Proficient Note Buyers
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May 19, 2008
The Good Ol' Days
Ah...remember way back to 2005? Home prices were going through the roof and gas was still affordable to the general populace. Even yours truly was sitting on a huge chunk of home equity as values kept right on rising. Then we had a...correction, if you will. That correction continues today.

This week's blog was inspired by a conversation my business partner Matt had with a realtor in Florida. They were discussing a waterfront house that had been on the market for quite awhile. Back in October 2007 the listing price was $1.75MM. The owners got a pre-qualified offer of $1.4MM and they refused it. Today, only seven months later, the list price is now $1.4MM and the realtor said the owners would happily take $1.2MM for it.

There's an old Merle Haggard song with the line "Is the best of the free life behind us now, and are the good times really over for good?" That's debatable, but it's clear that property owners that have 2005 mindsets about the value of their properties still own those same properties in 2008. Just because they wish it so doesn't make it so.

I relate Matt's discussion above with one I had with a noteholder last week. We offered a very strong price for his note, considering it was set to balloon in mid-2009, had a below-market interest rate, and was secured by a mobile home. Our bid took into consideration the very distinct possibility the buyer would not be able to pay the balloon payment when it came due, based on the limited availability of financing for mobile homes in today's market.

Historically, only about one in three balloon payments is made when it comes due. The other 2/3 are either extended or the note is modified, usually only for the benefit of the buyer. This particular noteholder said he was willing to take the risk of default by his buyer before he would take a discount on his note. Something tells me in approximately a year his situation will be just like the sellers' in Florida, wishing he would have taken the cash when it was available, rather than dealing with a situation in which he will have virtually no leverage with his buyer. (short of foreclosing and taking back the property, which is rarely the optimal solution, and an expensive one at that)

If you are a noteholder thinking about selling your note, give us a call. This isn't meant to be a scare tactic - just a reality check. Real estate notes are commodities, just like gasoline and groceries. Market forces dictate the price you get (or pay) for each. As the same Florida realtor above also said, "This is the price you could get TODAY for this property", inferring that he could make no guarantees about tomorrow's price. Let us give you a price TODAY so tomorrow's regrets are left to those still living in the past.

Make it a great day.


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