NPN Story: Another Short Sale Homerun
Here’s another story of a win-win short sale transaction. (Read the story of our previous win-win short sale.)
Negotiations Immediately Upon Acquisition
On the day that we closed on this non performing note, the seller told us that the borrower had contacted them regarding a short sale. It's always welcome news to get contacted by a borrower who wants to work something out. We took over the negotiations immediately. We talked to the attorney doing the closing of the short sale real estate transaction (who also defended the borrower in the foreclosure suit.) We got the purchase contract and estimated closing statement and examined the numbers right away to see if we could reach an agreement which made sense.
Legit Short Sale?
First thing to examine, though, was this a legitimate short sale offer?
Half of the short sale offers we get are low ball offers, in which we would lose a significant amount of money. We believe that the borrowers or real estate agents involved are trying to see if they can get one by the “bank.”
They submit very low offers, which are most likely non arms length transactions by which some or all of the participants involved are unfairly profiting at the lender’s expense.
Offer at Market Value?
The agent listed the property for $455,000 and had an accepted offer at $455,000. According to our valuation work, the property was worth about $460,000. This offer was reasonable and gave us more confidence that we were dealing with a borrower who was not trying to take advantage of us.
We saw that the borrower owed about $120,000 in back taxes, which would have to be paid off at closing to make this deal work.
Doing the Math
The total of our payoff ($412,000) and the back taxes was $532,000, which exceeded the value of the house. The only way to make this deal work was for us to take a short payoff.
Since we purchased the non performing note for about $260,000, we had some flexibility.
At this point, we needed to determine a payoff amount that could make the deal work while getting our investors a generous return.
At the end of the day, the back taxes were the borrower’s responsibility and would get dropped off in the foreclosure (these were IRS and state tax liens against individuals, not property taxes).
If We Didn’t Do the Short Sale
If we foreclosed, these taxes would go away and not affect us. They would stay with borrower. However, if we turned down the short sale request and proceeded with foreclosure, what would the borrower do then? A Chapter 13 bankruptcy filing would be a real possibility and that could drag things out for several years.
Our Rule of Thumb:
We always do our best to negotiate when a borrower is meeting us halfway. It’s much better to strike a deal in which everyone wins and you can be assured a timely outcome than to take a risk of a less desirable one.
The Right Amount
We determined that $360,000 was the right amount for our short payoff. We knew that the current math wouldn’t work but we weren’t going to take the entire hit. The borrower would have to negotiate their tax liens and maybe come in with some funds of their own. We told the closing attorney the short payoff amount and let him get to work getting the deal done.
Unfortunately, the buyer backed out of the deal but the attorney was able to negotiate the back taxes down to about $67,000. He had the agent re-list the property and they found another buyer but at a lower purchase price.
Three Months from Start to Finish
We stayed at our $360,000 payoff amount and the buyer came in with a little over $20,000 to make the new transaction work.
The borrower was able to extinguish $120,000 in delinquent taxes with $20,000, a small price to pay for getting a clean slate. We were able to get the generous return for our investors that we were shooting for.
The closing attorney was grateful to work with note investors like us, who could be flexible and act quickly, unlike slower moving big banks that take weeks and months to accomplish the same things it takes us to do in a few days, at most.
Another win-win short sale!
Purchase Price: $260,742
Total Cost Basis: $261,052
Short Payoff Amount: $360,000
Net Proceeds: $359,835
Net Profit: $98,782
Days Held: 80
Annualized ROI: 172.6%