Posted by John Behle on May 24, 2006 at 01:56:27:
You have a creative mind. That’s a great advantage. You see a problem and look for a possible solution.
Contracts are a problem in many areas. In some states note buyers will not touch them - no matter what the LTV, etc. That kind of thing frustrates me. I quickly tend to jump to a solution like buying a note at an extreme discount (with no competition) because it is a land contract and then turning it into a trust deed. Usually it is a better deal for the payor also and they can be very cooperative if you show them the benefits and pay the costs. Sometimes a small drop in the interest rate or some other incentive will swing them if the other issues are not enough.
Some of my best profits have been from notes no one else will touch. They turn away because of clauses, terms or problems with the collateral. I do too. But then I come back to the deal and look at it differently. What is the problem? Can it be fixed? Many times the same terms or clauses that are a problem for a note buyer are a problem for the payor also. Other times a bargain can be made to give benefits to the buyer to cooperate in altering the note.
I had a good example one time in a note that was a contract for deed. The underlying first loan was a fully assumable FHA loan. The wrap had a due on sale clause. The note was for sale and the property was for sale also. The property was not selling because of the lack of assumable financing from the due on sale clause. The note wasn’t selling because the seller wanted more for it than it was worth. As a note buyer, I had to look at the note as if it was going to pay over the full term of almost thirty years. That drives the value way down. Yet, here is a property for sale. It could pay off in thirty days instead of thirty years. I want to buy the note. The note seller wants to sell and the property owner wants to sell. The due on sale clause is both a problem and an opportunity. I discussed with them the idea of me taking the due on sale clause out if they would put in a 5 year balloon. That raises the value of the note substantially and gives them an assumable loan. Another option is a graduated payment yearly or just a slightly higher payment now to shorten the term - and raise the value of the note.
Collateral is the same way. If there is not enough collateral, I will see if there is some more collateral, different collateral or even a way to improve the collateral - like lending them money for rehab, etc. I’ve had note sellers add their own properties in as additional collateral or even just created a mirror type note on another property and bought that instead of the one the seller was trying to sell. They still get their need, which is cash and I get my need which is a good note. Anyone that says “win/win” is bunk or seminar jargon is a moron. Real estate and the note business can be a problem solving business where things can be structured to help everyone in the situation. Finances can be like “Economic Alchemy” and there are truly ways to create wealth. Anyone who sees thing as a zero sum game is naive and under-educated. Someone does not always have to lose for someone else to win. All parties to a transaction can come away with a good deal or have their needs met.