Date: Wed, 5 Apr 2006 06:46:39 -0500
From: "John" 
Newsgroups: misc.invest.financial-plan
Subject: Re: RE note investors - What do you earn?
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Hugh,

As we have no numbers to view concerning default risks of pooled
sub-prime loans lets not even go there. Obviously we are not discussing
buying a large pool by someone on this list. If someone wants a share
of a pool they would be best to focus on an REIT that buys such pools.

Focusing on individual notes...

Lets be specific about the loan to value. If the loan is at 70% LTV
(30% of equity or junior liens above the loan) would you be as
concerned about default risk? Even if there is a default would you
expect the lender to be made hole at the end?


On the property management and 1031 'no management deals'...

On your other point you are correct that people are using the 1031 tax
code to sell and buy a TIC as a replacement. The TIC structure appeals
to many as it is very passive and produces yields of 7%. There is a
large question about liquidation. As the TIC owner has a fractional
interest in a large property with professional management who will buy
such a stake in the future? How will the person eventually liquidate
(death or not before)? Where can such a partial interest be listed for
sale and who is likely to be in the pool of potential buyers? At some
level the value of an asset is a function of the size of the pool of
buyers (liquidity). There is very little history so far of TIC
interests being resold and what sort of values were placed on such
interests.

I am in theory a fan of TICs but I am not sure that there will be a
balanced market when people want to exit. As the TIC will legally fall
foul of the 1031 code is there is a pre-existing agreement concerning
liquidation buyers are going in blind. It could be better for them to
pay the tax now (15% long term capital gains plus the rate on
recapture) rather than push off the tax bill.

John Corey