Grist For The Mill...
ok...here's a note situation that's real estate related and may be a great opportunity,...could use feedback from you note hounds.
Situation: family business does home improvement type service. do 12 months same as cash financing, then sells paper at discount to Wells fargo. As I am exploring the cahs flow industry, I'm thinking "hey, there must be an opportnity here!" I can have the business if I want it. They do several million a year. I don't think discount is high (5%) but yield can be bumped through early payoffs etc,. (note enhancements?). Plus, after 12 months, rate jumps to 18%. Is this the proverbial low hanging fruit to be grabbed?
Thanks.
How are the notes collateralized?
Telemom,The notes are probably collateralized as 2nd or 3rd liens. Most of these notes will not be paid off in the 1st year. The yields are far better than bank rates and you have recourse against the homeowner.
your post is a bit disjointed, so if you could elaborate all of the players, what is reality vs. what you have in your mind, etc., that'd be helpful.
business notes are tough, though they do not real estate to be collateralized. Equipment, inventory, etc. is used, amongst other items
No one is doing simultaneous close deals to create new business notes for purchase. They need seasoning of at least 2 months. Any broker getting involved in that could be asking for trouble, unless there are lots of appropriate disclosures and disclaimers signed and countersigned, because even if an investor says "yes, with 2 months of on time payments, I can do X" nothing stops them from changing their mind, and I personally won't be involved in those kinds of deals - only seasoned business notes, if any.
Any note broker who tells you they can do business simo deals is blowing hot air, or they just graduated from America's Note Network, and are a little too eager, if you know what I mean.
Good luck, Dave
Thanks for the replies...I'll try to fill in the blanks as best I can as i have emails out with your questions.
I assume a fair number (%) do not payoff in 12 months which is where the real juice is. I have been told their default rate is about 1%.
Transaction looks like this:
1. Roofer does gutter job for customer.
2. Does 1 months same as cash financing
3. Sells paper to Wells Fargo at 5% discount
Important point here: I don't want to broker the note, I want to own and service them. I'm not after the commissions. I'm after the spread to be earned on the note yield less cost of capital. I am very new to the discount note business, but am VERY experienced in the capital markets. I am a professional equity/fixed income investor.
that should read 12 months, not 1.
Also I would imagine that there would be a business in and of itself to hold the notes for 3 months or so and season them, THEN sell them if I wanted to broker?
I find it very difficult to believe that WFNB is only buying these at a 5% discount. These can be very dangerous notes due to true collectibility issues. So many properties are being over appraised in an effort to keep the refi boom alive. If an appraisal is off by $5,000.00 and you are after the 1st, and the typical 2nd, plus the attornies, and with the record numbers of foreclosures and bankruptcies, yours would be in an unenviable situation. BTW, What yield are you looking for for a passive investment?
Good Luck,
Shawn(OH)
Shawn,
Good points. Getting answers to the questions posted here is an education in itself.
It's not so much that i have a targeted yield in mind as it is trying to assess whether or not there is opportunity here. As I mentioned, the business is miine if I want it. I am waiting on details to answer many of hte questions poosted here. I am trying to be mindful that there is opportunity wherever cash flows are occuring. The question is, how MUCH of an opportunity. I am actively pursuing a discounted mortgage business as my first foray into this business. I am very familiar with risk/reward assessment so I followed your train of thought on this one. I wil be back with more details.
Thanks,
David
I have a very hard time believing that WFNB has been buying these notes at a 5% discount? This is credit-card type underwriting. If I weren't making at least a 15% annual interest rate I'd walk. Collections and defaults are likely to be very high.
What has the default rate traditionally been? and what percentage fail to retire the debt at 12 months?
Has WFNB also been underwriting the borrowers? In other words, does the contractor business (who obvioulsy has a motivation to make sure everyone qualifies for the loan) do their own underwriting or does WFNB somehow review the creditworthyness of these borrowers before the work gets done (almost certainly the case)? If so are you equiped to also do that credit review? If not, or if your underwriting guidelines are different that WF's then the default rate could change dramatically.
This is essentially a retail credit approval deal. Equity in the houses is less important than the odds of the borrower paying off and that is probably better indicated by their general credit worthyness than any other criteria.