Guaranteeing Sellers Exit by Offering Inflated Purchase Price

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Guaranteeing Sellers Exit by Offering Inflated Purchase Price

Brandon SturgillBusiness Member
Real Estate Broker · Columbus, OH · Member since 2013 · 3k+ posts · 1k+ votes

I have a seller-finaced duplex that I am negotiating currently. Sellers are generally good on mortgage/note terms, but are seeking more security. I am ok offering a purchase price slightly higher to compensate for the estimated discount they can sell the note for. Has anyone used this technique to complete an acquisition. 

Moreover, what type of guidance would you give the seller to sell this note as quickly as possible?

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Chris SeveneyBusiness Member
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Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
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Brandon Sturgill Be careful. Not sure why you would pay more, but be reminded that an offer on a note is typically based on the Lower of the UPB and value of property. If property is worth $100k and you bump the price up to $120k that typically will not get the note holder more $ If you want to increase the value of the note the way to do it is increase the rate. A note of $100k with 9% interest is worth more than a note of $100k at 6% interest
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  • Chris SeveneyBusiness Member
    Moderator
    Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
    9y
    Brandon Sturgill Be careful. Not sure why you would pay more, but be reminded that an offer on a note is typically based on the Lower of the UPB and value of property. If property is worth $100k and you bump the price up to $120k that typically will not get the note holder more $ If you want to increase the value of the note the way to do it is increase the rate. A note of $100k with 9% interest is worth more than a note of $100k at 6% interest
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  • Jordan P.
    Hartford, CT · Member since 2017 · 39 posts · 16 votes
    9y

    @Brandon Sturgill

    Mostly agree with @Chris Seveney ...just to clarify performing notes are sold off of yield versus NPN that are sold directly off of lesser of UPB or FMV. However, a similar rule/effect applies to performing notes in that if the note they're selling is underwater because you negotiated a price over FMV an investor might want a higher yield, maybe 10% instead of 8%, than if the note had full equity.

    So, I wouldn't do what you're proposing for two reasons: (1) it's unnecessary; (2) putting borrowers, myself included, into a situation where they are immediately upside on a property doesn't sit right with me. Instead, as Chris suggested, put a rate on the note that is close or equal to what an investor would require to buy it. Consider the two illustrative notes below. The first has a 7% rate and grosses up the loan principal by $20k over value. Because the note is underwater an investor looking to buy wants a 10% return, so seller has to discount the price down to $91k. This is a lose-lose. Seller loses $9k of value on the property they sold and buyer is $20k underwater. The second note is underwritten at 9%. Because it has full equity, the same investor will accept a 9% return because they know they can get their money back if the note defaults and they have to foreclose, so seller can liquidate the note at par. This is a win-win. Seller gets full value and buyer is paying roughly the same monthly payment as option #1, but isn't underwater on the property.

    Opt #1Opt #2
    Principal120,000 100,000
    Rate7%9%
    Term360360
    MoPmt$798.36 $804.62
    Sale Yield10%9%
    Sale Price90,974 100,000
    Price / UPB75.8%100.0%
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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    PV s are what your looking for raise interest and shorten the term.

    a note with zero interest paid off in 30 months has the same PV as a note at 15% paid over 7 years. 

    so combo of rate and terms will do it.. not raising the price

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  • Brandon SturgillBusiness Member
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    Real Estate Broker · Columbus, OH · Member since 2013 · 3k+ posts · 1k+ votes
    9y

    @Jordan P. @Chris Seveney @Jay Hinrichs

    Makes sense gentlemen. Thanks for the guidance. On a related note, (no pun intended)...

    1) Is there an approach the note holder can take to sell on the market?

    2) Do note buyers consider lower value properties- is there a price point where they simply won't by: i.e. less than $50k

    3) Is yield the top consideration?...is the property itself a factor in the equation? 

    Details: this is a very modest property (duplex with $1,200 mo. gross rents)- $60k ARV. $35k purchase price. Terms so far are 10% Down/48-month balloon/30-yr Amortization/8% interest/Pre-payment to bring total monthly debt service to $350

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  • Mike CumbieBusiness Member
    REALTOR® · Brockport, NY · Member since 2015 · 3k+ posts · 4k+ votes
    9y

    @Brandon Sturgill

    "On a related note, (no pun intended)"

    You should so get a ban for that

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