Note Pro Rides White Steed Into Pasadena Escrow – Seller Financing Saves the Day
This is the time for note professionals to shine. Our expertise can make a meaningful contribution to the economy.
I got an email from Kay, who found me as a result of an Investor’s Business Daily interview: Seller Financing Can Seal the Deal in Rough Market. She was thrilled, and so was I, that we only lived 5 miles apart. (It’s always fun when you get to work with people in your own back yard).
She and her husband had an escrow that was falling apart, and they asked me to step in and put it back together. If this deal didn’t close, then they would most likely lose at least another $50,000 on this southbound investment.
Here’s the scoop:
A British buyer had originally made an all cash offer on a $764,000 home. He put down a non-refundable deposit of
$24,000, and was willing to walk away from it when the pound dropped substantially against the dollar, virtually overnight.
For him to liquidate enough of his own currency to complete the deal right now would effectively make his purchase price $900,000, and that didn’t mix well with his Earl Grey.
The sellers and I weighed the wrap (AITD) against subject-to and land trust transfer: seller financing on steroids – a technique to prevent the bank from being able to ‘call’ the note on any underlying financing left in place.
Here’s how the sellers made the transaction more palatable for the buyer and created a win-win-win-win-win (2 principals, 2 real estate agents, and 1 note pro):
Buyer made a $194,400 down payment, and took the property subject-to the sellers’ interest-only loan: principal balance $569,600, fixed at 7.25%. By George! Now he could put his focus back on the Breeder’s Cup!
As it becomes economically attractive for him to do so, he will liquidate pounds for dollars and pay off the underlying financing.
(After the holidays, won’t we all wish we could liquidate pounds for dollars?!)
I would have preferred that we had done a wrap (even if the interest rate was at par with the underlying financing). While both strategies are equally underwritten, the wrap would have given the sellers the right to foreclose in the unlikely event that the buyer quits making his monthly payments. Not that they would be willing to soak more money into the investment, but they would have retained more control.
The land trust transfer would have been watertight against potential loan acceleration, but the buyer’s financial strength made it an acceptable risk, so we elected not to try and educate everyone about this particular strategy.
Seller financing saved this Pasadena escrow and made everyone very happy: sellers got to sell, buyers got to buy, and agents made commissions. Now isn’t that some lovely jubbly!
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Aloha Dawn,
Congratulations on putting the transaction together. The only question I have is, isn’t the underlying due on sale clause still a risk (although not very big one in the current market). It would appear unlikely that the buyer would walk away from such a large down and while the land trust would have provided more protection (seller could still stop making payments on the underlying causing a problem for the buyer), your solution seems cleaner and worked for the parties involved. While the British gentleman probably isn’t concerned with the tax write woudl the tax write offs still be available to a US citizen in this situation and does the seller have a tax consequence this year. I guess it goes back to whatever works for the individuals involved and I appreciate your creativity as few people understand this process as well as you. Aloha,
Aloha! Thanks for your comments, Rein.
You’re right, the land trust would have been cleaner all around, but seemed like more of an educational hurdle when we desperately needed a quick close.
All parties understood the risk of acceleration, default, etc. The risks of the deal NOT going through in any form were much greater.
As far as the tax consequences go, I’m not a CPA, but it is my belief that the buyer could easily justify writing off the mortgage interest, since he is paying it, as well as taxes and insurance. The sellers will have a tax consequence as title was transferred.
Looking forward to working with you as you help people in the land of Paradise put these types of transactions together!
Take care,
Dawn