[The following article is an excerpt from John Behle's book Mortgage
Magic, which is part of
The Paper Game Trilogy.]
One of the tried and proven techniques of profiting through
real estate investment is a well known three-step process. The
steps to this simple process are:
STEP 1 - Buy a piece of real estate under the most
favorable terms and conditions possible with as much leverage
(OPM--other people's money) as you can.
STEP 2 - Fix it up or improve it in some way. This
step could involve anything from paint and elbow grease to
converting an apartment complex to condominiums or timeshares.
STEP 3 - Sell or finance the real estate in some way
to be able to compound profits and find more real estate to
follow the same three-step process.
This three-step process can be applied to other forms of
real estate investment as well. One of the most profitable of
these is in the field of "real estate paper," which
includes: contracts, trust deed notes and mortgage notes. What
a person buys when they buy real estate "paper" is
the right to receive a future income in the form of a series
of payments and/or a lump sum payment. Buying paper involves
buying the note on a property and having the property as
security for the payment of the note. Paper has long been
known to be one of the safest, most secure investments
available. Now it is taking a whole new change of direction
and is becoming one of the most creative and profitable forms
Paper Can Be
A similar three-step process is being used very
successfully in the field of real estate paper. Investors have
invested in paper for years and years, but seldom have used
the principle of leverage. Paper can be financed just as real
estate can be financed. There are many institutional and
private sources of financing available for real estate paper
which can make it as easy to finance as real estate.
Paper can be financed 100 percent and at a lower
rate of interest than it is bringing in. For example, you
might buy a $10,000 note at a discount of 40
percent for $6,000. Your yield or rate of return might
be 24 percent, but you might borrow the entire $6,000
at 17 percent--which would give you a 7 percent
return on borrowed money.
In the case of this note, that would mean an immediate cash
flow of over $30 per month. Since it was borrowed
money, this monthly cash flow would be free to you. Also, you
would show an immediate increase in your net worth of $4,000
(the amount of the discount) because you have a loan of $6,000
which purchased an asset of $10,000 (the face value of
the note). Wouldn't it be fun if you just did this first step 10
or 20 times?
Paper Can Be
How in the world can you fix up paper? You can't paint it
and re-carpet it, but you definitely can improve it. You can't
raise rents, but you can raise the payments. You can't do a
condo conversion on it, but you can restructure it.
There are over 117 different ways to improve real estate
paper. I will discuss one way of improving real estate
paper that is so simple, you will have wished you knew about
it several years ago.
Sell Paper At A
Once the paper has been improved or "fixed up" in
some way it can then be resold at a profit or refinanced to be
able to keep the profits compounding at an astronomical rate.
Let's look at the three steps:
STEP 1 - Buy or control paper through one of 11
different sources and finance paper through one of 12
STEP 2 - Improve paper through one of over 30
different ways all of which are very advantageous to all
parties involved in the transaction.
STEP 3 - Sell for a profit or refinance.
Sell It To The
One of the quickest and easiest ways to make profits in
real estate paper is to sell it back to the payor. You might
buy a note at a 40 percent discount and sell it to the
payor at a discount of 25 percent. You would think that
the first person that the seller of a note would contact when
he wants to sell his note would be the one paying on it, but
most of the time they don't. They assume that if they could
pay off the note that they would have already done so or that
if they had any interest they would have already contacted
This means that we can make a profit by just asking the
person the simple question of whether they would like to pay
off their note at a discount. An example might be where you
purchase a $10,000 note at a discount of 40% or
a price of $6,000. We could then contact the person
paying on the note and offer them the opportunity to pay off
the note for $7,500. This would mean a profit to you of
$1500 on an investment of $6,000 and could
happen in as little as 30 days. This would be a 25%
profit on your investment, which doesn't sound too
exciting until you consider that you did it in only one month.
If you financed the note, then you would have made that $1500
without even needing to invest anything but your time. What if
you had purchased a $100,000 note? Would $15,000
profit in 30 days interest you?
As soon as a person gets over the shock of this simple way
to make a big profit, they usually ask this question,
"What if the people don't have the money to pay off their
note at a discount?" Some people will have the ability to
pay off the note, but most will not happen to have $6,000
stuffed in their mattress.
An Offer They
What if you could approach a person paying you on a note
and show them a way to:
* LOWER THEIR MONTHLY PAYMENT
* LOWER THEIR LOAN AMOUNT BY $2,000
* PAY OFF THEIR LOAN IN THE SAME AMOUNT OF TIME
* PUT $500 CASH IN THEIR POCKET
* AND YOU'LL MAKE $1500 IN THE PROCESS
Do you think you might be able to get their attention if
you could make them an offer like that? If they don't get
excited, then you better check for a pulse and call for the
paramedics. They might also get a skeptical look on their face
and start looking for the "Candid Camera."
Here's how to do it: If the person paying you on the note
were to go to the bank and put on a new loan for $8,000,
they would have $500 cash left over after paying you
the $7500 that you said you would take for their $10,000
note that they owe to you.
The terms on the original note were as follows:
12.5% 180 months
The terms on the new note are:
16% 180 months
As you can see, the amount of the new loan is $2,000 less
and the interest rate is higher. The term of the loan is the
same, but the payment is actually lower.
Summary Of The
Here's a summary of the three-step process and how it would
apply to this particular situation.
STEP 1 - Sam calls you on your newspaper ad about
buying notes. You purchase his $10,000 note at a 40%
discount for $6,000. Your bank or an investor loans you
the $6,000 at 17% and you buy the note at a 24%
yield or rate of return.
STEP 2 - You meet with Paul that pays on the note
and offer him a discount. Paul agrees to pay off the note at a
25% discount for $7500. He doesn't have the
cash, so Paul gets a loan from the bank for $8,000 and
puts $500.00 in his pocket. Paul has lowered his
monthly payment and made a profit at the same time.
STEP 3 - In this case, there would be no need to
further finance or sell this note, because in step 2 you sold
it to the most logical person - the buyer.
Profits For You
This is another example of a very profitable form of
investment that will become increasingly more popular in the
coming years. Paper has many uses and profits can be made in
many different ways. Shouldn't you be making these profits
About the Author . . .
John D. Behle is one of the foremost educators and
practitioners in the field of discounted paper investment. His
innovative strategies and techniques have shaped the industry.
With over two decades in the industry and an extensive
background in real estate and finance, John Behle adds a
wealth of knowledge and experience to his creative
John holds an National Council of Exchangors "Gold
Card" and an EMS designation. He is also listed in Who's
Who In Creative Real Estate. John Behle is the author of
several hundred articles published in national magazines and
newsletters and of several ground-breaking real estate paper
Paper Game Trilogy
* The Paper
Game 5-Day Video Training
* Millions Of
Mortgages In Minutes
John Behle is also the host of our Cash