In every potential note purchase, there comes a time when your imagination and negotiating skills are tested. Every once in a while, though, a deal comes along where having those skills just makes you smile. Your grin gets larger as the deal moves along, and at closing you thank the note brokers who came before you for passing on their wisdom.
The call from a Realtor
My company got a phone call from a Realtor who was having trouble finding financing for a couple trying to buy a condominium. It was in an exclusive area of northwest Connecticut popular with New Yorkers and locals alike.
The sellers were an out-of-state couple who no longer wanted the unit. It had been a weekend getaway and then a rental, and now they just wanted to unload it.
The parties had agreed on a price of $65,000. The buyers, with a $1,500 down payment, tried to qualify for first-time buyer conventional financing but were turned down because of past credit problems. The Realtor, who represented both parties, called us to see whether an owner-financed sale was possible.
How the seller financing was set up
The parties went back to the table and agreed on this structure:
| Piece | Amount | Terms |
|---|---|---|
| Sale price | $65,000 | |
| Buyer down payment | $1,500 | |
| First mortgage (held by sellers) | $53,500 | 30-year amortization at 8.00%, 7-year balloon |
| Second mortgage (held by sellers) | $10,000 | 30-year amortization at 5.00%, $53.68 a month, 7-year balloon |
The first offer and why it failed
We offered to buy just the first mortgage for $40,475, or both mortgages for $44,165. The sellers turned it down for two reasons:
- They didn’t want to hold a second mortgage.
- They felt they could sell the unit tomorrow for $50,000, and $45,665 ($44,165 from us plus the $1,500 deposit) wasn’t enough.
What did that $50,000 figure tell us? That the sellers would be happy with about $47,000 net, after paying the Realtor a 6% commission on a $50,000 sale.
Closing the gap
We suggested that the Realtor give up his commission and buy the second mortgage himself at a discount. After talking it over with his wife, he decided not to. But he was willing to cut his commission to $1,500 to make the deal work. He had taken these buyers under his wing and really wanted them to have this home.
That left two choices: let the deal die or buy the second mortgage ourselves. Our philosophy in these situations is to limit our cash outlay as much as possible and get as quick a payback as possible. In other words, if there isn’t enough equity in the property to cover our investment, we want our principal back fast.
We went back to the sellers and had them shift some of our closing costs to the buyers. That let us raise our offer for both mortgages to $45,200. It was also the sellers’ net, after adding the $1,500 down payment and subtracting the $1,500 commission. It wasn’t the $47,000 they wanted, but it was close enough, and they took the deal.
