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September 26th, 2009 by Dawn Rickabaugh
If you see tornado clouds forming on the horizon, chances are you’re going to grab a flashlight and a box of crackers, (and some wine and cheese to go with) and head for the cellar. That is, unless you’re like Dorothy in the Wizard of Oz, who peddles along absolutely clueless, but with a nice set of braids, none-the-less.
Sometimes private note holders (sellers who offered owner financing when they sold a piece of property) see flying monkeys on the horizon and start worrying that those nice juicy note payments might stop coming in. This is especially true if they didn’t have a lot of guidance in structuring the transaction and the actual note documents from the beginning.
And if payments stop coming in, that turns everything into a witch of a deal, whether it’s in the east OR west.
OK, so I’m going to quit being abstract and just share a story as we hold hands down the yellow brick road. It started with this email:
“Hi Dawn, I found your web site by searching how to sell our note. My husband and I are the only note holders to the house we sold. We’ve been kicking around the idea of selling the note, but still not sure. Your web site is very informative, this is something we might be interested in. Looking forward to hearing from you. Regards, Jennifer”
So here’s how this Riverside County deal looked:
Sales price: $450,000
8.4% down payment: $38,000
Note amount: $412,000
Interest rate: 6.5%
Monthly (interest only) payment: $2,231.67
Besides the down payment, the buyer fully pre-paid one year of interest on the note at close of escrow, so, his first regularly scheduled payment is due a month from now. But, the sellers are worried that their little munchkin won’t be able to come up with the dough.
Why? Because he somehow failed to pay the last round of property taxes. So, he’s technically in default already.
Thus, the note holders are starting to feel those fluttering flying monkeys right in the middle of their soft bellies. They’re getting a bit nervous, because if/when he misses the first payment, then they’ll have to decide what to do, and that’s just more of a hassle than they (thought they) signed up for.
Additionally, the property is now worth less than the balance on the note: $350,000. So, they were hoping that they could just sell the note for $350,000 and be done with it. And I couldn’t even begin to touch that number. For a peek into my thought process, watch the video on my website.
Instead, I responded with a few ideas for them:
“Dear Jennifer, It was a pleasure to speak with you today, and I look forward to helping you and your husband navigate the current situation for the best possible outcome. To summarize, you have 3 options:
1. Try to sell the entire note for as much as $150,000 (50% of the value of the property, not the note balance). Anyone who buys this note will expect to eventually have to foreclose, so they need to buy at a price that ensures they can still profit after all is said and done.
2. We can see if he can get regular financing. If he could qualify for a traditional loan of say $300,000, you would walk away with more money on a “short refinance” than an outright sale of your note.
3. You can work out a loan modification. You can make it as easy as possible for him to continue (or start) paying you. Your return would significantly decrease, but you may be able to avoid massive principal reduction. I am often hired to help negotiate deals like this. We’d use a Title Holding Land Trust to eliminate your exposure to foreclosure from here on out.”
Always consult with your CPA, tax attorney and/or financial advisor before selling property or paper.
Dawn Rickabaugh is a RE broker with expertise in owner financing and RE notes. www.NoteQueen.com 626.641.3931