At the end of my inspection of the property we sat down to talk more about some ideas. I gave her my opinion on value and market timing. We also discussed the possibility of renting their home if they could not sell it by the time they needed to move. At the end of my presentation the referral says "Well, it looks like we are upside down. We owe $10,000 more than what you are telling us the market value of our home is."
For a moment that was a showstopper. At this point prepared to discuss the negative implications that being upside down meant to their future financial situation. Then they explained to me that they had purchased the home with seller financing. This was great news. With that in mind, I explained that we three options:
1. We could rent their home out for market rate and have them subsidize the difference between rent and the motgage. They would lose approximately $200-250/mo. Hopefully in 5-10 years the appreciation and amortization would catch up to make them liquid and they could sell the home.
2. We could return the keys of the property to the private lender and thank him for letting the them live there for 2 years.
3. We could "short sale" the property with permission of the private lender. The home would sell at market value. The client would experience no credit problems because the private lender likely did not report the mortgage to a credit agency. There would be virtually no negative credit consequences.
Of the three options, I believe option three would be the most logical. On paper, the lender has $60,000 profit coming to him if the referral sells at the note value plus commissions and title fees. The market simply won't bear that right now. The funny thing is that if the referral just walked away, the private lender would have the exact same problem trying to sell the property. Changing sellers doesn't change the value of the property.
So the question is: Would the private lender prefer to take about $30,000 cash at closing through a short sale or take the property back? We will find out as we get closer to preparing to sell the property. I am betting the lender would prefer the cash. I will let you know how it turns out.
Might i throw in there #4?
ReplyDelete4. Talk to the lender and explain the situation. IF the current buyers are taking good care of the home then he might be open to letting them stay. They could become renters. They could renegotiate terms of purchase. Who knows what else.
If I was the lender then I need to think "what can i sell/rent it for now?" If the current buyer is a good tenant then I am open to keeping them in the home and just re-discussing the loan or rent terms.
Just my .02. Good luck and I hope the buyers AND lender the best of luck.
Ross,
ReplyDeleteYou are right. Converting the note to a lease agreement would make sense under the right circumstances. These folks pay their mortgage on time each month. However, in this case, they don't want to stay, they want to move due to a job promotion. The lenders hand is going to be forced since they don't want to turn down the job.
"There will be virtually no negative credit consequences for the borrower". I'm curious how the borrower would feel if the note holder decided to bail on them. Its fortunate for the borrower to be offered a job promotion however, why should the note holder be expected to eat it? If there was equity the borrowers would take it but since their isn't they feel they can just walk away. If I was the note holder I would ask for a promissory note for any loss I took using your short sale strategy.
ReplyDeleteExcellent point Shawn. The lender can certainly do just that and ask for a promissory note for the difference. But, if the borrowers are unwilling to do that, what other recourse is there for the private lender? None really. That is why I think the lender will work something out with the borrowers. Also, you mentioned the lender "bailing" on the borrowers. In this specific situation there is no underlying financing so I am unsure if that is even possible or would be in the interest of the noteholder.
ReplyDeleteDid my last comment get deleted?
ReplyDeleteI can think of at least two more solutions that would keep the seller whole and the buyer not skip-out on their obligation:
ReplyDelete1. Find another contract buyer to take over. If it was stood deal two years ago it should still be a good deal.
2. Rent it but negotiate deferal of interest on some of the note or in some way renegotiate the terms of the loan. There are a million ways to do this- all it takes is creativity and knowledge. If someone needs more ideas they can contact me or attend next Tuesday night's Investors Workshop meeting in Ogden.