Vic:
If the holder of that loan YOU are paying on really does not wish to get paid off, then ask her if she would be willing to accept what equity you do have in your personal residence or other properties as a substituted collateral for the debt you owe her.
The worst thing she might say is NO. But then again she may agree to allow for you to move her debt to be secured by a “Blanket” lien on the equity you do have in these other properties so that she can continue to collect interest income.
The other alternative is for YOU to sell YOUR position to a note funder (like ourselves) to do away with the monthly spread and raise CASH that you can invest and grow. We can look at buying out your wrap around posistion and freeing up some cash to you today rather than you having to wait 9 or 10 more years for that balloon to become due.
Hi everyone,
I’m wondering if I can do anything with this note. Let me explain the situation first:
Approximately 4 yrs ago I bought a 4 plex for $79,900. I put $10,000 down & the seller financed the balance to me at 8% interest, amortized over 30 yrs. with a balloon at the end of 10 years.
I turned around & sold it on a land contract one year later for $91,500. This buyer put down $10,000 (which meant that I now have no cash of my own in this deal). I financed it to him at 9.5%, amortized over 30 yrs. with a 9 year balloon (I did this so that his balloon would come do at the same time as mine.)
I currently owe approx. $67,500 to the original seller & I am owed approximately $79,000 from the person I sold it to on the land contract. So I have about $12000 or so of equity in the note.
I was thinking about refinancing & paying off the lady that I bought this property from. I called her & offered her $45000. She called me back a couple days later & said that she didn’t want to do this because she wouldn’t be able to get a better return on her money than what she is getting now. The only reason I made this offer to her was because I thought I could gain some quick equity in the property. I don’t mind staying where I am now, as I currently get a check every month for $172 (which represents spread on price & interest).
My question: Should I stay where I am or is there some way that I can make this deal better? I’m sure the seller would work with me if I could come up with something that would be a win-win situation. Please let me know what you’ll think.
Posted by John Behle on April 13, 2000 at 12:14:13:
All the options below are good. It may be that the seller has a tax concern also - whether she knows it or not.
If it come up, substituting collateral does not invalidate the tax treatment on seller financing. If she is paying taxes on her gain gradually through an installment sale, a substituton of collateral does not affect that - AS LONG AS - her original note stays intact and is not cancelled.
If it is cancelled and a new note were drawn she could be taxable immediately. The scenario of her getting paid and loaning back the money is great as long as she doesn’t need the tax benefits of an installment sale. Otherwise, just substitute collateral with her and you receive the cash.
Anytime I hear someone say that they are “happy” with the “interest” they currently receive from me, my ears perk up a bit.
Michael is absolutely correct. “Walking the mortgage” as he calls it is a great way to take further advantage of the excellent financing already in place.
The easiest way to do this is to put a “substitution of collateral” clause into your original purchase agreement whenever possible. This clause should be phrased in plain english, not legalese.
The two clauses that have made (and continue to make) the most money for me are: “substitution of collateral” and the “right of first refusal”. Learn to use them.
Vi c;
I don’t know all about your other real estate holdings, equity that exists, etc. to provide proper counsel and there have been some excellent suggestions that have already been provided however I want you to consider this concept.
It sounds like the original seller to you enjoys the interest income each month and does not want to lose that benifit. What if you could “tweak” her interst rate slighly higher and then also aks her to extend the term of her financing to you providing you can “walk the mortgage” from this property to some other acceptable real estate collateral that would provide her with similar security.
If you have other real estate holdings where you can get the seller to agree to allow for a transfer of the lien from the subject property to another property you now can approach the payor who is paying you and see if he /she will consider a refinancing OR you can sell that contract instrument to a note funder for CASH.
You now have “Cranked” cash out of this property and have the long term use of that cash while you continue to repaid the other debt to the original seller who agrees to move “walk” her lien to another property so she can continue to enjoy the interest income.
Many years ago I met a man who had walked a $400,000.00 20-year mortgage on a mobile home park to another property. He then sold the park for cash to interested buyers and had the use of the $400,0000.00 cash to invest over the years. Needless to say he is wealthy and retired today.
