Let’s pretend!
Let’s pretend that you have a house you want to sell and I want to buy it. There is a problem, though. I can’t get a bank loan. So, I ask if you will agree to be the bank and work out terms with me. You say okay, we work it out, title company does all the paperwork, the transaction closes and I move into the house.
Let’s say you are holding a $100,000 note at 8% for 240 months. I am paying you $836.44 monthly.
What do you have?
You have a promise to pay – nothing more, nothing less. You have my promise that I will pay you $836.44 every month. You believe I will keep my promise, you think I will keep my promise, and yes, you hope I will keep my promise. But I do not guarantee that I will pay you $836.44 every month. How are you protected if I don’t keep my promise? Your security is the trust deed – you can take the house back if I break my promise.
Now, let’s pretend you have $100, 000 in a CD sitting in the bank at 1% interest.
What do you have?
You have $100,000 cash money! If you want to go to the bank and take back your CD, the bank will give you $100,000 plus the 1% interest minus a withdrawal fee.
You had cash in the beginning and you have cash at the end.
Do you see the difference between the two? Most people do. Some people don’t. Some people think their $100,000 note is equivalent to $100,000 cash sitting in the bank. They believe if they want to cash in their note, they should get $100, 000 for it. They believe all risk should be ignored – equity risk, property value risk, interest rate risk, credit risk, etc. They believe $836.44 monthly equals $100,000 cash money.
Sorry, it does not!
One of the biggest challenges in my business is to get some sellers to understand simple truths. If a person has never done a transaction involving a seller carryback, learning these truths after the transaction is completed can be a cold slap in the face. I get it, I understand that.
So, if you are thinking about selling a property and if you may offer to carryback the note, please call me before you negotiate with your buyer. Be prepared with information. Don’t go at it blindly. Protect yourself. Call me.
