If you want to make things work really
easy, look for a property that is for sale that has a large,
existing privately held mortgage. In other words, a property
that was sold fairly recently with a large amount of seller
carry back financing.
To find these properties is much simpler than you might
think. Plug in your computer modem, call the Board of Realtors
Multiple Listing Service computer and search for properties
with private loans. In my state, it is a simple process to
search for who the loan is made to. It won't give the name if
it is a private loan, it will just say "private." It
is also possible to search for "loan type." I search
for "CT" which stands for contract, which is a
Uniform Real Estate Contract or Contract for Deed. Ninety-Nine
percent of the time, that means there is a private party on
the receiving end.
In a few areas some of this information may not be
available. In others, it is not easily accessible or the
system that the board uses does not allow a search for these
items. Well, it doesn't take more than a few seconds to figure
out that you can download the entire data base onto your hard
drive and search through the search feature of your word
If you're not an agent with access to the MLS, now is a
real good time to take one to lunch and get to know him or
Let's look at an example. We find a property that is for
sale for $100,000 with $20,000 down to assume an
existing $80,000 privately held first loan with
interest at 9% over 360 months. The payment on
this loan is $643.70 and it is worth $51,000
when discounted to a 15% yield.
Approach the seller and negotiate the deal along with a
"subject to" clause that gives you an out. This
might be straight forward as in "subject to satisfactory
re-negotiating of the existing first loan" or may just
say "subject to inspection and approval of buyer's
partner, Jim Shu, which shall take place not later than 5 days
of the acceptance of this offer."
Discount or Substitute
This gives you five days to negotiate with the holder of
the first loan. The negotiation will be seeing if the holder
of the first loan (let's call him Ben) will discount. Chances
are slim that he will discount substantially (30-40%).
That's OK, because we know that if he won't discount, there
are thousands of others out there that will.
A Trail of Ten
Dollar Bills to The Title Company
What we need at this point is to entice him to substitute
collateral. I say entice, because there is nearly no incentive
that Ben can see to encourage him to give up his trusty
collateral for something unknown to him. It's not hard to find
some incentive for him that would work. It could be any number
of different items like:
1 - Better collateral (LTV ratio)
2 - Higher payments or interest rate
3 - Some principal reduction
4 - Cash or other incentives
We find an incentive that works and then substitute as
collateral for Ben a similar note or group of notes to the one
that he currently has.
What the Property
Costs a Creative Note Investor
This means that the cost of the property is:
$20,000 cash down payment
$51,000 cash (for the $80,000 note)
$71,000 cash - total cost
I LIKE THIS TECHNIQUE. That means we just bought a property
at 71% of value and the seller didn't even take a
discount. In fact, he received all cash for his equity.
When you buy a property where the seller is carrying back a
large portion of his equity, you face two challenges. The
first is to convince the seller to carry a note and the second
is to sell the idea of different collateral other than the
property that he is selling.
What I like about finding a property with an existing
private loan is that someone has already made that first
decision to carry paper.
The second part that is nice is that the holder of the loan
may have separated emotionally from the property and can be
easier to entice to substitute collateral for his loan.
There is little other competition giving hopes of higher
prices or all cash prices like there may be in the case of a
property seller. The agent, who is usually the biggest
obstacle, is not involved and properties with private
financing may be found easier in any market than sellers
willing to carry paper
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
* The Paper Game Trilogy
* The Paper Game 5-Day Video Training
* Millions Of Mortgages In Minutes
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