Navigating in the Imperfect Marketplace for Private Mortgages
©2001 by Bill Broadbent, San Luis Obispo, California
While there is NO "PERFECT" MARKETPLACE, the major U.S. stock exchanges probably come the closest since there are many buyers, many sellers and lots of information available for review on listed companies. These conditions may be very helpful in making buy or sell decisions.
By comparison, the market for privately held seller carried-mortgage notes is relatively small, there are fewer buyers, few motivated sellers, few experienced note brokers and the documentation and information available on each situation is different and somewhat limited. Here is an actual case that illustrates the point.
Mr. H (a consulting client of mine) made an appointment with me to discuss selling a note he held that was secured by a first deed of trust. The security was a Single Family Residence (SFR), owner occupied by his son. The house had first been transferred in December 1996 from Mr. H’s mother (who had owned it for about 50 years). She transferred it to her grandson at a value of $150,000, gifting him a $5,000 down payment credit and he had executed a note to her for $145,000 amortized over 30 years at 7.4% interest. The grandson did some significant remodeling which added value to the house.
Subsequently her health declined and in the spring of 2000 she moved to a nursing home. To qualify her for Medi-Cal and eliminate a medical penalty transfer, Mr. H employed an attorney who specialized in elder law. In July 2000 some corrective deeds were recorded by the attorney and a revised note for $128,541.61 was signed by the grandson to his father Mr. H. The deed of trust pledged the house and an adjoining lot as security for the debt. A portion of the garage encroached onto the vacant lot but this could easily be corrected with a lot line adjustment. I recommended that Mr. H and his son get a preliminary lot line adjustment map prepared by a registered engineer. This would clearly establish the boundaries and clarify the encroachment problem. I also recommended an independent fee appraisal on the house and another appraisal on the vacant lot as if the lot line adjustment had been completed. We also got a current title report on the property and credit reports on the Payors (the grandson and his wife).
The appraisal on the vacant lot came in at $65,000 subject to completion of the lot line adjustment. The house (w/o the vacant lot) appraised at $225,000. The current balance due on the note was $127,739.34. I was now ready to solicit offers on Mr. H’s note from some active institutional buyers.
The Marketplace:
I first approached an eastern company who liked lower LTV (loan to value ) notes and Payors with high credit scores. I had both these elements, Low LTV (57%) and very High credit scores. Unfortunately this company no longer buys notes in California, Alaska and Hawaii.
I then turned to one of the largest note buyers in the country. To my surprise they offered only $79,632. I was confident I could do better.
Next were two companies who had helped me with a note valuation situation back in March of 2000. One faxed me a very intelligent proposal at $94,016. The midwestern company gave me a quote of $95,050. Things were looking better.
I recalled a company from the southeast that I had closed a deal with several years ago on a Colorado trust deed note. After reviewing Mr. H’s note and my supporting documentation they came through with a quote of $109,000. My client was very pleased and he accepted the $109,000 quote.
Now the paperwork challenge began. I wrote a two page summary of the transaction and then met with my real estate attorney to discuss the matter. An agreement was prepared that would allow the vacant lot to be released as part of the security once the lot line adjustment and encroachment issue was resolved by obtaining the proper governmental approvals. The note buyer would be protected and the Payor could still accomplish his objective (to eventually sell the lot).
The big surprise in this transaction was the wide range of offers $79,632 on the low end to $109,000 on the high end. This was almost a $30,000 difference on a low LTV, high credit score, well secured note. Each buyer had a decidedly different interpretation of the facts. Over forty years in real estate and two decades of experience in the discounted note field enabled me to overcome the encroachment distraction and negotiate the best price and terms for my client, Mr. H.
This case proves conclusively that note sellers need REPRESENTATION by an experienced, professional if they hope to successfully navigate the uncertain, choppy waters and imperfect conditions of the discounted note market. Our imperfect world is full of would-be note buyers with inadequate training and experience.
2/26/01
Ed Arnett or Bill Broadbent, S.E.C.-CCIM
Arnett & Broadbent Inc.
SINGLE AGENCY REAL ESTATE REPRESENTATION1380 Broad St.
San Luis Obispo, CA 93401-3910
(805) 543-9100
e-mail to bill@arnettbroadbent.com
Copyright © 1997 Arnett & Broadbent, Inc. All rights reserved.