Don’t Panic If Your Buyer Defaults! How to Save a Deal Gone Sour
Purchasing property the right way can get you past the hiccups in a deal.
There’s no question that you will come across complications in your property deals that will make you want to throw your hands up in despair. But don’t!
Sometimes the difficulties in a deal can become a source of added benefit. Challenging purchases might not go on to become your most profitable story, but there’s something to be said about salvaging a deal gone bad.
With my company, we try to find an upside in these situations—for instance, by creating a fourth payday from it.
What to Do When a Deal Doesn’t Work Out—Twice
One example I recall was when a house we bought had two different buyers after one defaulted.
In 2015, we put an expired listing under contract for $263,000 using a sandwich lease. The purchase price was what she owed on it, and we agreed to terms with nine years left so as to give time for the market to potentially appreciate and for principal to come down.
A “subject to” deal is preferable when the seller owes on the property, but in this case, they did not want to give up the title (either for the tax benefits or out of general discomfort).
We sold this property to a buyer for $329K, but they eventually defaulted. The combined paydays were:
- Payday 1: $12,000
Payday 2: $10,800
- Roughly $300/mo. x 36 months
Payday 3: $16,200
- $450/mo. x 36 of principal paydown
- Keep in mind there was no markup as we didn’t cash it out yet—we resold.
- Total: $33,000 in profit from the first two tenant-buyers
However, the net was closer to $4,800 on payday No. 2 since the property was vacant at times and we had to pay to maintain it. We paid for this with the spreads created by other deals, so it wasn’t truly an out-of-pocket expense.
By making a few deals with predictable paydays, you can create a safety net for events like default. Despite your best efforts to follow every best practice and to properly vet your buyers, things will still happen. From time to time, buyers will have what I call “life events.”
The Third Time’s the Charm
Because this situation involved a nine-year term with the seller of which there were several years left when this happened, we had plenty of time. When we buy a property subject to or when there’s a lease purchase where the debt starts out at about what it’s worth, we want two things to happen: the principal to decrease and the market to trend up.
Both of those things happened, and we were able to sell it to our third tenant-buyer for $359,000. After our principal paydown, the balance on the mortgage was roughly $246,800.
This new buyer created the same $300 monthly spread as before in payday No. 2. Since the market rose, the principal paydown also increased, but we’ll keep the $450 in this example for easier comparison.
Apparently, the third time’s the charm.
Here’s a recap of deal number three:
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$6,000 today + $14,000 over the next 36 months (non-refundable deposit)
$300 x 36 = $10,800 in spreads
$450 x 36 = $16,200 (principal paydowns)
Sale price: $359,000
Down payment: $20,000
Additional premium: $92,200
The $92,200 in premiums, $16,200 in principal paydowns, and $10,800 in spreads combined for $119,200 in profits on this deal. Plus, we had already received $33,000 from the first two tenant-buyers, so the property ended up netting us $152,200 in total paydays.
So what if tenant No. 2 defaults? We still had plenty of time left, so at the end of that period, we could have sold it traditionally—or better yet, placed another tenant-buyer.
However, our program is designed to help buyers get to the finish line, so we do all we can within our systems to promote this.
In this example, we dealt with a default yet were still able to craft a deal to our benefit (despite some hiccups along the way). When a deal falls through or is disrupted by a major life event, it is important to remember that the change in circumstances can be countered with a change in terms.
And in some cases, it may be time to break the usual rules of a deal and find something that benefits the seller, the eventual buyer, and you.
Have you experienced a deal gone sour? How did you handle it? How did it work out?
Share your story in a comment below.