The Cash Flow Clarion

The Cash Flow Clarion

March 26, 2006

The Value Of Second Mortgages

Second mortgages are those mortgages which are subordinate to another mortgage. In other words, these are mortgages which are placed on properties that already have a mortgage on them. In the event of a default leading to a foreclosure, the first mortgage will take precedence over a second mortgage. It is possible for the holder of a second mortgage to foreclose on the property. However, in order to do so, the holder of the second mortgage will likely be responsible for paying off the first mortgage on the property. For this reason, second mortgages are considered to be a riskier asset than a first mortgage. However, under the right circumstances, second mortgages can be sold for cash in much the same way that a first mortgage can be.

Second mortgages on single family homes, multi-family homes and many commercial properties are considered to be liquid assets, depending on how the note is structured. Conversely, second mortgages on businesses and free standing mobile homes have very little, if any, market for liquidation. Seconds on condos and land notes may or may not be marketable, depending on the individual note. Commercial properties such as apartment complexes are likely to be marketable, whereas other types of commercial properties may or may not be sellable.

In order for a second mortgage to be a valuable asset which can be converted to cash, the mortgage must be structured properly. One of the primary factors involved in evaluating the value of a second mortgage is the ratio of the first mortgage to the second mortgage. If the first mortgage is very high in relation to the second mortgage, the second mortgage is often termed a "throw-away" mortgage and will not be sellable. In order for a second mortgage note on a home to be a viable loan, the first to second ratio should be at least 3 to 1, although 2 to 1 is preferable and will create a more valuable note. On commercial properties, a ratio of 3 to 1 is likely to be the maximum acceptable value.

As with first mortgages, the amount of equity in the property also plays a role in the value of the note. Ideally, a down-payment of 15% or more of the total purchase price is mandatory. If the note is less than 12 months old, a down-payment of 20% or more is more in line.

The combined loan to value (CLTV) is the total of the balance on both the first and second mortgages compared to the value of the property. For instance, if the property is valued at $10,000 and has a first mortgage with a balance of $4000 and a second mortgage with a balance of $2000, the CLTV would be 60% (4000 + 2000/10,000). For most properties, a CTLV of 70 % or less will make the loan marketable. The lower the CTLV, the higher the value of the note. (Another way to look at this is the amount of equity in the property. The equity value is the opposite of the CTLV. In our example, the equity would be 40%. The higher the equity in the property, the more valuable the note will be.)

These are a few of the factors important in evaluating a second mortgage. As with a first mortgage, other factors (such as the payor's credit rating and history, the value of property, and the terms of the note) will affect the value as well.

Keep in mind that the values listed above are average values, but are not "set in stone". If a loan is very strong in one area, it may overshadow a weakness in another area. If you own a second mortgage which you are interested in selling, we invite you to contact us for an evaluation of the note. You may also call us at (401)-258-7158.

Selling Your Land Note

As the name implies, land notes are mortgages or trust deeds which are secured by land. There are four categories of land notes: buildable lots, improved land, unimproved land and commercial/industrial land.

Buildable lots which are located in prime residential areas will provide the best pricing. These lots are usually 5 acres or less, are legally platted lots with a legal description, and feature full utilities to the lot line (including electric, telephone, water, sewer, and possibly cable). These lots will also feature paved public roads to the lot line. Buildable lots may be subdivision lots, urban lots or second home properties. For buildable lots, a down-payment of 10-20% with a term around 10 years is preferred, although notes with terms less than 20 years may be viable. Balloons (if used) should be less than 70% of the original note balance.

Improved lots are similar to buildable lots but are located in more rural areas or outlying resort areas. They may be developed as resort or second home properties. These lots are generally 15 acres or less and should be "improved" with at least 3 of the following features: structures, well or other water supply, paved road access, septic or sewer system, telephone, and/or a desirable view. There may also be a recorded plat map of the lot. This category also includes working farms of less than 15 acres. If the property is a working farm, crops are often included as an "improvement". To be considered sellable, these notes should have at least 20-30% equity in the property and a balloon of no more than 70% of the original note value (if a balloon is included).

