Need Help Writing/ Selling A Note
I have a home listed in which the seller has an offer on another of my listings contingent on their own home selling. I spoke with a prospective buyer's lender Friday and the buyer would like the seller to do an owner carry for 10%. I think my seller would be open to this idea if I could let them know that they could sell the note. How should the note be written as far as terms and how do I find someone to purchase the note?
(Single family home, 3 bed, 2 bath, 1 car attached garage, very well maintained)
Thanks for all of your help!
Casey
Casey, not sure what this "private investor" is saying, but buying a 10% second at close or soon after is going to result in a STEEP discount, like purchase of 20- to 35 cents on the dollar at best.
If a 1st lien note AND a second lien note was structured using temporary owner financing, you could sell the first note at closing for cash proceeds (plus DP), and carry the second, but very few investor buy seconds. Perhaps they do it to backdoor foreclose or some such reason, but those notes are very hard to sell.... but if this investor is a buyer, and they want to buy, and it fits their criteria, I would said you got lucky.... my best, Dave
whoops, guess we had some posts deleted, so parts of my post won't make sense, but you get the idea. An owner financed second needs to be planned to carry to term, not gonna have much luck selling those, especially a 10% lien. 15-30%......up to 35 cents on the dollar, which could work if you are VERY motivated and need cash
There is no mention of the LTV and how much cash the buyer is putting into the transaction.
As noted, selling a new second will cause a large discount. If the seller and buyer can agree a higher price and then the second is discounted the seller would still get the same cash. The buyer would end up paying a good bit more. Then again the buyer is the one who wants more house then they can pay for by their own means.
John
John, what you are talking about is artificially inflating the value of the property and/or the note, and this is what is called fraud. I believe this also violates usury laws as well.
For someone who works with notes as much as you seem to, I am surprised you are putting out this kind of advice.
Very dangerous, and if it were me, I'd avoid any such practices at all costs, unless you like hanging with a roommate named Bubba that you get to share a dirty chrome toilet with.
My two cents...
How much down is the purchaser giving? IAssuming the dp is low or 0, raising the price artificially as John suggests rarely works, even on a first position note. An appraisal will uncover this tactic and you will not be able to sell the note or it will be discounted even further. Consider a 2nd like this one as a nice gift to the purchaser unless the seller plans to hold it. If he holds it, consider a balloon after two years. That gives him/her a chance to change the terms.
I am not suggesting artificially raising the price. If the sale happens not to be at FMV then there is room to raise the price.
There is a line between artificially raising the price and finding a new FMV. Dave in particular knows this is true. Fraud is when you knowingly inflate a price to deceive the lender and otherwise fudge the numbers. Agreeing to pay a bit more for better terms is not fraud.
The appraiser has to be happy with the numbers and the comps will tell you what the range is that will work.
BTW - This is similar to buying below market. The lender lends on the sale price in that case. They partially are saying the price is the value and they do not want to consider higher values. There is risk if they do. At the same time the investor will commonly believe that they have a bargain and the value is there.
Hence the sale price can vary around a middle number and all are 'reasonable'
John
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2nds are much harder to sell.
Notes with balloons are much harder to sell.
A second with a short balloon will be even worse.
The logic is the buyer of the note can not tell if the borrower will be able to refinance or otherwise pay off the note. If the time horizon is short there is little time for the value of the property to rise.
If the 2nd goes bad then the note holder needs to not only foreclose but keep up the payments on the first.
So, it will be difficult to sell a 2nd with a short balloon. The risks to the seller are actually the same so any seller looking at such a deal should really understand just how the borrower expects to have the cash in 2 years (the suggested balloon).
John
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Dave,
One more thing on price vs. terms.
An old book says "Your price, my terms or My price and your terms."
Cash buyers expect a discount. Buyers with seller financing expect to pay full price.
Hence there is always a range between the low price (cash buyer with a distressed seller) and the high price (seller who can wait and is willing to offer terms to the buyer).
My point is to never lie or otherwise try to deceive a lender as that is fraud. At the same time never accept that there is only one price or that the price can not be adjusted to compensate for other terms and conditions.
my 2 cents plus a lot more... some advice is worth more...
John
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Casey,
What ever happened to the deal (and the possible note sale)?
John
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