In the 1998 publication Owner Will Carry, the authors state: “The biggest mistake sellers make is when they sell their property for little or no down payment. Remember, in all markets, up, down or sidewise, Equity Is Your Guardian Angel.”
In the mortgage field, this margin of safety is known as Protective Equity. But, sometimes, real life gets in the way and we can’t get what we want. Let’s take a look:
You are selling a property and willing to carry the note. Upfront your key requirement is a 20% down payment. you will accept nothing less, you will not negotiate. Using simple numbers, your situation looks like this:
Sales Price $100,000
Down Payment $20,000
Note Amount $80,000
Term 180 months
Interest Rate 7.0%
Monthly Payment $719.06
You start showing your home and meeting potential buyers. You are not comfortable with any of them. Then, it happens. You meet this couple. No, not just the couple, but their kids and both set of grandparemts. The whole family wants to meet you, check you out and roam through the home. You like it. The vibe is strong. The Dad says they love the home, but, he can’t give you $20,000. He can give you $10,000.
@$&%$ !!!!
Now what? You told yourself $20,000 – that’s it. So, why aren’t you saying no? Why aren’t you walking away? The asnswer is you like the “circumstance.” You like the “situation.” You like these “people.”
You pivot.
You tell him that you like him and his family, and respect the fact they want to feel as good aabout you as you want to feel about them. You will accept the $10,000. In return, you ask for stepped-up payments beginning year 2. The result will be to accelerate equity growth and allow him to pay off the note sooner. Looks like this:
Sales Price $100,000
Down Payment $10,000
Note Amount $90,000
Term 180 months
Interest Rate 7.0%
Monthly Payment $808.95
Beginning month 13, the payment will increase by $100 to $908.95. Maintaing this schedule will pay off the note in about 151 months. If we increase another $100 in month 25 – to $1008.95 – the note will pay off in about 133 months. We both are more secure. Good deal for both of us.
You tell him it looks like he has a committed family and you want a committed buyer.
He agrees, done deal, let’s be each others’ Guardian Angel.
