YOUR charm and good looks, you may find "paper"
to be your most powerful tool as an agent, investor or
exchangor. Creative real estate might be boring without it. As
an agent and broker for 20 years, I've found my knowledge and
use of paper to be my most valuable tool.
I began as a real estate investor and agent. I did the
tenants and toilets game for what seems like a hundred years.
I sort of backed my way into paper investment. I learned to
use notes in my investing, and mortgage buyers became a
valuable resource. I work with Realtors daily as a mortgage
buyer and teach continuing education for the State of Utah.
Throughout The Paper Game and my other books, I have
techniques that I teach Realtors. Instead of having everyone
read a thousand pages of materials or go through 5 days of
video tapes, I decided to compile the techniques into
"The Alternative Financing Toolkit." Here are the
first five techniques in the volume. I hope they work for you
as well as they have for me.
CREATE A SECOND AND THIRD -- SELL THE SECOND
Sometimes you will run into a situation where a buyer is
willing to pay a good price for a property but does not have
the needed cash to assume the existing financing or the
ability to refinance with a large down payment. Many times the
seller wants or needs a particular amount of cash and might
consider a discount off of the price in exchange for the
needed cash. Using private financing and your knowledge of
seller financing, here is a technique that works very well.
Lets's say that the buyer is short of as much cash as the
seller requires, but the seller is willing to discount his
property a little in exchange for the cash (or the buyer is
willing to pay a little over market). When the seller has a
large portion of his equity that will be taken back in paper
and is willing to discount a little, there is a way to put
this deal together.
The seller wants $17,000 cash, but the buyer only
has $10,000 to work with. To get the extra cash the
seller would be willing to discount a few thousand off the
market price. The buyer is willing to pay full price, but
needs a lower down. The value of the property is $50,000.
Here are the terms:
The way to put this deal together is to take the seller's
discount and use it to generate the cash. Instead of creating
one $25,000 second to the seller, create a $10,000
second and a $15,000 third. The $10,000 second
is sold in the marketplace for $7,000 cash and the
third is given to the seller. The seller now has his terms and
his cash and the buyer has his terms.
The Buyer pays $50,000 with $10,000 down,
assumes (or takes title subject to) the $15,000 first and pays the seller on a $10,000
private second and a $15,000 private third. The seller
gets $10,000 cash down, assumption of the $15,000
first, $7,000 from the sale of the second to a
"paper investor" and receives payments on a $15,000
seller carry back (the third). His total is $47,000 and both buyer
and seller have had their needs met.
PRIORITIZED COMMISSION NOTES
Many deals fail to close when there is just a small
distance between the needs of the seller and the buyer. Much
of the time, the amount of cash being received by the seller
is the issue and the agent could close a deal if they took
their commission on a note.
Agents and their brokers tend to shy away from this option
because they feel they need immediate cash and see no
alternative with a note other than collecting payments. If
structured properly, the commission note could be set up to be
salable immediately with very little discount and the deal
could be saved. You can as much as double your sales if you
don't walk away so easily from the ones that come close.
Those agents that do take their commissions in the form of
a note usually create a note that is not salable. Even that
would be better than a deal that doesn't close, but there is a
A note that is secured by real estate with a safe loan to
value ratio (usually 80% or less) is readily salable.
Let's look at two scenarios. The first is the standard way
most agents would approach the transaction. The second one
includes a simple change that makes a major difference.
$100,000 Sale price
$ 60,000 Existing first loan (assumable)
$ 10,000 Down payment from buyer
$ 23,000 Second to seller (private seller financing)
$ 7,000 Third trust deed to broker for commission
Many brokers wouldn't even insist on a trust deed note to
secure their commission, yet this third may not be very
salable. The loan to value ratio is 90% and most note
buyers would not buy a third with only 10% equity above
them. Now for one simple change.
$100,000 Sale price
$ 60,000 Existing first loan (assumable)
$ 10,000 Down payment from buyer
$ 7,000 Second trust deed to broker for commission
$ 23,000 Third to seller (private seller financing)
The broker takes his commission in a second position
and the seller subordinates his note to a third position. When
the seller requests you take your commission on a note, it is
not out of place to insist that your note is safe and salable.
Usually this will be a small note and will be paid off soon.
When the second is paid off, the seller's note, which is
currently in a third position, will drop down into the second
position. You can also structure this transaction so that all
of the payments on the seller financing go to your second
trust deed note until it is paid. More on that later.
LOWER THE RATE, RAISE THE BALANCE
This is a valuable technique to help bring buyers and
sellers together that are in disagreement about the price to
be paid for the property. A tremendous negotiation technique
Let's say that a buyer has offered $85,000 for a
property and will assume a $40,000 first loan. The down
payment will be $15,000 and the seller would receive a $30,000
second loan at 13% payable $331.86 per month.
The seller wants $11,000 more for the property. The
buyer thinks a price of $96,000 is ridiculous, but
wants the property. What do you do? Would you walk away? Beat
on the buyer and seller trying to get them to agree on price?
|1st Loan (Assume):
|2nd to Seller:
In many cases where the seller is hung up on price, he may
not be as hung up on terms. Do you know you can please both
the buyer and seller at the same time? If the buyer offered a $41,244.16
note at 9% the payments would be $331.86 per
month for the same period of time as the first note. Does the
buyer pay any more? No! Does the seller receive his price?
Yes! (Even a little more.) Both notes, if discounted, are
worth exactly the same amount. The real difference is how it
looks. You just have the negotiating advantage of
understanding the correlation between interest rate and price.
A small change in the interest rate can make a large
difference. The buyer will pay the same amount and the seller
will receive the same amount. The difference is in the
packaging. Here are the original terms of the $30,000
note and the terms of the new note.
The strategy is to look at an interest rate
adjustment when the seller and buyer are apart on
price. A few percent difference in the interest rate can mean
a difference of thousands of dollars in the long run.
GRADUATED PAYMENT BALLOON ALTERNATIVE
Balloon payments are like time bombs sometimes. A
foreclosure in embryo. A potential problem and lawsuit. There
are better alternatives than balloon payments that will
accomplish the same goals without the risks.
A common situation that is created is where the buyer has a
30 year amortization on his or her note and a 5 year balloon
payment. A $30,000 note might look like the following.
The amount of the balloon payment in 5 years would
be almost $29,000. Where is the buyer going to get the
cash? Can he refinance? What are the rates? Is financing
available? Is the buyer still financable? These are some
If the buyer began with the same payment of $263.27
per month, but raised it by $50 each year, the loan
would pay off in less than one third the time of the original.
Instead of a nasty, potentially hazardous balloon payment in 60
months, the loan would fully amortize in 106 months.
The sellers achieve their goal of getting their money out
quickly, with less risk of problems and taking the property
back. The buyer has a far more palatable scenario of a gradual
increase in his payments. If the payments become a burden, the
buyer can refinance at a time that makes sense (60
months may not).
BALLOON PAYMENT ROLLOVER PROVISION
Another alternative to a balloon payment is to have an
extension provision that will give the buyer some time to
raise funds or workable financing. This may be a provision
that allows for a one year extension of the balloon payment
upon the payment of 10% of the outstanding principle
balance. In the previous example, the balloon payment of $28,972
could be extended for a year upon payment of $2,897 in
principle on the note. This can be structured as a one time or
continuous provision. That means that the next year the same
provision could apply if financing were tight. The clause can
also be qualified as to available financing and interest
rates. This is just a sample of some of the ways agents can
use paper to improve their profits.
About the Author . . .
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 money-making techniques.
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