The third category, unimproved land, usually includes 15 acres of land or more. As the name implies, there will likely be no "improvements" to the land (i.e. no electricity, telephone, water, sewer, paved road access, etc). In order for these notes to be marketable, a down-payment of 30-50% is preferred. Terms less than 20 years will be considered, and balloons (if part of the mortgage or trust deed) should be less than 55% of the original note value.

The final category is commercial/industrial land. Pricing for these types of notes will be dependent on the recent history of the property and its viability for its intended use. Information about zoning, current usage, demographics, and local economics will be important in evaluating this type of note. Land zoned for light retail and commercial properties are likely to be more valuable than land zoned for light industrial activity.

If you are collecting payments on a land note, First Class Cash Flow Handlers will buy that note from you. Please feel free to contact us or call us at (401)-258-7158.

In This Issue:

The Value Of Second Mortgages
Selling Your Land Note

Important Links:

The Cash Flow Clarion Home

First Class Cash Flow Handlers-

Home page for First Class Cash Flow Handlers

Note Submission Page-

Submit your cash flow note on this page if you would like to sell your note

FAQ's Page-

Questions relating to First Class Cash Flow products and services

Note Holders Page-

Information and answers to

questions frequently asked by

note holders

Realtors Page-

Information for realtors

explaining how owner financing

can increase sales and

commissions

Real Estate Professionals Page-

Dedicated to attorneys, CPA's,

financial consultants, mortgage brokers, and any other professional whose clientele hold cash flow notes

Products Offered-

Information about specialized products such as "How To Sell Your Home Fast In Good

Or Bad Markets" training course, the "Note Holders Manual", the "Cash For Paper" audio course, and the "Update On Real Estate

Newsletter"

In Next Issue:\

Structuring A Successful Owner Financed Home Sale
Working With Balloons

Contact Information:

