THERE ARE A
variety of ways to finance paper, both short-term and
When a good note is for sale, it will usually be gone in
just a few days. In most areas, note buyers have cash and are
ready to move. You will greatly improve your profits by being
able to pay cash for notes with a 12 hour notice or less.
First, we'll look at some examples and then we will begin
looking at ways to develop financing resources.
A short while ago a note seller called me about a note that
they needed to sell quickly. The call came at about 8:00 on a
Thursday night and the seller needed cash by 8:00 Monday
The first thought that came to my mind was that 8:00 would
be too early in the day to record any documents at the county
recorders office. That meant that I would have to close on
Friday. We negotiated the price over the phone and set an
appointment for 8:30 the next morning (they mentioned an
appointment with someone else at 9:00 - I wanted to be there
I left with a blank check in hand from an investor and did
all I needed to close the note by about 3:00 that afternoon.
By moving as quickly as I did, I bought a real good note at
over a 24% yield before other note buyers had even returned
the seller's call. You snooze, you lose....
A seller called on Friday afternoon and needed a loan. We
easily closed and gave him cash at the county recorders office
on Monday. Since we had cash and could close quickly
ourselves, we received a 21% yield and ten points.
An agent called on 8:30 on a Monday morning about a
property that was scheduled to go to sale at 10:00 for a
foreclosure of the FHA first loan. By 10:00 we had bought the
second of $7600 for $2000 and the third loan of $3000 for $400
and reinstated the first loan.
We had already pre-arranged with the tenant to buy the
property. A couple days later, we closed on the sale of the
property on a wrap around loan (contract) to the tenant.
Nothing down and an instant cash flow for 30 years.
Because we could close in one day, we were able to buy a
nice first trust deed of $42,000 that had been seasoned for
two and a half years for just $19,000.
The seller of the note was leaving town and sold for much
less than two or three of our other competitors had offered,
because we could close a few days sooner. It just took a few
hours to close the note.
Cash or Credit
Maybe this illustrates why you need to have either ready
cash or ready credit to be able to buy notes with. Short-term
financing or super-quick long-term financing is the key to
tying up many good deals out in the marketplace.
There are two general categories of long term financing.
Let's look at institutional financing first.
The first place people go to try and finance notes is to
their local bank. Institutions will finance paper, but the
smaller institutions will be your best bet. Finance companies,
credit unions and thrift and loans are usually much more
flexible than large banks. In dealing with institutions, there
are two very important factors that can help you.
First, a personal relationship and track record with your
banker can make all the difference in whether you get a loan.
Work hard to develop good relationships with the institutions
that you deal with.
The second important factor is to have a good backup
package containing all of the information an institution could
ever want to know about your note.
This could include: appraisals, pictures, title reports,
credit reports (yourself and the payor), copies of the note
and trust deed, copies of loan documents on any other loans,
information about any other loans, payment record,
amortization schedules, any information you have about the
payor of the note and any other information that is pertinent.
Remember, with a bank, you are "Paid by the Pound."
Wrong with Financing with Financial Institutions?
It can be hard to find an institution that will finance
you. They do not understand "paper" and the time
value of money. If a banker has a financial calculator on his
desk - it is a paper weight. You may have to train and educate
the banker and then do it all over again as he is promoted or
Their policies can change at a moments notice and they can
be very strict on their lending policies. They may not lend on
the length of term that you need. They can be very slow and
Financing (Private Investors)
I much prefer using private investors for my financing.
Once they are familiar with paper, they can be easy to work
with. I have the best success in cultivating investors from
I show them how their cash flow can be increased through
investment in paper and techniques like "Equity
arbitrage" and the "Discount Refinance." I
teach my investors about paper, familiarize them with the
forms I use and prepare them to move quickly. I make sure that
their funds are readily accessible to them (cash or
immediately accessible credit) and that they realize how
important timing can be in buying notes. We look at sample
notes of past transactions and discuss the steps in closing
Many of these investors come from calls I receive because
of my ad in the classifieds for buying paper. They read the ad
and then call to ask if I also sell notes. Another way to find
investors is to advertise to sell a particular note that you
have. Anyone that is receiving less than a 12-18% rate of
return is a good potential investor. I stress the safety of
paper and the fact that it is backed up by real estate.
Once they see the cash flow, they start getting excited. I
determine the rate to give them based on what we negotiate. I
learned along time ago that in negotiations, "he who
names a number first loses."
I try to determine early in the negotiations what the
comfort zone of the investor is, because I have found that it
can be devastating to offer them too high of a rate of return
if they don't believe it is possible. Many investors will
invest with you at 14% when 20% would scare them and make them
feel it is risky - even though it is the same identical
Versus Rate of Return
Even though I would like to give them a high rate of
return, some investors would feel there is risk. Somewhere
along the line they bought the fallacy that a high rate of
return means a high risk. Paper is a perfect violation of that
rule of thumb. I secure the money borrowed from the investor
by the note that is being purchased. I buy the note at yields
of 14% and higher and borrow the money at from 10 to 14%. The
terms are structured similar to the note that is purchased.
of Short-Term Financing
of the best sources of short term financing is to use credit
cards. It isn't too hard to build up credit card credit. The
short-term financing that you need should be about 10 to 25
thousand dollars. There is nothing at all wrong about having
credit cards or easily available credit. It can be one of the
best assets that you can have.
The only problem comes when someone uses this credit
improperly. Credit cards can be an expensive form of financing
if used for a long term. If used for a short time period (less
than 30 days), many cards do not charge any interest at all.
If interest is charged, it amounts to very little when
compared to the opportunity cost of missing out on a good
Refinance with lower interest long term financing as soon
Equity Line of Credit. You
may find the best of both worlds to be the Home Equity Lines
Of Credit that is secured by your home. The amounts available
can be in the tens of thousands and the rates can be very
reasonable. These lines of credit usually come with a
checkbook giving you the ability to fund immediately.
A nice thing about using short-term financing is that you
can purchase the note and then gather the information and
documentation needed to put together a real nice financing
package to obtain long-term financing.
Credit Line. Another
source of short term credit is to line up an unsecured line of
credit with your banker that can be accessed easily and
quickly. Investors and private money brokers can be cultivated
to act quickly and loan money for interim financing between
when you buy the note and refinance with a long term loan.
They may want high rates, but it can be well worth it if it
helps you get a good note. Avoid points if at all possible on
any short-term financing.
There can also be a mixture of the two forms of financing
in cases where an institution may loan against the note, but
not all that you need to buy it. An example is an institution
in our area that at one point had a policy of loaning only 75%
of what they would buy the note for.
This may be all I need if I am getting a better yield than
they are willing to pay. If getting the same yield, I can
borrow the 75% from them and then worry about getting the
extra 25% from somewhere else.
This should give you some ideas about financing notes. I
have found it possible to finance every note that I buy at
100% or more of what I have needed to pay, and it can happen
just as easily for you.
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
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* Millions Of Mortgages In Minutes