Should I Carry Paper for This Buyer?
Recently, a seller called me wondering if she should accept a seller carry back offer. She and her sister had inherited a residential property after their mother’s death, and they owned it free and clear (no underlying mortgage).
They’ve had it listed at $1,500,000 for the last 9 months. In that time they’ve had a couple of full price offers, but it has fallen out of escrow each time because ultimately, the buyers couldn’t get bank financing to come through. This is the perfect time for a serious seller to consider offering terms.
Here’s the offer on her plate now:
- Sales price: $1,400,000
- Down payment 20%: $280,000
- Note amount (1st TD): $1,120,000
- Interest rate: 6%
- Amortized over: 360 (30 years)
- Monthly payment: $6,552.20
- Due in 120: $963,954.05 (balloon in 10 years)
So, what do you think? Should she take it? She wanted all cash, or cash-to-new-loan, but she can’t seem to get it in today’s mortgage climate. Is this a good deal?
By most standards, yes. The purchase price is reasonable (the property would appraise), the buyer’s FICO is 780, and a 20% down payment is considered strong . . . 20% usually provides ample protective equity if the payor defaults.
The interest rate is on the low side, even if you’re only trying to match what the institutional lenders are doing, and I would want a 5 year balloon instead of a 10 year. After 5 years, the Time Value of Money starts to seriously erode the present value of future payments to be received . . . especially in this climate of ever increasing inflationary pressure.
If they don’t sell now, they risk having the property sit on the market for another 9 months, or they will need to consider a drastic price reduction. Additionally, the city could force some costly repairs/remodeling at any moment due to a variance that was only good as long as their mother was alive.
So, if she accepts, here’s what she and her sister will split:
- Down payment: $280,000 (minus closing costs and any capital gains)
- 120 payments of $6,552.20: $786,263.77
- Balloon in 10 years: $963,954.05
- TOTAL to sellers: $2,030,217.82
Doesn’t sound too bad, does it?
The seller is concerned about carrying because she doesn’t trust the buying power of the balloon. The way we’re printing money these days, she might be able to go to a show, get a large popcorn and 32oz soda on that $963,954.05 ten years from now!
What if the sellers need more than $280,000 at the closing table? Are there any options?
Actually, yes. After the close of the first escrow selling the house, they can sell a portion of their note to raise some additional capital. They might need to receive at least one payment. Six months’ seasoning is even better. How much they need and the note buying climate at the time will determine the discount that will be required.
Can they sell the whole note? Probably not . . . not without a monster discount. I, like most investors, would consider it too risky, even with a 20% down payment and a great credit score. Property values don’t have to decrease by much to annihilate any protective equity.
All in all, it’s a fair offer. It will just be up to the sellers to determine what’s most important to them. There are risks and rewards either way they go.