Have you ever wanted to attend a big sporting event or musical concert? The desire builds inside you, you have to go. The problem is you don’t have a ticket. And, you will not be satisfied unless you get a “good seat.” You will not sit up in the rafters.
What do you do? You go to a ticket broker. Sure enough, he has the seat location you want. And if your desire and pocketbook are aligned, you will buy the ticket and pay the broker’s price. And if the event lives up to your expectations, the whole experience will be a gratifying one. You would do it all over again.
Most of us have done this and had a good time. This is the marketplace at work. This is the secondary market.
Here is what happens. Let’s say you are a season ticket holder for a major professional sport team. You can’t go to an upcoming game, and neither can any of your friends. You don’t want to get stuck with the ticket and take a loss. That would be foolish. So, you offer your ticket to a sports ticket broker, who will normally pay you face value. At this point, you are made whole. You are out of the risk. You have transferred the risk to the ticket broker. You are happy.
The ticket broker is now 100% invested in the risk. He will attempt to sell your ticket at a premium, and if successful, he will make a profit. On the other extreme, if he can’t sell your ticket, he has lost his entire investment. This is the broker’s price of doing business.
People have different views about the role of ticket brokers. The bottom line, though, is that the marketplace will dictate the pricing of any particular ticket for any particular event. The more desirable the event, the higher the price. Simple as that. When the seller transfers the risk to the ticket broker, the ticket broker accepts that risk. If I want that ticket, I will pay the premium required to get what I want. So, all parties – seller, ticket broker, new buyer – are satisfied. The secondary market is working at it’s best.
When a person sells a property, carries back the note, receives monthly payments for a period of time, and then decides to sell that note to an investor in the secondary market, the same principles apply. The seller has made a decision that he wants to transfer the risk to the investor, receive his cash, and move on. The investor, through his due diligence, has offered a price he believes is fair and hopefully, will prove to be a prudent investment over time. But, the investor will only discover everything he needs to know about that note until he actually owns it and is receiving payments. Most of the time, the transaction works out. Sometimes it does not. Sometimes it is a disaster, and the investor has a mess on his hands. This is the price of doing business. This is the secondary market at work.
What I love about the world of seller carryback transactions is the democracy of the whole thing. Two people deciding, without interference, the terms of their transaction, and then living with the good and the bad. And, should the seller ultimately decide to sell his stream of monthly payments for cash, and transfer the risk, this is just another example of two parties – on their own – allowing the marketplace to work.
A beautiful thing!
