Welcome to Real Deals! It’s always easier to learn from real life so here we share information from actual owner financed transactions. This Texas note deal found a seller scurrying to pay three years of back taxes that their buyer failed to keep current. Selling the note to an investor saved the buyer and seller from losing both the property and the note to a county tax auction.
The seller sold a single family home in Texas to a first time homebuyer. The sales price was $130,000 with an $8,000 down payment made at closing. The seller agreed to carry back the balance of $122,000 at 7.0% interest payable in 120 installments of $1,416.52 per month.
The buyer made monthly payments to the seller for four years. While making the monthly payments, the buyer was not keeping the real estate taxes current. The seller was surprised to receive a notice from the county of severely delinquent back taxes totaling over $12,000 for the past three years. Unfortunately the buyer hadn’t been paying the taxes and the seller had not been verifying tax status with the county. They both had a looming problem.
When real estate taxes become severely delinquent, generally over two years, the county can start an action to sell the property for non-payment. Since a lien for delinquent real estate taxes takes priority over any mortgages, the seller could have their interest wiped out. Even though the buyer owed the taxes, the seller needed to pay them to protect their interest. The seller could in turn start their own foreclosure action for the buyer’s failure to keep taxes current as required in the note and vendor’s lien with deed of trust.
The seller had often received letters and postcards from note finders and investors offering to purchase his payments for cash now. The seller contacted a note investor and explained the situation. The investor agreed to purchase the note, pay the back taxes, add the amount to the note, and modify the terms for the buyer so the payment (including a amount for taxes) would be affordable.
The remaining principal balance was $107,322.50 with an advance of $12,677.78 required to payoff the three years of delinquent real estate taxes, penalties and interest. The terms of the note were modified to 9.5% with payments of $1009.03 per month based on a 30 year amortization. Since the payments were lowered and the interest rate increased, a balloon payment was required in 5 years to keep the final term at the original 10 years.
A reserve account was also set-up for taxes and insurance. The buyer paid an additional amount each month equal to 1/12th the annual tax and insurance bill. This would assure the buyer did not get behind in the future.
The transaction involved the cooperation of the buyer, seller, and investor to create a win-win situation for all parties. The buyer avoided foreclosure. The seller protected their note and received cash now avoiding future worries and collection hassles. The investor purchased a high interest rate note at a discount for a healthy return.
Real deals are based on actual transactions completed within the past ten years. Market conditions change frequently resulting in pricing and underwriting changes by note investors. Work with qualified professionals when creating new notes to obtain accurate and up-to-date pricing and investment parameters.