Don't do this...

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Posted by Michael Morrongiello on November 16, 2008 at 21:12:56:

Don't make this mistake...

When creating a sale and taking back seller financed "paper" - think through the transaction

You cleary do want to Sell a home to a marginal credit buyer (600 scores or < less) with a light down payment, and then seller finance them with an interest only Note which balloons in 36 months (or some short period of time)

This is a train wreck waiting to happen.

WHY?

Because the VERY dangerous HIGH LTV - loan to value balloon payment will most likely NEVER get paid when it comes due.

In our industry we used to have a term called
"BTV"; this refers to Balloon Payment to Value

It signifies what the BTV ratio is expressed as a percentage % for WHEN the future balloon payment matures and it due.

EG.

Home sells for $100,000.00 to a buyer with marginal credit and only $5,000.00 (5%) cash down. The balance of $95,000.00 is seller financed @ 10% with I/O interest only payments of $833.33 per month and a 36 month balloon payment due date when the entire $95,000.00 principal must be repaid.

Look at the current LTV- loan to value and also the BTV balloon to value ratio's - they are both 95%

How in the world, short of all the planets in the solar system aligning perfectly will this borrower be able to difuse this future balloon payment?

The person who creates such a note has HURT the value of the their "paper".

Also the I/O interest only repayment terms without an loan amortization taking place is not viewed favorably any longer as well.

In todays marketplace - try to have the BTV - balloon to value trigger when the loan is close to 80% or less< of the current value of the property. Also use AMORTIZING Debt Vs Interest only.

This deal would benift from pushing that VERY dangerous short term 36 month balloon payment out to around 120 months or so - thus when it becomes due the BTV is far lower than 95%

Continued best to your success;
Michael Morrongiello
Paper Practioner
www.sunvestinc.com
Author of the following home study courses;

Paper Into Cash - The Convertible Currency - How to Effectively Create Marketable Real Estate Notes
&
The Unity of Real Estate & "Paper" - Advanced techniques for both the acquisition and disposition of properties using Real Estate "paper

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