HOW ABOUT A
FEW ways to fund notes at full face value or very low
One of the primary reasons I plunged into paper was to use
it to buy real estate at great discounts. The profit in
real estate should be made (and easily can) on the buy, not
hanging on for years in hopes of an eventual profit.
% Of Value With No Down and a Positive Cash Flow!
There are few reasons why you need to pay full price for
properties. Let's look at a particular technique that I like.
Using real estate paper, it is easy to buy properties at as
much as a 40% discount from the market value.
The idea is simple - buy a $100,000 note for $60,000 and
then turn around and trade it to someone for the full face
value of $100,000. The result is you have bought a property
for $60,000 cash or 60% of value.
- Current Market Rates
Turn around and finance the property and you have a nothing
down, cash in your pocket, below market deal. When I first
began to try to implement this exciting technique, I ran into
many problems. What I found out is:
1 - YOU
NEED A PORTFOLIO OF NOTES
2 - NEGOTIATIONS ARE CRUCIAL
3 - FINDING THE RIGHT PROPERTY
4 - QUALIFYING THE PROPERTY QUICKLY
5 - PULLING YOUR CASH BACK OUT
6 - AVOIDING TAX PROBLEMS
- You Need a Portfolio of notes
Without a doubt, before you even start, you need a
portfolio of notes that you either own, control or have an
option to own. You'll need a backup package with all of the
information that an individual and their financial advisors
might need to determine the quality of the collateral.
We originally began using this technique before putting
together our pool of paper. Others teach that it is
possible and easy to do it that way. Just tell the
seller you will show them the collateral - after they
sign. Sounds good but doesn't work. One of those
techniques that doesn't translate from the "Podium to
the Pavement." It works, you just need to know
how and be set up to do it.
- Negotiations are CRUCIAL
When you are trying to talk a seller into taking some
collateral that is foreign to him, you have a real challenge.
These negotiations with a seller and his advisors are the
backbone of getting this type of transaction through. I can't
go into details here, but they are covered in The
Paper Game book.
- Finding the right property
When we started, it took a month to find and qualify 10
good properties. Now I can find dozens in a minute or two on
the Realtor's Multiple Listing computer. If you use some
of the powerful search tools available on the web or through
the MLS computers you can easily identify the right potential
- Qualifying the property quickly
You can waste a lot of time and eventually your whole life
trying to put together a deal on the wrong properties. I
learned to spend a few minutes on the phone and about 95%
qualify a property. The most important part is dis-qualifying
the properties that won't work. At first it took 106 calls and
10 offers to get a property. With the refining of the finding
and qualifying process, it takes about 9 calls for 3 offers
and one out of three offers is accepted.
- Pulling your cash back out
It takes cash to buy the paper and a loan to refinance out
of the property. How the purchase is structured can make a
tremendous difference on how easy it is to get your cash back
out through a refinance. It's possible to finance the
property right at the time of purchase or a few days or weeks
later to get your cash and possibly some cash profit back out.
- Avoiding Tax problems
At first I tried to trade the notes. That carries with it
some tax consequences. They are: immediate taxable gain for
the buyer (investor) and taxation as if cash were received for
the seller. If a property is bought and a new note is created,
it may qualify as an installment sale for the seller. If an
identical existing note is traded, it is taxable as cash. If
the same existing note is used as collateral for a new note
that is created, it should be taxable as an installment sale.
The best step is to use an existing note as collateral for
a newly created note. Many people shy away as soon as they see
some problem, yet behind each problem is profit. These six
problems weren't that hard to solve.
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.
Through the MLS
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.
Through "Subject To"
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."
to 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.
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:
Better collateral (LTV ratio)
Higher payments or interest rate
3 - Some
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.
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 full price for his
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