What one can do with houses, one can sometimes also do with privately held seller financing. Suppose in the foregoing example in the last Blog that the transaction had all been done with seller financing. Now the seller has a promissory Note secured by his former property that is paying 10% interest only, or $25,000 per year, for ten years. He’ll or his assigns receive $250,000 at that time.
Sometime later lets suppose that the Note holder sees an opportunity to make a profit on another opportunity if he can round up $125,000 in cash. The only way he can raise this is to sell his $250,000 Note. When he approaches various discounted Note buyers, the best offer he can get is $200,000 in cash.
He is reluctant to sell it at that price, but he offers a Note buyer a better deal which will also work better for him. He agrees to sell his Note for $125,000, but only if he can buy it back for $125,000 anytime during the next ten years. Why did he do this? Why did the Note buyer agree to it?
From his point of view, he is getting the cash he needs to make his next deal. Once he makes his profit on that transaction, he can take part of the profit and buy his Note back at the same price he sold it for. All his next deal is going to cost him is the interest he would have otherwise been paid on his Note.
In the meantime, he can still try to find a buyer for the house he sold on which he kept a buy-back Option. If he finds one, he can buy his house and his Note back using the funds provided by the house buyer.
The Note buyer sees things a little differently. He is earning $25,000 in interest on a $125,000 investment. He can use the $250,000 first mortgage Note as collateral at his bank to borrow $125,000 at 8%. If his interest payments were $10,000 per year, he’ll be earning $15,000 with nothing invested but his credit. Because the bank is so well secured, there is no practical limit to the number of times he can do this
So what happens when the original house seller finds a buyer who will pay $300,000 for his house? He instructs the escrow agent to contact the Note buyer and pay him $125,000 to repurchase his Note. Then the escrow agent tenders $25,000 in cash to the original house buyer along with the return of the $250,000 Note used to buy it with. The original house seller gets $25,000 in additional gross proceeds from the original house sale and any profits from the $125,000 transaction.
The reason so many sellers can’t sell their houses is because they can’t see beyond their current situation and don’t know how to put rational deals together; nor do the Brokers they employ. Now that I’ve explained discount buy-back concepts to you, could you put one together? If not, why not?
