Utopia Talk / Politics / Rental property, 30YF, 0% down.

earthpig GTFO HOer	Fri Mar 31 01:31:55 Achievement unlocked. Loan funded today. No fraud. I don't know that this has been done since 2007. micdropmeme.jpg.
earthpig GTFO HOer	Fri Mar 31 01:34:01 How do you calculate cash-on-cash return-on-investment when the out-of-pocket investment from the investor was a down payment of 0%?
zavyx Member	Fri Mar 31 03:31:44 I thought this sort of stuff was what brought the U.S undone the last time???
Seb Member	Fri Mar 31 04:46:17 If you are offering 0% downpayments, your shouldering 100% of the risk, at that point shouldn't you just get into the direct rental business.
jergul large member	Fri Mar 31 05:14:16 His/her out of pocket is greater than 0%. Sundry stuff getting the loan and getting the renters into the building. Then give goodwill from mortgage company an economic value. Your goodwill is worth exactly the % downpayment that is usual. Goodwill value + sundry expenses = dollar sign. This gives basis for caluclating ROI.
Rugian Member	Fri Mar 31 09:04:19 earthpig GTFO HOer Fri Mar 31 01:34:01 "How do you calculate cash-on-cash return-on-investment when the out-of-pocket investment from the investor was a down payment of 0%?" Why would you bother with RoR on a 30 year investment in the first place? IRR, nigga.
Rugian Member	Fri Mar 31 09:09:05 And to answer your question, the investor had better hope he paid for like a new chair or something on Day 1. Seriously though, WTF is making you sign $0 down deals?
earthpig GTFO HOer	Fri Mar 31 23:52:21 @Seb: What risk is me or my employer shouldering? We still have a secondary market for mortgages. This one is a 'Merica-only 30 year fixed GSE conforming mortgage. Not brokered portfolio or hard money. @Jergul: "Your goodwill is worth exactly the % downpayment that is usual." Aww, thanks. I've never had my goodwill valued in six figures. @Rugian: "Seriously though, WTF is making you sign $0 down deals?" Each incremental aspect of the transaction conformed with the relevant GSE guidelines, to a T. Underwriting looked in great detail for, and could not find, a valid basis for loan denial. Nothing is "making" me sign this stuff -- I structured everything start to finish to arrive at this net end result. Reading GSE underwriting guidelines as a "how to" guide upfront, and not as a "will we do it?" guide after the fact. It was sold on the secondary market before we even funded it. I actually have a lot of fun doing real estate investor deals; it's kind of become my niche. Without having to go to law school, I get to point at comma placement, and the like, in order to make multiple hundreds of thousands of dollars appear.
earthpig GTFO HOer	Fri Mar 31 23:58:06 "And to answer your question, the investor had better hope he paid for like a new chair or something on Day 1. " Huh?
Seb Member	Sat Apr 01 16:57:32 Earthpig: And that is the sound of the squirrels nibbling on the roots of the world tree. You are all selling on this buy-to-let mortgage with zero downpayment: what risk is the buyer taking? He's got no equity so if things go tits up cant he just post the keys through the door and walk away? The risk lies with the ultimate owner of the loan. Sure, I'm sure it's all legal. But is it wise? I'm not sure the guys that wrote the loans in retail ended up so well in the last crash. Sure, not punished, but they didn't get to walk away insulated from the systemic crash either.
earthpig GTFO HOer	Sun Apr 02 00:00:23 " what risk is the buyer taking? He's got no equity so if things go tits up cant he just post the keys through the door and walk away? " I said he put 0% down, I didn't say he lacked equity. It's super niche: a roadblock that American REI come up against is that you can't "count" the difference between contract purchase price and appraised value. So if you get into contract to buy a $600k property for $500k, we ignore the $600k. If it's a 25% down program, that means we will lend $375k and want you to put down $125k, because to us by default we consider that a $500k property. Through much convoluted bullshit, I found a way to disregard the $500k contract purchase price, and look only at the $600k appraised value. " Sure, not punished, but they didn't get to walk away insulated from the systemic crash either. " A lot of them actually had really good 2009, 2010, 2011s. Investors gobbling up properties at the bottom of the market need mortgages too. I'm actually positioning myself well, I think: * Most in my profession have been focusing on refinances, taking advantage of continued historically low interest rates. I'm assuming that's going to go away, historic norms will return, and my business is entirely purchase-focused except when refinance business falls into our lap. * Most in my profession focus on owner occupants with simple salaried jobs that require minimal documentation (relatively speaking). I focus on the self employed (who have a hard time getting mortgages) and real estate investors (who have a hard time getting mortgages). Getting good at what everyone else sucks at. I feel that between those two things, I'm incredibly well insulated from whatever the real estate market does. Rates go up? Great, glad I'm purchase focused and not refinance focused. Rates somehow get lower than the current historic lows? Great, I have all those past purchase customers. Real estate values go down? Great, REI will be looking to gobble up rental properties again, just like they did in 2010. I have a database full of people that were told "no" by multiple other mortgage lenders before I told them "yes, and here's how..." Real estate values go up? Great, things continue as-is and all my hedging was for nothing. There's a little 4 square thing of possibilities. Rates going up/down on one axis, real estate values going up/down on the other.
