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September 21st, 2009 by Dawn Rickabaugh
“Get your clothes on, Ethel!” I’m wanting to say that line came from a song inspired by the streaking culture in the ’70s.
I’m sure many people were offended by the 500 nude participants at the University of Maryland in 1973 that started the whole phenomenon, and the rash of streaking incidents that followed.
In fact, when I was in 5th grade, my “almost boyfriend” streaked past my house one night, and of course I did my best to feign offense (even though I was secretly disappointed that I didn’t see anything).
The funny thing is that the same people who are so opposed to being exposed to the human body will often think nothing of taking a 5% down payment (or less) from a 560 FICO on a seller carry back.
They’ll take 10% down (or less) on a commercial property, or a high end luxury home and feel pretty nifty getting the price they wanted.
And they won’t even try to be private about it. In fact, they’ll march right over to the County Recorder and acknowledge their dirty deed in the public records!
That’s what I call Indecent Foreclosure Exposure.
Of course we know that most of these note holders will be surprised at the discounts they’ll have to take when they go to sell their prized promissories (promissory notes), if indeed they can sell them at all.
And the reason is the exposure to foreclosure. No investor wants to be left holding the bag when these statistically risky loans begin to default.
These deals just don’t have enough duds on . . . they’re shamelessly streaking around without enough protective equity, which all too often translates into capital losses.
Now let me back up for just a minute. I’m obviously having some fun here, and I don’t want you to get the idea that these types of transactions are intrinsically evil.
In this arena, morality is subjective . . . it depends on what sellers need and want at the time. The only thing I find objectionable is watching a naive seller sustain a nasty financial surprise that significantly affects their quality of life.
It can make sense to endure foreclosure exposure, but sellers need to have a realistic grasp of the inherent risks and rewards.
And if you’re a real estate agent, then you’d help yourself and your client by facilitating an understanding of both the short and long term implications of the owner financing strategy they are considering.
If taking 5% down is the only way to quickly sell a property at a good price, and the seller understands the risks, then why not?
There are definitely risks in NOT selling:
• extended DOM – how many more mortgage payments will they make waiting for the next buyer?
• the risk of further depreciation (more price reductions)
• renting it out instead, accepting negative cash flow and lots of repairs after the tenants are gone
• inflation – it’s not a matter of ‘if,’ but ‘when,’ so the sooner they sell for a fair price, the better. Selling for less now can ultimately provide more value than selling for more later
So, selling with a scantily clad seller carry back can make sense . . . at least there’s a chance of collecting the desired equity. It just wouldn’t be realistic to expect to sell the note without taking a substantial haircut.
To reduce indecent foreclosure exposure, sellers can ask for a larger down payment, or use a lease-option or contract for deed. And if they really want to shield the property, they can put it in a Title Holding (Land) Trust.