Several years ago my investor and I were involved in a transaction that went bad – real bad. Hopefully you can learn a principle or two and apply it to your own business.
A noteholder I was talking to accepted my offer to purchase his note. The property was a home in California, the noteholder lived in another state. I told him I would prepare an Intent to Purchase letter when he interrupted me. He said he wanted an option to buy back the note, and gave me a specific price for months 1-6 and a higher price for months 7-12. I was very hesitant, but the investor agreed to the option. I put the exact language the seller requested in the Intent letter, we both signed it, and the investor accepted it. It was a pleasant and non-eventful underwriting experience and we closed in less than 30 days. I did not see the final purchase agreement as I was not a party at that time.
Four years later I received a phone call from my investor’s business partner, who relayed the following story:
Sometime during the first 12 months following our close, the seller called the investor and said he wanted to exercise his option. The investor told him there was no option to exercise because the payor had paid off the note. The seller then filed suit against the investor in his home state. He lost. He appealed the decision and lost again. He then moved to California, filed suit again, naming me as co-defendant and claiming, among a host of other things, elder abuse. The investor told me their attorney would be contacting me and keep me in the loop. Since I did not benefit financially from the note payoff, the investor would absorb any and all costs.
I supplied the attorney with whatever information I had. Over several months, I received an occasional email from the attorney with an update. Then nothing. Eventually, the attorney emails and says he is hearing nothing from the other side. More time goes by and the attorney finally emails saying he had been contacted by the attorney for the seller’s estate – he had passed away. Now, “we” would be dealing with the estate and executor.
A negotiation takes place in order to avoid a court hearing and a settlement is reached.
Five years after the note sale, we have a conclusion.
What happened here?
If a note purchase will include an option to buy back the note, it appears the language should be explicitly clear so both parties know exactly what is required of them. More importantly, it’s probably a bad idea for a seller to ask for an option to buy back the note. And, it is a horrible idea for a note investor to agree to buy a note and at the same time agree to sell it back. Stuff happens, bad stuff, as this situation shows.
Lesson learned!