Seb Member	Sun Apr 02 04:16:47 earthpig: "So if you get into contract to buy a $600k property for $500k, we ignore the $600k. If it's a 25% down program, that means we will lend $375k and want you to put down $125k, because to us by default we consider that a $500k property." Ah, I think things work differently here then. We call the equity component the deposit, assumed it was the same thing? Or do you mean the gap between the $600 and $500 is the equity? If the appraisal is greater than the sale price in the market, that tends to mean that the buyer has no real equity at all. So, basically, your hypothetical buyer of this $600k valued but $500k sale price property - how much is he actually borrowing from you? $500k? "There's a little 4 square thing of possibilities. Rates going up/down on one axis, real estate values going up/down on the other." Think you are missing some squares. The last crash was due to a lack of availability of credit at any price because dubious financial instruments composed of hashed up mortgages that nobody could be confident of the actual value. What happens if you can't sell the mortgages on? You are left holding the baby. Northern Rock was the first bank to go to the wall in the UK and had precisely that business model: it's ability to offer mortgages was entirely dependent on it's ability to sell them on almost immediately in the secondary market. When the demand for CDO's collapsed, the secondary market for mortgages also imploded, and they went bust overnight. And of course the reason the market collapsed was because of systemic effects breaking the risk model. You surely aren't the only one that has figured out this loophole...
Seb Member	Sun Apr 02 04:18:15 And if the equity is this gap between valuation and actual market price, which he can't access anyway, there is still nothing to stop him posting his keys through the door and walking away.
jergul large member	Sun Apr 02 09:10:55 EP Yapp, "your" goodwill is worth 6 figures. Or whatever 6 digit sum of money you made appear, then gave to the investor.
MrPresident07 Member	Sun Apr 02 14:29:33 What bank is this? I can't find one for less than 15% down on commercial property. Looking for my 4th property now...if I could throw 0% down I would be looking at a 5th and 6th or something a lot nicer for my 4th.
earthpig GTFO HOer	Sun Apr 02 19:11:47 @Seb: "So, basically, your hypothetical buyer of this $600k valued but $500k sale price property - how much is he actually borrowing from you? $500k?" Normally, if it's a 25% down loan program, we'd lend $375k and require $125k down. The $600k appraisal is nice, but we throw out the appraisal if it comes in higher than contract price. I managed to get the loan up to $500k with no down payment. " And if the equity is this gap between valuation and actual market price, which he can't access anyway, there is still nothing to stop him posting his keys through the door and walking away. " In this case, according to the appraisal that I had zero influence on, he'd be leaving six figures on the table. @MP07 - Tell me when you want to buy in CA, and we will talk.
MrPresident07 Member	Sun Apr 02 20:57:10 EP- Are you simply employing the cash back option from the seller? In that case, there would technically be a "down payment". You could do a $600k deal at 15% down, with the seller giving the buyer $93-94k back at close ($90k for downpayment, $3-4k for closing costs). Is this what you did? Hard to believe any bank would be allowed to do what you just did.
earthpig GTFO HOer	Sun Apr 02 23:01:03 Interested Party Contributions are capped at 3%/6%/9% of purchase price with the larger percentages only possible with substantial down payments. http://www...t/guide/selling/b3/4.1/02.html
Seb Member	Mon Apr 03 02:09:49 Earthpig: Right, so if there is no downpayment, where's his equity? He borrowed 500k, bought the house. The notional difference between the market price and valuation often just reflects the market having moved ahead of the valuation. Properties sell below the valuation price all the time. And if he walks, he's not really leaving 100k on the table at all if the house will only sell for 500k. Also, in unrelated news, whichever dick head decided to have the Google keyboard autocorrect start to suggest emoji's for words needs to be shot (e.g. trying to put an emoji of a house where i wrote for house).
