How Do You Present Offers To Pay Off Seller 2nds Early At A Discount?

Question

The new year is upon us and some JV partners and I are going to start to offer to pay off seller 2nds carried at a discount to what is currently owed.  One projects has a small balloon note due in two years and we are going to offer to pay it off at roughly half price to the seller that carried the paper.

How do you normally arrive at your offer price for these types of scenarios?  This seller was quite motivated at the time we bought this property 3 years ago so my suspicion is that this will be attractive to him now.  However, I really have no way of knowing without throwing the offer out there.

Ideas?  How do you approach this normally?

Joel Owens · Answer

Yes if your other notes are at those interest rates you stated then keeping the cash to make new investments makes sense.

Make a low offer to all 3 and see if one of them bites.Start out at 30 like I said.At the end of the day they want to feel they got more than you were willing to pay them.They want to mentally win the war and feel superior in negotiations.

Let them feel this way and revel in their accomplishments.You will know all the time you accomplished your goals.

Joel Owens · Answer

So you are only trying to buy off the seconds on properties you bought a few years ago and obtained owner finance on???

3 years is a long time and motivations can stay the same or change.If they don't need the money now they might not want to sell at 50 cents on the dollar.

In my sellers listings most note buyers haven't touched a second in a few years.The reason is most markets have been  declining in value.If they have to foreclose they would lose money on the deal.

So some seconds will be bought but only if the appraisal shows a ton of equity left over after the first and second position.

With you you own the property so in paying off the second you are just reducing your debt down.

If you want to pay 50 cents on the dollar offer 30 cents and work your way up to 50.The owner holding the second may be happy that you have been paying all this time and wants to keep things status quo or they might have other investments they want to pursue.

For example the note is for 300k.You payoff at 150k and they use that to buy a distressed apartment building etc. where over time they turn the 150k into 600k.

Just make the offer and feel them out.

Paul B. · Answer

I'm not sure what you're hoping to hear since I know you're a bright guy who understands well the need to state benefits when trying to convince someone to do anything.

If someone is even remotely savvy, I'm not sure why they would take 50 cents on the dollar for a note with a two-year balloon, unless they don't have the means to foreclose, in which case they could presumably sell the note to someone else.

Longer term loans should be easier to pay off early since some people would rather have cash today. But, with today's low interest rates, the reinvestment opportunities are weak, so they might not have any incentive to take the partial payoff.

What are your thoughts on why note-holders would go for this?

Thanks,

Paul

Bryan Hancock · Answer

Well I sent the proposal via email today at 50 cents on the dollar for an early payoff.  I guess we'll see if he bites!

Bryan Hancock · Answer

The CLTV blended is around 60-70% depending on whose appraisal you use.  Comps are so weird right now that I am not confident in any appraisal.

Yeah...I have made solid payments for around 3 years now.

Loc R. · Answer

Bryan,

You have to take the entire transaction into consideration.

What is the LTV of all liens?

Is the payor performing?

From there you can better guestimate what kind of offer will likely get a response.

Bryan Hancock · Answer

I don't see the seller being a very savvy investor, but he certainly is liquid.  He bought this particular property for cash and sold it at a big loss.  I don't really know much about this personal situation other than he didn't know what he was doing in the market he bought in.

Joel Owens · Answer

It really depends on who the seller is.Was the seller who owner financed a corporation or a one time property owner or  a seasoned investor??

If say they invest in a certain asset class say multifamily the deals that are abound today might not be here in a few years and the interest rate might be higher.So in that case they will have a motivation today to cash in.

There are hundreds of reasons they might or might not sell.Some want existing security above  potential reinvestment returns.

If they do want to sell the note I don't see them selling to someone else unless as I said there is a ton of equity and the interest rate on the note is great (for the note buyer).

Bryan Hancock · Answer

Thanks Joel...There is only about $18k left on this particular note.  I do have some larger 2nds on other projects so this thread is a bit more general in nature.

All of the projects (three total) have pretty decent equity at current market prices so there would still be some security for the 2nds.  I want to decrease our leverage ratios a bit this year and strengthen our balance sheet and this seems like an efficient way of doing so.  Hoarding the cash is a better option without a good deal on buying out the 2nds.

Bryan Hancock · Answer

Thanks for the compliment Paul ;-)

The note is 5% amortized over 30 years so I am guessing the holder may be able to put that money to work more efficiently.  He is a California investor that got chewed up and spit out investing in a market he didn't understand.  My thought is that he may just want to be done with the whole thing.  I also figured that starting at 50%ish would give us room to negotiate north a bit.  Absent a great deal we are just going to wait and pay it off in two years.  I was hoping some of our expert negotiators may have some words of wisdom or that a thread may help me recognize things to highlight before I send the email to gauge interest.

Does that help at all?

How Do You Present Offers To Pay Off Seller 2nds Early At A Discount?

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