An Age-Old Concept Reaping Future Rewards

Why are social media like Facebook and Instagram so darn popular among real estate and mortgage folks? Hint: the top reason might be an endless supply of memes, cat videos, and the chance to be snarky, but the other reason runs a VERY CLOSE second. Give up? Answer: They’re free – and they really help even the playing field by enabling a one-person shop look and market like an organization who employs an army of wordsmiths and graphic artists. This new century is glorious, right? With that in mind, let me re-introduce you to a centuries-old concept that is equally glorious – and can help IMPROVE the playing field for you, regardless of the size of your team: karma. On the subject of “free”, I’m not suggesting that you work for free, but when you freely give of yourself and your knowledge, you’ll see a greater payoff, I promise!

Recently, an agent came to us with a question: she has a client who is looking to sell his condo. It’s no longer warrantable, and the value is around $45,000. He owns the condo free and clear, and really just wants to walk away from it netting $45,000. The agent knew, of course, that no bank would lend on this, so she asked us for a possible solution. We could tell by her body language that she had already approached a number of our competitors, and they had all, most likely in a very nice way, told her that it just wasn’t possible citing one or two of the obvious reasons. Rather than joining the chorus of negativity, we offered her this solution:

The seller could put the condo up for sale for $60,000 and advertise it as a seller-carryback loan. He would require the buyer to provide a down payment of 20%, or $12,000 – this leaves a balance of $48,000, which the seller now carries as a mortgage (he acts like a bank). Are you with me so far?

The seller then takes this $48,000 balance and splits it into two notes: the first-position note is for $29,250 at an interest rate of 10% (I’ll explain how we arrived at those amounts in just a moment); the second-position note is for $18,750 at an interest rate of 10%. The seller turns around and seeks out an investor who buys notes (or mortgages) and sells the first-position note of $29,250.

In the market today, investors who buy notes like these usually want to see a Loan-To-Value Ratio (LTV) of no more than 65%, and they want the interest rate to be healthy. In this case, $29,250 is 65% of the value of the condo, $45,000; 10% interest is something that will give these investors a reasonable return. Any higher LTV or lower interest rate, and it’s likely potential investors will start vanishing.

This solution provides the seller with $12,000 from the down payment from the buyer of the condo plus $29,250 with the sale of the first-position note to an investor – he immediately nets $41,250, which is not quite the $45K he was looking to net. Have no fear: we’re not asking him to settle. Remember the second-position note? Using just simple interest for the sake of the analysis, the seller would receive a check for a little over $150 each month from the title company on this second-position note. In just two years, the seller will have received enough in residual income to get him up to that $45K net mark – and he’ll continue to receive residual income until that second-position note is satisfied.

Wait, it gets better! By selling the condo for $60,000 (using our solution), the agent helps improve the comps for the condo complex. In the meantime, she can meet with other owners in the same complex who are looking to sell and help them, too – a growing list of referrals. Perhaps the HOA will erect a statue in her honor! Our solution does nothing for us – we make money by writing loans, and this isn’t a loan we can write – but it was the right thing to do. While karma usually gets a bad rap, she’s got your back, too. Hugs and kisses, karma!