Seb Member	Mon Apr 03 02:21:12 Earthpig: It seems to me then that a house price fall would make these mortgages very risky on a loan book for the ultimate book holder. If rents fall, as would tend to happen if lots of housing stock became available, then the owner might get out of the rental market. He faces no real losses by defaulting on the mortgage (though i don't know exactly what that does to his credit rating even though loan is secured on the property), but faces real losses of he keeps renting, so defaulting is potentialy preferable to selling below 500k. I don't know about the American market but in the UK lots of people use buy-to-let properties as a retirement income generator: they tend to be loss averse and more interested in protecting their cash flow in the short term. So that's exactly the behaviour I'd expect: default and walk away. Systemically this is terrible as there is a strong feedback effect where each buy-to-let landlord quits the market increases surplus housing stock on the market, further reducing prices of houses which both decreases rents and increases incentive to default as exit path. Note this cycle can be triggered by a rate rise too.
Seb Member	Mon Apr 03 02:23:38 I'm kinda surprised you can do this tbh. Whoever is buying your book off of you in the secondary market sound like they slept through 2008-2013
MrPresident07 Member	Tue Apr 04 19:17:40 "Interested Party Contributions are capped at 3%/6%/9% of purchase price with the larger percentages only possible with substantial down payments." Then there is no equity without a down payment. Unless there's a rule for collateral.
Cherub Cow Member	Tue Apr 04 19:51:36 Can't help but wonder how many people in this thread work in ep's field ;p
earthpig GTFO HOer	Wed Apr 05 02:46:13 Aaaaaand my facebook friends in 5... 4... 3...
Cherub Cow Member	Wed Apr 05 16:36:51 You mean your Facebook friends also watched "The Big Short" or a documentary on the housing bubble and have thus become experts in your field? ;D
earthpig GTFO HOer	Thu Apr 06 03:37:01 @mp07 - I'm not licensed in your state. I cannot help you unless you are purchasing real estate in CA. My client's down payment was 0% of the purchase price. It is a good 30YF mortgage at a good interest rate. He has six figures of equity in the property. My client also knows how to sell. That is critical. All of real estate is sales, ESPECIALLY landlording. @seb - "I'm kinda surprised you can do this tbh." - It's lawyer bullshit. Comma here, period there, you are contractually obligated to purchase this half million dollar note kthxbai. @cc - correct.
Seb Member	Thu Apr 06 03:59:57 EP: Still not really clear to me where the equity is though. Is it that the sale price is somehow being forced low? But If 500 is the price he can buy/sell it for in the market, isn't the equity essentially illusory? If he bought for 500 and the property fetches 600, he could just flip it for an instant 100 grand no? Even after capital gains, isn't that going to be like 5-10 years of rental profit (I'm using London figures so probably wildly off for CA). So is there something you aren't telling us about the purchase? It may be how your regs estimate equity, but as I understand it from how you've told it, he's paid nothing for the property, profiting from the rents, but if cash flow goes negative it's much better for him to cash out, and if the reality is the property will only fetch 500, not 600, he loses nothing. Now this doesn't affects you and your firm - you've sold the book on into the secondary market, but surely that's problematic long term. Congratulations, sort of, for finding a loophole but it sounds like it's creating a huge externality.
earthpig GTFO HOer	Thu Apr 06 04:10:33 "So is there something you aren't telling us about the purchase?" Yup. You make money when you buy. Everyone knows this. I paid attention to the commas. Hey, person with $100k invested on Wall Street, what did Wall Street pay you last year? 5%? What if I offer you 10%, and if I don't deliver then you can foreclose on me? Is your stock broker or fund manager going to offer you that? No? I didn't think so. Why don't you put your money with me for a month or two, earning 10%, which is double your current ROI, instead. High risk, high reward. Our real estate investor here needs to be willing AND ABLE to pay 10%, of course, just in case. Which is what tenants are for!
Seb Member	Thu Apr 06 06:16:06 EP: You're still being too elliptic for me to follow. Is this person wth 100k the buyer or another party? If the former, then it's it just they buy 16.5% of the house at 100, and then borrow 500 against the remaining share? Or is the buyer borrowing from third party, rather than from you, the remaining 100? If so, then it's clearly not the buyers equity. How does the buyer foreclose on you
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