A year ago, you sold a property. You wanted to cash out, but your buyer could not qualify for conventional financing. Reluctantly, you agreed to carry back a note.

Recently, you approached me and asked if I would be interested in buying your note. I collected some information from you and we are meeting today. We have agreed to do something unusual. To truly appreciate each other's position, we are switching roles. I will be the seller and you will be the buyer. Why? We want to try to get the emotion out of it, we want to be more objective. We have had one week to prepare to be the "other guy."

Let's pretend.

Me: Okay, how much will you give me for my note?

You: Well, how much do you need?

Me: She has paid me 10 payments on time, my balance is about $91,000. I want $91,000.

You: $91,000? Wait a minute, we have a problem here.

Me: What problem - is my math wrong?

You: No, your math is correct. But, there is a big risk for me if I give you $91,000 of my capital. I have done a little homework and we have some issues here.

Me: I was honest with you about her bankruptcy. She's getting her life together and all her payments are on time. Isn't that the most important thing?

You: Well, let's take a look. At the time you sold your property, most homes in this neighborhood were priced around $85,000 -$90,000. You sold for $100,000. How did you guys arrive at that figure?

Me: I told her I did a lot of work on the house, and since I was doing her a favor by carrying the note, I had to charge her a premium. Plus, this is the nicest house in the neighborhood. It is worth every penny. It might be worth even more today.

You: Worth more today? In the last year, two other similar homes have sold on this street, one for $76,000 and the other for $82,000. They weren't foreclosures either.

Me: Come on, those homes have nothing on my house. This is the best house on the street.

You: It's a nice house. But the reality is you sold the house for $100,000, got a $7000 downpayment, carried a note for $93,000 at 6% with a balloon in 5 years. The $91,000 balance on your note is higher than the property value in today's market. I will not give you more capital than the property is worth.

Me: Well, how much will you give me?

You: Let's talk about your buyer. She went through a divorce, has had three different jobs in the last five years, and filed for bankruptcy two years ago. I respect the fact that stability seems to be returning to her life. How do you receive her payment?

Me: She drops it off at my office, usually on the 2nd or 3rd.

You: Did you consider using a servicing agent to collect the payments for you?

Me: They want a fee and I have to wait about a week or more to get my money. I don't want to wait that long.

You: Well, the servicing company also helps your buyer because they report her timely payments to the credit bureaus. This can be important as she works to improve her credit standing.

Me: I guess. I didn't look at it that way.

You: Why do you have a balloon payment four years from now?

Me: She felt she would be in a position to refinance by then, and I had a need to get my money sooner rather than later.

You: I get it. The balloon payment is almost $79,000. Suppose she can't come up with the money? What do you do then? Do you really believe the balloon payment will be paid when due?

Me: I'd say it's 50/50 she comes up with the money. I would not want to throw her out of the house. I would hate to do it, but I'd probably extend the contract out.

You: That's probably realistic. So, to sum this up. You sold a house for more than it was worth. The downpayment was 7%. Today, property values are lower than they were when you sold the home.The current balance on your note is higher than the property value of any home in this neighborhood. Your buyer is trying but has a horrible credit/employment background. The note has a balloon payment of almost $80,000 due in four years and you have no real confidence your buyer will be able to make that payment. Is this a fair summary?

Me: I don't like the direction this is going. Do you want to buy my note?

You: Let's stop pretending. Let's sleep on it. Let's get together again tomorrow. You be you and I will be me. We'll talk. Ok?

Me: I feel you. Ok. I think.

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On January 31, 2012, Standard and Poors released its S&P/Case-Shiller Home Price Indices, the leading measure of U.S home prices in the country. The data is through November 2011. 19 of the 20 cities covered by the indices saw home prices DECREASE for the 2nd consecutive month. The report says that average home prices across the United States are back to the levels where they were in mid-2003. Measured from the mid 2006 peak, the decline is almost 33%.

Ouch ! Do you think notebuyers know this information? Do you think notesellers should know this information? How would this knowledge affect the outcome of the conversation we just had?

To get the easy to read 5 page report, go to www.standardandpoors.com.

To read S&P's new blog, go to HousingViews.com.

Sincerely,

Denny Stanz

760-245-5366
760-245-5367 fax
dennystanz@verizon.net
www.CaliforniaNoteBuyerLLC.com