to come up with that lump sum payment at closing.

Good luck with it.

Ruben D. Flores

816 918-9041


#3

Hey Andy,

I’m going to show you something very cool about partials. I learned this from John Behle.

Let’s say you have a note seller with a note that has a current face value of $10K with 60 mos remaining:

60 mos 10% $10,000 $212.47/mo

They are willing to sell a partial on the note, but they are not willing to discount. So you say "hey, ms. note seller, I’ll pay you face value of the note, but I just want to buy the first half of the payments. So you pay $5000 for the next 30 payments. Look at your yield:

30 mos 19.7% $5,000 $212.47/mo

Or how about you just buy the next 12 months of payments (1/5 of the note for 1/5 of the value) for $2000:

12 mos 47% $2000 $212.47/mo.

YOWZA! Look at that yield!!

Now, I realize I haven’t answered your other questions, but thought you might be able to see your way into buying some partials at “full value” but making great yields. Just remember, you need to buy the FRONT part of the payment stream. The increase in yield when you buy part of the cashflow is because of the time value of money.

I’ve used this method to get great yields when I had a note seller who wanted cash up front, but just a little. I’d buy a year’s worth of payments at a time, and each time I was getting fabulous yields, they were happy to get full value, and then 12 months later we’d do it all over again with the same note.

good luck,

Anne


#4

Another possibility is to buy the portfolio of notes at book value if the seller provides recourse. That way you have a responsible person on the hook instead of a subprime borrower.

Daphne


#5

What a dilemma - MH Buyer MAY walk in 2 years: Sell MH again - get new down payment and New MH Buyer. New MH Buyer MAY walk in 2 years - repeat above step over and over until MH is paid in full. What was the question?


#6

The question is: What do you pay for a note? Would you pay $20,000 for a $20,000 note secured by a $10,000 trailer? Even using discounted cash flow, the note was is based on the retail price of the trailer or an artificial number and duration to make the note plus lot rent equal a trailer rent. Not to mention, when they default, you are going to have to put money into the home in order to resell it.

If you buy partial note say 4 years of a 8 year note and at the end of 4 years you don’t want to extend for another 4 years because rehab cost or what ever, does the note revert to the original park owner and the home is his problem?


#7

Andy,

From your original post I read the only reason you are buying the notes is because the homes are in the park. You do not want the homes leaving the park (unless you are going to replace them anyway). So I am willing to pay a little bit more for a note in a park that I am going to own to control the home.

I have purchased 2 deals where an existing tenant (who I turned into a buyer) or a person who was on a contract for deed (turned to a note buyer) were in place. In one deal I paid 50% of the face value of the amount of payments still owed on the contract for deed. I knew I could sell the home for more than double the amount I had in it the next day if I needed to. On the rental turned sale I only paid 33% of the value of the home (it needed exterior siding work). I knew I could sell for triple my money if I needed to after addressing the siding issues. BUT these were both homes in a park I did not own so I was not willing to have more money invested in them.

Here are the questions I would want answered if I were looking at your deal:

  1. What is the value of the homes. You are right in your post in asking about the price of a home. If the note is for 20K but the home is only worth 10K you value the note at 10K and discount from there. You (or another local Lonnie Dealer) are the only ones who can answer the question about value because each market is different. In my area a home in one location may be worth 7K. Move that home to another park 20 miles away and that home could be worth 17K. Depends on the area.

  2. Do you want to keep these homes in the park. If yes figure out the replacement cost of the home if you do not want the homes and are going to replace them then you should not even consider buying the note unless you get an outstanding discount.

For example. Let’s say in your area a home similar to the one you are looking at on a note already in the park will sell wholesale for 8K. Then figure in your move costs (say 4K total for a singlwide for breakdown, move, set up, hook up utilities and getting decking if needed). So to move a home to replace the one on the note would cost you 12K. Then do not pay more than 12K for the note.

In my post earlier in this thread I was just giving you my idea’s of how to structure a win win deal with the person who has the note. As in any investment I always want to know what the other party in my negotiation wants. What does your note seller want. Cash now (what will they do with the cash), monthly income with no hassle (come up with a way to accomplish this maybe service the note for a fee), control of the homes for future income (come to an agreement, in writing, for right of first refusal on the home prior to it leaving your park). Talk to your seller and find out what their need is and fullfill that need.

Good luck with your deal.

Ruben D. Flores

816 918-9041