By Barry Lebow
In various parts of the country, some buyers are backing out of deals. The reason for many is simple – they bought but could not sell (at their price) their own home. In many cases, one sale leads to a chain of sales and that first deal can cause problems for four or more other sales up the line.
Recently a broker friend received a pleading email asking her to share in a $10,000 shortfall by a buyer. This was not her client. This party was the first in a chain that impacted three more deals. The first buyers could not sell their home, save for less money than they had budgeted for, and they wanted all the salespeople to kick in to share in their loss.
I told my friend to simply reply that it seems fair if the party would sign a guarantee that the agents who contribute to the loss would get half of any appreciation over the next 10 years. Funny, isn’t it? People are always reaching out for others to help them share in their losses but seldom do they divide up their gains.
So what options can a Realtor offer to save a deal or worse, a chain of deals? First, mortgage manipulation. Let’s take a simple example, the $400,000 house sale.
We will assume the buyer has 20 per cent or an $80,000 down payment. The issue is that at the last minute the appraiser valued the house at $380,000 and the financing is now predicated on that price.
The buyer still has the same $80,000 down payment. The problem is, they need another $20,000 to close the deal, which they just cannot come up with.
Yes, you may be able to go back and renegotiate the price with the seller, but the odds of that are against you.
The simplest solution is to use a mortgage. You calmly present to the buyer and the seller that they face litigation, which is very costly and you have a plan to avoid it – a take-back mortgage.
In this case I would advise the seller to take a note, registered as a second mortgage against the property for $20,000. The term would be maybe two to three years. I would start with offering the buyer no payments for the term. If the seller wants repayment, I would do something simple like $100 per month plus interest (to be negotiated). You can work on the terms. There are so many variables. I am not in favour of holding an amortized mortgage as a private lender.
By taking back the mortgage, the seller still gets their price but just a small part of it is deferred. The buyer still lives up to their obligation in respect to that price.
Here is another aspect. That second mortgage, depending on how it is written and under what terms, is saleable. Private investors through mortgage brokers or lawyers are seeking good returns (for a saleable mortgage, interest must be in place). Before negotiating a seller take-back mortgage, speak to your favourite mortgage broker – one who handles private funds – and find out what terms are necessary to make it saleable and what the discount on the paper would be.
If the interest rate is reasonable, the costs to sell that mortgage would mostly reflect fees to the broker and for legal costs. The seller may lose only a couple to a few thousand dollars in the end, which is a lot cheaper than the legal costs to sue a buyer who cannot close.
Seller-take-back mortgages and discounting mortgages were once staples of this industry and are a forgotten method of making deals.
There are other options for negotiating to close a deal, from price concessions, extended closing dates or a commission reduction (why would you do that as you will be working even harder). But overall, I have found that taking back paper is one my best options to make a perilous deal become a solid deal.
Want to learn more? Sit down with a mortgage broker who works with private funds and learn.
Deals not closing? My favourite line was stated by Napoleon Hill of Think and Get Rich fame. He wrote, “It’s always your next move.” I keep that in my daybook as a daily affirmation.