First Class Cash Flow Handlers

www.firstclasscashflow.com loriehuston@firstclasscashflow.com

(401)-258-7158


The Cash Flow Clarion
March 26, 2006
The Value Of Second Mortgages Second mortgages are those mortgages which are subordinate to another mortgage. In other words, these are mortgages which are placed on properties that already have a mortgage on them. In the event of a default leading to a foreclosure, the first mortgage will take precedence over a second mortgage. It is possible for the holder of a second mortgage to foreclose on the property. However, in order to do so, the holder of the second mortgage will likely be responsible for paying off the first mortgage on the property. For this reason, second mortgages are considered to be a riskier asset than a first mortgage. However, under the right circumstances, second mortgages can be sold for cash in much the same way that a first mortgage can be. Second mortgages on single family homes, multi-family homes and many commercial properties are considered to be liquid assets, depending on how the note is structured. Conversely, second mortgages on businesses and free standing mobile homes have very little, if any, market for liquidation. Seconds on condos and land notes may or may not be marketable, depending on the individual note. Commercial properties such as apartment complexes are likely to be marketable, whereas other types of commercial properties may or may not be sellable. In order for a second mortgage to be a valuable asset which can be converted to cash, the mortgage must be structured properly. One of the primary factors involved in evaluating the value of a second mortgage is the ratio of the first mortgage to the second mortgage. If the first mortgage is very high in relation to the second mortgage, the second mortgage is often termed a "throw-away" mortgage and will not be sellable. In order for a second mortgage note on a home to be a viable loan, the first to second ratio should be at least 3 to 1, although 2 to 1 is preferable and will create a more valuable note. On commercial properties, a ratio of 3 to 1 is likely to be the maximum acceptable value. As with first mortgages, the amount of equity in the property also plays a role in the value of the note. Ideally, a down-payment of 15% or more of the total purchase price is mandatory. If the note is less than 12 months old, a down-payment of 20% or more is more in line. The combined loan to value (CLTV) is the total of the balance on both the first and second mortgages compared to the value of the property. For instance, if the property is valued at $10,000 and has a first mortgage with a balance of $4000 and a second mortgage with a balance of $2000, the CLTV would be 60% (4000 + 2000/10,000). For most properties, a CTLV of 70 % or less will make the loan marketable. The lower the CTLV, the higher the value of the note. (Another way to look at this is the amount of equity in the property. The equity value is the opposite of the CTLV. In our example, the equity would be 40%. The higher the equity in the property, the more valuable the note will be.) These are a few of the factors important in evaluating a second mortgage. As with a first mortgage, other factors (such as the payor's credit rating and history, the value of property, and the terms of the note) will affect the value as well. Keep in mind that the values listed above are average values, but are not "set in stone". If a loan is very strong in one area, it may overshadow a weakness in another area. If you own a second mortgage which you are interested in selling, we invite you to contact us for an evaluation of the note. You may also call us at (401)-258-7158. Selling Your Land Note As the name implies, land notes are mortgages or trust deeds which are secured by land. There are four categories of land notes: buildable lots, improved land, unimproved land and commercial/industrial land. Buildable lots which are located in prime residential areas will provide the best pricing. These lots are usually 5 acres or less, are legally platted lots with a legal description, and feature full utilities to the lot line (including electric, telephone, water, sewer, and possibly cable). These lots will also feature paved public roads to the lot line. Buildable lots may be subdivision lots, urban lots or second home properties. For buildable lots, a down-payment of 10-20% with a term around 10 years is preferred, although notes with terms less than 20 years may be viable. Balloons (if used) should be less than 70% of the original note balance. Improved lots are similar to buildable lots but are located in more rural areas or outlying resort areas. They may be developed as resort or second home properties. These lots are generally 15 acres or less and should be "improved" with at least 3 of the following features: structures, well or other water supply, paved road access, septic or sewer system, telephone, and/or a desirable view. There may also be a recorded plat map of the lot. This category also includes working farms of less than 15 acres. If the property is a working farm, crops are often included as an "improvement". To be considered sellable, these notes should have at least 20-30% equity in the property and a balloon of no more than 70% of the original note value (if a balloon is included). The third category, unimproved land, usually includes 15 acres of land or more. As the name implies, there will likely be no "improvements" to the land (i.e. no electricity, telephone, water, sewer, paved road access, etc). In order for these notes to be marketable, a down-payment of 30-50% is preferred. Terms less than 20 years will be considered, and balloons (if part of the mortgage or trust deed) should be less than 55% of the original note value. The final category is commercial/industrial land. Pricing for these types of notes will be dependent on the recent history of the property and its viability for its intended use. Information about zoning, current usage, demographics, and local economics will be important in evaluating this type of note. Land zoned for light retail and commercial properties are likely to be more valuable than land zoned for light industrial activity. If you are collecting payments on a land note, First Class Cash Flow Handlers will buy that note from you. Please feel free to contact us or call us at (401)-258-7158.	In This Issue: The Value Of Second Mortgages Selling Your Land Note Important Links: The Cash Flow Clarion Home First Class Cash Flow Handlers- Home page for First Class Cash Flow Handlers Note Submission Page- Submit your cash flow note on this page if you would like to sell your note FAQ's Page- Questions relating to First Class Cash Flow products and services Note Holders Page- Information and answers to questions frequently asked by note holders Realtors Page- Information for realtors explaining how owner financing can increase sales and commissions Real Estate Professionals Page- Dedicated to attorneys, CPA's, financial consultants, mortgage brokers, and any other professional whose clientele hold cash flow notes Products Offered- Information about specialized products such as "How To Sell Your Home Fast In Good Or Bad Markets" training course, the "Note Holders Manual", the "Cash For Paper" audio course, and the "Update On Real Estate Newsletter" In Next Issue:\ Structuring A Successful Owner Financed Home Sale Working With Balloons Contact Information: First Class Cash Flow Handlers www.firstclasscashflow.com loriehuston@firstclasscashflow.com (401)-258-7158