AGO when I began selling and investing in real estate, I
became acquainted with "PAPER." As an agent or
investor, I would have an occasion to sell a Trust Deed Note
or Uniform Real Estate Contract to put a deal together. I had
heard "paper" discussed briefly in several of the
seminars I had attended. Most of what I knew about paper was
that for some strange reason someone out there in the world
wanted to buy it.
To me, paper was something that I or another investor
created to help make a "high leverage" deal. It was
an easy idea for me to create a note on the property I was
buying or on one of my other properties as part of the down
payment. If the seller needed more cash, we could track down
someone to buy the note.
Excitement of Paper
I always wondered why someone would want to buy a note and
remember thinking that if they had any sense they would invest
in real estate instead. As I attended a myriad of other
seminars and conventions, it seemed like everyone had a little
bit of good to say about paper. I became intrigued with the
subject. I was still in the dark until I attended a convention
in another state where a Broker and paper investor from my
city was also in attendance. It struck me then that whether it
was seminars, conventions or exchange meetings that I attended
- he was always there.
I knew he was no dummy when it came to education or
experience, so "why did he invest in paper?" One of
the speakers spoke on real estate paper techniques that
excited me, especially the prospect of buying real estate at
tremendous discounts using paper. As I walked out with a dazed
but excited look on my face, the Broker I referred to smiled
and said "Now you see why I buy paper".
Through books, tapes, seminars and especially practical
experience, I fed my desires to learn all I could about an
exciting, extremely profitable form of investment. In this
article I'm going to share some of these ideas with you.
You'll see why paper is becoming one of the most profitable
and desirable forms of investment.
There are basically three steps:
Step 1 -
Buy a note (100% financing can be used).
Step 2 -
Fix it up or improve it in some way.
Step 3 -
Sell, trade or refinance the note.
Let's look at some of the ways to fix up or improve a note.
Each of these techniques can provide a tremendous profit to
A - Early Payoff
1. Early Payoff
Many times a note is paid off in full in advance of the
time that it is scheduled to. The average life of a 30 year
loan tends to be 7 to 10 years.
2. Early Payoff with a Discount
Offering a small to large discount will many times entice a
person to pay a note off early. Example, buy a $10,000.00
note for $6,000.00 and have the payor pay it off for $7,500.00.
3. Early Payoff Refinance (Them)
If the payor doesn't have the cash, show them how they can
finance the property and even lower their payments by taking
advantage of the discount that you are offering them.
4. Early Payoff Refinance (Investor)
If the payor of the note lacks the ability to finance the
property, you or another investor could finance the property
by co-signing for the payor or by taking title, financing and
then re-selling to the payor on a wrap.
5. Early Payoff Discount Underlying
You may be able to negotiate a discount on underlying loans
as an enticement for an early payoff on your note.
6. Early Payoff Over-finance
By financing more than the amount needed to pay off your
note at a discount, the payor may be able to pocket some cash.
7. Early Payoff Over-finance - Invest the Difference
The payor could finance more than the amount needed to pay
your note off at a discount and the difference can be invested
in some paper. The net result to the payor is a discount on
his note and a lower net payment as well as the ownership of
some good paper. The result to you would be a profit on your
note as well as a commission on the sale of another note to
8. Partial Payoff Partial Subordination
For a partial payoff on the note the investor could agree
to subordinate to new financing. The investor's yield (rate of
return) on the cash investment he has in the note would
9. Partial Payoff Lower Interest
In exchange for a partial payoff the interest rate and
payment could be lowered. The cash investment in the note
would have a very good yield.
B - Restructure Terms
1. Lower Interest Raise Payment
The payor raises his payment in exchange for a lower
interest rate. The investor's yield increases substantially
and the payor saves a great deal of interest charges.
2. Lower Interest Graduate Payment
In exchange for a payment that increases each year, the
rate is lowered. The payor saves interest and the investor
increases his yield and cash flow.
3. Graduate Payment - Eliminate Balloon
For a gradual yearly increase in the payment, the investor
will eliminate a balloon payment, which will also increase his
4. Graduate Payment - Shorten Amortization
The payor may agree to a gradual yearly increase in the
payment just for the difference it would make in the length of
the loan and the amount of interest it would save.
5. Raised Payment - Pop Balloon
A balloon payment could be eliminated in exchange for a
raise in the monthly payment.
6. Raise Payment - Balloon Extension
In exchange for a raise in the payment, the balloon payment
could be extended for a longer period of time.
7. Wrap Your Loan
The payor may be in need of cash or may be behind in
payments and you can loan the money in exchange for increasing
the rate slightly on the entire note.
8. Bad Note - Fix Terms or Clauses
There is a great deal of potential in changing bad terms or
clauses of a note. Many undesirable notes can become very
desirable with minor modification. Most of the time it is a
win-win situation for all involved. If a note has a problem,
don't look at it as a negative point. Could you buy the note
and change the clause? Be sure to negotiate before the
C - Financing / Collateralizing
1. Collateralize - Financial Institution
Banks and other financial institutions will loan against
paper. They may loan more than the cost of the note and at a
lower interest rate. That means 100% financing and a positive
2. Collateralize - Investor
Another source of financing is with private investors. One
on one transactions and syndications are used to fund paper.
