Almost 20 years ago, two veteran real estate brokers, Bill Broadbent and George Rosenberg, wrote a book called "Owner Will Carry." Their message was to clearly educate sellers on the inherent risks and opportunities to sell their property by offering a seller carryback.

They began by saying " THE BIGGEST MISTAKE sellers make is when they sell their property for little or nothing down." Their experience with thousands of owner carryback transactions illustrated the tragic consequences when false assumptions dictated the terms of the note deal. What kind of assumptions?

1. Home prices will rise and create equity.

2. My buyer will be able to refinance in a few years.

3. I will take back a 2nd for the difference between the sales price and the 1st mortgage loan my buyer obtained.

I could list others, but hopefully you get the point. Why should a buyer contribute nothing and assume little or no risk? Why should all or most of the risk lie with the seller? If the seller gets tired of handling monthly payments and decides to sell his note for cash, he will be in for a shocker when a notebuyer offers a huge discount for his note, or more likely, has no interest because the risk is too great.

Sellers must have a margin of safety. Again, to quote our "Owner Will Carry" authors, "In the mortgage field the margin of safety is known as protective equity."

In real estate, nothing brings peace of mind and comfort like equity does. Nothing. Buyer and seller both have added degrees of security, and both are better off for it.

So how can both parties obtain this level of security in our current housing environment of sinking prices, negative equity, and low downpayments?

Here is one idea -  stepped payments. In an owner carryback transaction, both parties need to understand and agree that growing equity is a very good thing - for both of them. And, they need to ensure that the terms of their agreement provide the security and stability they both should demand and desire.

If the buyer is unable to make a downpayment that satisfies the seller - let's say it is less than 20% - then they could consider the following:

1. Beginning year 2, increase the monthly payment by a fixed amount. Or,

2. Beginning year 2, increase the monthly payment by a fixed percentage.

So, if the monthly payment is $500, the parties could agree, for example, to increase that payment by $50 beginning with the 13th payment. The buyer is now paying $550. In the 25th month, the payment increases to $600, and this scenario continues until the note is paid off. Or, they could agree, let's say, to a 5% increase. So, in the 13th month, the $500 payment becomes $525, in the 25th month it becomes $551.25, etc.

The parties should think long term and run amortization tables comparing the 3 scenarios - fixed payment, fixed amount increase, and percentage increase - and find common ground. They should realize that regardless of conditions in the real estate marketplace,

a decision that will provide "protective equity" gives each of them  personal stability and plays a small part in bringing some sanity and sound judgment to an owner carryback transaction.

We live in a society where "commitment" means nothing, and "loyalty" has vanished. Sometimes, two people sitting down and hammering out an agreement in a business transaction, can look each other in the eye, shake hands, and commit to uphold their end of the bargain.

One small step for mankind!

God has given us two ears and one mouth. I think He is sending a message!

If you enjoy this Newsletter, do you have a friend in real estate who

would appreciate receiving it? Forward it to him/her.

Sincerely,

Denny Stanz

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