The Buyer is Asking Me to Carry Paper – Would it be a Good Note and Would You Buy It?
On Cinco de Mayo I was on my way down to San Diego for a real estate radio show when I got a call from a guy who owns a multifamily property in Arizona. He was wondering if he should accept a seller carry back offer, because he was either going to keep the note, or sell it to complete a 1031 exchange . . . he wasn’t sure yet.
In either case, he needs to structure the transaction to ensure that he has a note that will sell for minimum discount. The stronger the note is, the more money it will fetch in the secondary trust deed market, and the more money he can bring towards his exchange.
If he ends up keeping the note, he wants to know that he has a strong investment that he won’t have to worry about. He doesn’t want to be “taken” when taking back a note.
So here’s the offer on the table:
- Purchase price: $1,300,000
- Down payment: $650,000
- First deed of trust: $650,000
- Interest rate: 7.5%
- Term: 360 (amortized over 30 years)
- Monthly payment: $4,423.55
- Due in: 60 (5 year balloon)
- Amount due in 60: $623,814.08 (balloon payment)
Wow! Sounds OK, doesn’t it? 50% LTV (loan-to-value), that’s a lot of protective equity! Yes, the interest rate could be a little higher, but especially if the buyer has decent credit (FICO over 625), this note is very solid, and would sell for minimum discount, even with a 7.5% interest rate. The 5 year balloon also preserves the value of the note. A 30 year note without a balloon payment would be worth much less.
And then he called back today to say that the buyer wants him to carry in second position. “Will it still be a good note?”
Perhaps, but a second position note is a completely different animal. It changes everything. Depending upon how much hard equity the buyer is putting down, it can still be a fairly good deal, but only if he decides to keep the note for a while and forget about the exchange. To sell that second completely, he’s going to take a much bigger discount.