Posted by David Butler America’s Note Network on April 15, 2000 at 15:54:32:
You have asked some very good questions! I always recommend starting with your local bank.
Several things weigh in to the equation however. A person who has established a good track record at this sort of thing, and who has a strong working relationship with his local bank, can often finance the paper up to his bankable limits as he goes.
The problem more recently has been that these kinds of relationships are becoming scarcer, as banks are consolidating and centralizing authority. This often results in your local branch manager being handcuffed in his decision making ability.
However, for beginning investors in the rehab field, the problem has always been the same. Finding the front end funding to acquire the property, and then to fund the rehab work, has always been a challenge.
The first stumbling block is inexperience. Unless you are a licensed contractor, or you have one worked into the mix, it is extremely difficult to convince someone to take a chance on you, unless the property itself only requires minor, or comsmetic repairs.
It’s a tough proposition even with good credit, but many beginners start out with limited or no funding, and often with some type of credit or income impairment, making the process more difficult.
It sounds like you have cleared that hurdle, so you can likely have a lot of flexibility with your carryback notes, depending on the quality of your buyer, the equity in the home, and your own negotiating skills.
Depending on your circumstances and your needs at any given time, you can arrange a simultaneous closing with a local note broker, or post your note on our free national note listing service at America’s Note Network (see banner above).
To get a better price, and to preserve the back end profits for yourself, you can sell only a part of your note to get what funds you need.
Or, you can structure your deals to avoid tax friction, by carrying back notes, and then using them to cross-cross collateralize new notes that you give to property sellers who need cash.
For example, you sell one of your rehabs for $85,000, with $5,000 down, that has a $50,000 9% loan on it. If you can, you might be better off carrying a wrap mortgage there, for $80,000, at 9.5% to 10%.
You want to purchase a duplex for $120,000 that has an assumable $85,000 mortgage on it. The seller wants cash to loan, but you only have the $5,000 you pulled out of the sale of your rehab property. But you also have a wrap loan for $80,000 with $30,000 equity in it.
So you give the duplex seller $5,000 down, and a 2nd mortgage for $30,000, subject to finding a note buyer to cash out the 2nd mortgage. At the high LTV, that might be hard to find, or the discount may be too steep. To mitigate these problems, you provide the $80,000 wrap note you are holding as additional collateral for the new 2nd $30,000 note you give to the duplex seller.
Going this route, the duplex seller gets the cash he wants, the note buyer gets the security he wants, and you get the property you want… If structured properly, you are earning a tax free profit on the wrap, you are deferring the bulk of taxes you owe on the sale of your rehab (subject to “Dealer Rules” under the federal tax code), and you are pyramiding your capital asset base by maximizing your dollars into the new duplex investment.
If you have to pay off the existing first on the sale of your rehab, it gets a little trickier. But you can arrange a similar scenario with a simultaneous closing. Here, you create say, a $57,000 first, and a $23,000 2nd. You sell the first at a discount and pay off the existing first through escrow. You use the $23,000 to cross-collateralize the new $30,000 2nd that you give to the duplex seller.
These are just several of many different ways to go with private notes. There are some excellent course on note structuring right here on this site, including John Behle’s Paper Game material. You might also want to click on our banner above, to take a look at the numerous free articles and “How-To-Reports” we have available on the subject of note investing and dealing.
Hope this helps, and best of luck.
David P. Butler, Vice President, Broker Relations