I had a phone conversation this morning that, unfortunately, I have had too many times.
A man called about a marketing letter he received from me and wanted to know how the note selling process worked. I asked if he had ever sold a note before. He said no. I asked if he understood notes were purchased at a discount. He said yes. He indicated he was holding a residential and a commercial note and asked what kind of discount would apply. I answered that the note particulars dictated the pricing, and that a broad range in this market was 60-85 cents of the unpaid balance. The bigger the downpayment, the more seasoning, the stronger the note terms, the better the credit, etc., the closer the price is to the top of the market. And, the contrary applies for transactions that are weaker. He said he would not sell for a 20% discount.
I asked him to tell me about the commercial note. He began evasively. I then asked how much downpayment he received. He said “zero.” I asked if the payments were principal and interest. He said “No.” He said the payments were interest only with an annual balloon, with full payment due in 5 years. He then said he was getting ready to take the property back. I asked if he was receiving the interest only payments and he said “No.” With every question, the news got worse. I told him his note was not marketable to buyers of performing notes.
This man wanted information from me before he gave me any facts about his situation. I was a stranger to him, so I understand that. I told him I wished we could have talked before he negotiated this sale, because he made a lot of mistakes. The biggest, it appears, is that he did not know his buyer well enough. He said he owed back property taxes and he gave concessions on the terms in return for the buyer paying the taxes. In less than a year, the deal was falling apart.
I repeat this Ad Nauseum – the world of seller carryback is the Wild Wild West. A buyer and seller can basically agree on any terms they want. That doesn’t mean, however, that the terms are wise or protective of the parties. Exhibit A is the story I just told you. What’s more important – to get the price a seller wants or to get a strong buyer? A very high percentage of owner carryback transactions in the current marketplace are first time owner carryback sellers. Many times they are not being advised properly or at all. Sometimes it all works out fine. Sometimes the result is as I just described.
We all know the Latin saying Caveat Emptor – let the buyer beware.
In the world of owner carryback, pay heed to Caveat Vendit – let the seller beware.
