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How Good Deals Go Bad

Written by Jeffrey R. Armstrong – President/Owner of Armstrong Capital

Your favorite Master Note Buyer – Straightforward, Honest, Fair…

When a prospect calls you up, do you consider that a deal? Some people in the industry seem to think that just because they found a potential note seller and filled out a worksheet that it is a deal.  That is far from reality.  It only gets to the deal stage when a note holder says yes and accepts one of your offers, then you have a transaction. As a Master Broker for the private mortgage note niche, a current practitioner, speaker, teacher, trainer and an experienced note broker and buyer I have all kinds of stories as to why a transaction might not get to closing.  With over 19 years of experience buying and brokering real estate secured notes and with just under 1400 actual transactions closed I have had my share of transactions fall through.  In looking over some recent transactions I wanted to share with you just how some seemingly good deals went bad and some of the reasons why a transaction may not get to the closing table even after the note holder accepts your offer.

We’ll start with the obvious (or maybe not so obvious) reasons of poor credit, poor appraisal and clouded title.  One reason that a real estate note transaction might go bad is that the payor could have poor credit.  When the credit is poor the note investor source will either pass on the transaction or lower their pay price to a more acceptable risk level for themselves.  If you can’t get the seller to accept the “cut” the transaction is cancelled and it goes from a good deal to a bad deal.

Another reason for a good deal to go bad and for the note purchase transaction to be cancelled would be a low appraisal of the subject property.  (This is happening more often than we like these days.) Usually, a transaction will be cancelled immediately if the appraisal of the subject property turns out to be less than the balance on the note.  If the appraisal comes in for less than what the property sold for then the note investor will have the option of lowering their pay price or canceling the transaction.  If the appraisal value comes in acceptable but the property condition is less than desirable the note investor may cancel the transaction.

The third most common reason for a good deal to go bad and for the note purchase transaction to be cancelled would be clouded title (Meaning that the title to the property is unclear.)  Maybe there is an old lien that was never satisfied (paid off), association liens, mechanics liens, delinquent property taxes or maybe the chain of title is out of order.  All of these things could affect the value of the note and the risk level of the funding source purchasing the note.  If the risk is too great the note purchase transaction will be cancelled.  Let me also say that note investors will bend over backwards to make a transaction go through by getting the title cleared, coming up with different options when the risk is higher and by doing everything possible to get a particular transaction to closing.  The note investors do not make money if the transaction does not close.

Some of the more out of the ordinary reasons why some of my transactions last year went from good to bad deals and have been cancelled include issues involving weather, disasters and untruthful sellers.  In early February there were some torrential rains in San Antonio, Texas.  I was working on a note that was secured by a mobile home with land.  After the rains had subsided we were finally able to get an appraiser out to the property.  When we received the appraisal back the mobile home had been washed away and all that was remaining was the wet dirt.  Good deal went bad.

In Bullhead City, Arizona we were working on purchasing a note secured by a single family home last summer.  For those of you that don’t know this area of the country heats up very rapidly in the summer and quite often there are thunderstorms in the afternoon with lightning associated with them.  Well, the subject property was struck by lightning and the entire electrical system to the house was burned out.  Good deal went bad.  (When the electrical system is repaired we will be happy to continue with our transaction).

In the spring of this year I was looking at buying a small note for myself secured by a cabin in Lake Arrowhead, CA.  Well, during the course of the transaction, (when we got the appraisal back) we discovered that the “cabin” had been burned down!  No wonder the seller wanted to sell the note, the payor didn’t have any hazard insurance and all that was left was the charred remains of the cabin on a blackened lot. Good deal went bad.

In late spring of this year we were working on a note secured by what we were told was a single family home, a residential property, in Denver, CO.  However, when we received the appraisal back the property turned out to be a home that was being used as a dog kennel with 60 dog runs in the back yard, a commercial property!  There was a big sign in the front yard that said “…Dog Kennel”.  Did the seller think we were not going to find out?  We find out everything, which is why the note investors do their due diligence.  In this case the pricing changed because of the type of property and the seller argued with us until he was blue in the face.  Long story short, good deal went bad.

In the late summer, early fall a couple of years ago we were working on a note secured by a mobile home with land in Kissimmee, FL.  Well, we all know that Florida had several hurricanes roll through their state within about four weeks that year.  The end result for me was the mobile home was severely damaged and the payors decided to move out of state.  That meant they had stopped making payments and thus defaulted on the note.  What happened to my transaction, you guessed it, a good deal went bad.

I am not writing this to discourage you but to show you that sometimes things happen that are out of our control and that not every accepted deal would result in a closed transaction.  My personal statistics over the last nineteen years suggests that I now need to fill out approximately forty note worksheets to get one note holder to accept an offer.  Of those that accept an offer my personal statistic is that seven out of ten of those accepted offers will get to the closing table and funded.

Remember, success demands action! Keep on marketing and qualifying those leads, it’s going to work! TWITA! (That’s What I’m Talking About!)

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