Sometimes The Best Deals Just Fall In Your Lap

Sometimes The Best Deals Just Fall In Your Lap

by Dana Barnes

 

 

In every potential note purchase, there comes a time when your imagination and negotiating skills are tested. However, every once in awhile, a deal comes along where having those skills just makes you smile. You find your grin getting larger as the process progresses, and when the closing takes place, you thank those note brokers that came before you for imparting their wisdom upon you.

My company, New World Capital funding (NWCF), got a phone call from a Realtor who was having difficulty finding financing for a couple who were trying a buy a condominium in an exclusive area in northwest Connecticut frequented by New Yorkers and locals alike. The seller of the condominium was an out-of-state couple who no longer wanted the unit. It had been a weekend getaway and then a rental unit – now they just wanted to unload it.

The parties had negotiated a price of $65,000. The buyers, with $1,500 down payment, attempted to qualify for “first time buyer” conventional financing but were rejected because of prior credit problems. The Realtor, representing both parties, was calling NWCF to see if an owner financed sale was feasible.

The parties went back to the negotiating table and came up with the following: The condo would sell for $65,000. The buyers would put down $1,500. The sellers would hold a first mortgage of $53,500 over 30 years at 8.00% with a 7 year balloon. The sellers would also hold a second mortgage of $10,000 over 30 years at 5.00% with monthly payments of $53.68 and a 7 year balloon.

NWCF offered to buy just the first mortgage for $40,475 or both mortgages for $44,165. This offer was rejected by the sellers. First, they did not want to hold a second mortgage. Second, they felt that they could sell this unit tomorrow for $50,000 and $45,665 ($44,165 from NWCF and $1,500 buyer deposit) was not enough….

What did this $50,000 figure tell us? It meant that the sellers would be happy with a net $47,000 after paying the Realtor his 6% commission on a $50,000 sale price.

NWCF suggested that the Realtor forego his commission and buy the second mortgage himself at a discount. After talking it over with his wife, the Realtor decided against buying the second mortgage. However, he was willing to cut his commission to $1,500 to make the deal fly. He had taken these buyers under his wing, and he really wanted them to have this home.

In our further analysis of the situation, we either had to let the deal die or have NWCF buy the second mortgage. Our philosophy in these situations is to limit our cash outlay as much as possible and to get as quick a payback period as possible. In other words, we want to get our principal back as quickly as possible if there is not sufficient equity in the property to cover our investment. NWCF talked to the

sellers again and had them shift some of our closing costs to the buyers of the property which enabled NWCF to increase its offer for both mortgages to $45,200. This would also be the sellers' net figure after adding the $1,500 buyer down payment and subtracting the $1,500 Realtor commission. It was not the net $47,000 figure they were looking for, but it was close enough. They decided to take the deal.

What did this mean for NWCF? First, it meant that after all of the closing costs (i.e. attorney fees, recording, etc.), our out-of-pocket expense to buy the $10,000 second mortgage was $680. The payback period on our investment would be 13 months ($680 / $53.68). The yield on our money would be 96.47% assuming they could pay the balloon of $8,794 after 7 years. It was certainly not a bad return, but we felt a little uncomfortable with the balloon payment given this credit history. Therefore, we further negotiated a modification of the second mortgage after the closing. (Editor’s note: Dana was right in NEVER trying to modify a note before you own it.) With the modification, the second mortgage will fully amortize over 7 years. The new monthly payment is $141.34. The new payback period is just 5 months, and the increased yield is G.E. (good enough – thanks, Pete Fortunato).

The result of this successful transaction: Satisfied sellers, very happy buyers, a content Realtor, a relatively safe investment for NWCF and a big smile when the check comes each month.

Dana E. Barnes is with New World Capital Funding, Inc. of South Windsor, CT. NWCF buys notes and other receivables in Connecticut and Massachusetts. He can be reached at (860) 648-1449.

THE PAPER SOURCE JOURNAL  www.PaperSourceOnline.com 1-800-542-2270

 

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