A few weeks ago I talked about the importance of negotiation. I have noticed lately that sellers and other counter parties often give reasons for pricing that are completely ridiculous, and the only way they could be accepted is if I was completely brand new to notes and had no idea how ridiculous their statements were. Since I have observed a pattern that I get nonsense requests from sellers, realtors and other vendors on a regular basis, I can only assume that some note buyers out there must be falling for them. So as a public service I’m going to do a series of blogs on some the common ones I run into.
“We know liens may show up, that’s why these are already discounted…..”
I’ve seen this one from a couple sellers, and ran into it just this last week. I had a bid accepted on a property in Florida I was really excited about. I did my initial due diligence which included checking the property taxes, and then put in a bid. I accepted a counter offer and then proceeded with the rest of the due diligence. It turned out there was a city code lien for over $5000. I double checked that the lien was indeed attached to the property, although the underlying code problem had been addressed which was good. Then I told the seller I would need the price reduced by the lien amount to proceed. The seller then responded with “we know liens may show up, that’s why these are already discounted…..”
Let’s break down why I find this so crazy:
- There are many shades of gray when it comes to how much of a discount off the UPB or BPO value you should get when buying a loan. There is no such thing as discrete buckets of “performing” and “non-performing” with standard discounts. Home value, condition, pay history, title condition, delinquent taxes, a million other factors, and yes other liens, all affect what I am willing to pay for a note. You can’t check all of these prior to submitting a bid. So you check as much as you reasonable can and let the seller know what you have checked when you place your bids.
- The note price was ~$20,000, and this lien basically increased the net price by over 25% to ~$25,000. So a good deal becomes a terrible one if the price isn’t adjusted for the lien. Occasionally I’ll run into something that has a small dollar amount and I’ll end up eating it to make the deal work. If its a good deal I don’t want to lose it over $200, but $5000 is a showstopper.
- I’ve transacted with this seller multiple times before. They know that I check for taxes before bidding, but don’t pull O&E reports or get pictures and BPOs until after the bid is accepted. In the past I’ve had bids accepted on other notes where I’ve found problems in the final due diligence phase. I don’t know why they thought I might accept their rationale. Maybe they were just taking a shot in the dark in case I agreed?
So if a seller or other counter party tells you something that seems crazy at first, that just might be the case. Don’t assume what they are telling you is reasonable just because they have been in the industry a long time.