Jumbo Owner Carry Back Financing – Can You Sell Those High-End Notes?
I’ve had a couple of email inquiries about the use of owner financing (with the subsequent sale of the note) for high-end properties, and oddly, I was just interviewed by the Wall Street Journal who was covering the topic, inspired by a $29,000,000 listing where the seller is not only willing to offer terms, but creating a financial incentive if the prospective buyer will allow him to be the bank. More on that below…
Certain questions seem to fill my inbox in small, orchestrated groupings, as if there’s something in the air that makes several people have a certain thought or question all at the same time. Lately, it’s been the issue of how reasonable it is to expect that the secondary market for jumbo owner carry back notes provides a meaningful exit strategy for high-end home sellers.
Most of the notes I buy and/or broker are under $100,000, so I had to call around to a couple of larger note buyers to try and get my finger on the pulse of it, and I would greatly appreciate and encourage others to share with me if they’ve found different answers, or know of someone willing to drop millions at a time for an owner carry note… I can imagine some large hedge fund being able to absorb them, but I don’t personally know of any.
From what some of my peers in the industry have shared with me, they’d be willing to drop as much as $1,000,000 on a single note, as long as the underwriting was water tight… solid appraisal, large down payment, sterling credit.
That helps if the home sale is $2mil or less, but a seller of a more expensive home might need to leave quite a bit of equity in the deal until the buyer/borrower is able to refinance, or sells the property.
For some sellers, this is absolutely desirable, like for the guy mentioned in the WSJ article, who was actually willing to reduce the purchase price by $3mil if the buyer would allow him the privilege of being the bank.
Here’s what the seller was willing to do:
- Purchase Price: $26,000,000
- 60% Down Payment: $15,600,000
- First Note & Deed of Trust: $10,400,000
- Interest Rate: 3.8% (fixed)
- Term: 360 (30 years)
- Monthly Payment: $48,459.56
Why would he do this? My guess is he’s looking at other investment vehicles and deciding that all things considered, he’d rather have his $10mil secured by a property he knows intimately, rather than be exposed to the risks of mainstream investments one has less control over…. and, I’m supposing there could be a rather relevant capital gains issue there, as well.
I’ve had two buyer consulting clients recently who were looking to acquire high-end properties with terms offered by the seller, but in these two instances, there has been a rather significant bank loan that needs to be leveraged. The sellers have had as little as 25% equity (there was a 75% LTV note held by an institution), so we were exploring the various deal structures that would meet the needs of, and best protect, all parties (and the existing financing… which in one case was at 2% fixed after a successful loan modification).