3. Collateralize - Partial Interests
Several investors can be sold partial interests in a note.
This can amount to 100% financing of the cost of the note and
an interest in the note left over for you.
4. Collateralize - Seller
If the note seller doesn't need all cash, you can give him
part cash and a note secured by his own note or by another
note or property. This way you can give him a higher price and
still get the yield that you need.
D - Trading (Collateralizing)
1. Trade - Real Estate
By buying notes at a discount and then trading them or
using them as collateral at their full face value, you can
effectively buy real estate at very deep discounts (20 to 45%
below market value).
2. Trade - Personal Property
You can also trade paper at face value for all kinds of
personal property such as cars, boats, etc.
3. Trade - Face Value for Discounted
It is also possible to trade good paper at face value for
less desirable paper at a discounted value. Expertise in
dealing with notes, collection procedures and solving problems
can turn that note into a more desirable note.
4. Overtrading - Bank
Using the spread in the interest rates to make you a profit
and solve a problem for your banker is what is involved in
this technique. The banker makes you a loan secured by paper
that you own or are acquiring and in exchange you buy some of
his repossessed merchandise (which ends up free to you).
E - Underlying Loans
1. Wrap Underlying - Reinstate
If your loan of an underlying loan is behind in payments,
that can be the opportunity to advance some money at a high
rate of yield. It can occur by "wrapping" the
underlying loan or loans at a higher rate of interest.
2. Wrap Underlying - Loan Money
If the payor is in need of cash, you can loan them money
and use that as an opportunity to wrap the underlying loans
and increase your yield.
3. Buy Underlying - Bank
The most ideal note for you to try and buy is the one that
lies beneath any note that you already own. Even banks will
occasionally sell notes at a discount. It is always worth
4. Buy Underlying - Private
Always contact any private note holders that own a note
that is on a property that you have a note on.
5. Refinance Underlying - Discount
Negotiate a discount with underlying loans and then finance
the property. You can then sell it back to the payor on a
wrap-around. Possibly at better terms than he already had.
6. Refinance Underlying - 100%
In refinancing the underlying loan or loans, you may be
able to finance out the cost of your note also, so that you
have all of your cash out of the property and still have a
profit coming in from the note (the wrap).
7. Refinance Underlying - Over-finance
You might also finance the note and underlying loans for
more than the amount of your cost on the note. It could be
possible to walk away with cash and even share some with the
payor or lessen his terms in some way.
8. Refinance Underlying - Lower Rate
Many times it is possible to refinance one of the
underlying loans at a lower interest rate and better terms
than presently exists, especially in the case of second loans.
Profits in cash flow or cash could be shared with the payor.
9. Refinance Underlying - Partial Pay - Lower Interest
In refinancing underlying loans, you might be able to get a
lower interest rate and also some of your cost of the note
The chart that follows is what I call the P.A.M. chart,
which stands for Paper Analysis Matrix. When I buy or
an considering buying a note, I analyze it using the chart and
what possible techniques are available to improve the note.
PAYOFF EARLY PAYOFF WITH A DISCOUNT
PAYOFF REFINANCE (THEM)
PAYOFF REFINANCE (INVESTOR)
PAYOFF DISCOUNT UNDERLYING
PAYOFF OVER-FINANCE - INVEST THE DIFFERENCE
PAYOFF PARTIAL SUBORDINATION
PAYOFF LOWER INTEREST
INTEREST RAISE PAYMENT
INTEREST GRADUATE PAYMENT
PAYMENT - ELIMINATE BALLOON
PAYMENT - SHORTEN AMORTIZATION
PAYMENT - POP BALLOON
PAYMENT - BALLOON EXTENSION
DUCKLING TURNS TO A SWAN
- FINANCIAL INSTITUTION
- PARTIAL INTERESTS
- REAL ESTATE
- PERSONAL PROPERTY
- FACE VALUE FOR DISCOUNTED
UNDERLYING - REINSTATE
UNDERLYING - LOAN MONEY
UNDERLYING - BANK
UNDERLYING - PRIVATE
UNDERLYING - DISCOUNT
UNDERLYING - 100%
UNDERLYING - OVER-FINANCE
UNDERLYING - LOWER RATE
UNDERLYING - PARTIAL PAY - LOWER INTEREST
||(((Your contribution here)))
Get Involved These have been a few of the ways to
make profits with notes from the standpoint of owning them or
controlling them. A brief synopsis may not give you the full
idea of how to execute a technique. The purpose of the article
is to give you the opportunity to get involved in the profits
of paper. Paper can be as profitable or more profitable than
real estate investment and is the perfect compliment to any
real estate investor's portfolio. In future articles we will
explore some of these techniques more fully. If there are any
in particular that you would like to see explained more fully,
then feel free to drop me a line and let me know which ones.
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