While she did not say that she would take the discount, it did point out that she wanted the income. While it may be hard to find that note to buy that matches the terms you want it is not hard to create one yourself. Find a property that can be discounted for cash. Use the refi money to pay her off then the money she gets she loans to you against that property.
The other play is to offer her an increased payment for a reduction in the principal amount. Don’t offer to change interest rate just some number of payments discounted if she wants an extra hundred a month. It is also time to ask about changing the loan to be fully amortized instead of a balloon. On the other end you can increase the rate in exchange for the concession to fully amortize the land contract.
…I’d recommend that you take that $45,000 and buy a note with it. Let’s say you find a similar note for $68,000 at 9% interest and you can pick it up for $45,000.
Then you take the note you just bought and trade it with the person you’re paying with. She’ll be happy because it’s a little bit more principal and a little bit higher interest and you just paid off your $67,500 debt for $45,000.
John,
Can you explain that last sentence you wrote a lil bit more. You said, just substitute collateral with her & to keep the difference. Are you saying to do as one of the other posters suggested & find a similar note that I can buy for, say 45K, & then swap notes with her. Is this what you are saying? If not, then I’m totally lost. If I did swap notes with her & cancel out the first one, then she’d be taxed, if I’m reading your post right. Is this correct? She is very concerned with avoiding capital gains taxes & that is why she sold like she did.
Also, I have another deal brewing very similar to the one mentioned above. Same situation, older guy retiring & wants to avoid taxes. We have not consumated the sale yet, but he will be holding paper when we do. What clauses would you reccommend that I put in the 1st mtg. that he gives to me. In other words what clauses would allow me to come back later on & improve my position or allow me flexibility to substitute notes, etc. I’m a real beginner with this note thing, so please explain in as much detail as possible.
Thanks for all your help & I really enjoy this forum a whole bunch.
Thanks,
Vic
Mike,
Hi & thanks so much for responding. I think I understand your concept of walking the mortgage. If I’m right, basically, what you mean is to take the mortgage off of the property that it is currently on & move it to another property. If I was to do that, how would I be any better off. In other words, I owe her $67K, if I was to move that $67K to another property, how does that benefit me any. I still owe her the same $67K that I started out with. Where is my gain?
I’m new to this & trying to absorb all of these different concepts. Some day in near future I’m sure I’ll have absorbed enough to actually understand this.
Oh, how nice that will be.
I still have your phone number, maybe the best thing would be for me to just give you a call.
Posted by John Behle on April 26, 2000 at 18:09:33:
What I was refering to was a technique I call the “Installment Sandwich”. Sometimes you run into situations (or can seek them out) where someone has sold on an installment sale for tax reasons - and - the payor is trying or wants to pay them off.
I get intriqued by a scenario where someone tells me they don’t want (or can’t take) low interest cash. Since an installment sale IS NOT PREDICATED upon what your collateral is - or whether you substitute later - I came up with the solution to step in the middle.
It’s a matter of substituting another note as collateral. That leaves the property free and clear and it can then be financed or paid off without having to cancel the original note. You can also arrange to step in the middle of the payor’s position too.
When the dust settles, you have received a cash payoff of a note at face value, taken part of the cash to buy the note you substituted collateral with and pocketed the profit. The seller still has their installment sale and the buyer/payor has their property free and clear or refinanced.
Vic:
You are correct you would still owe the $67K debt to the mortgage holder however as discussed you may be able to extend its terms to a longer term (thats a benefit) and avoid the balloon.
And the REAL benifit is that now the property that you sold on contract is FREE of any debt other than the borrower who owes you on that contract. If you can “entice” the borrower to refinance and pay you off on the contract you now have the use of that CASH without having to pay a good portion of it to the seller. You can also SELL us the contract that you are collecting on as a way to raise investment capital.
Assuming you are a prudent investor, over time as your experience and confidence level grows, you can invest that cash and turn it over and over again earning you a much GREATER return than the simple interest expense you would have on the mortgage.
This is an excellent way to raise “seed” capital without having to go to a bank to get it.
I am always happy to speak to you if this is unclear. Feel free to call me.
Mike,
I follow you totally now. If I did what you suggested, what I’d be doing is freeing up a property so that I could refinance it & use that money to buy other properties. Very, very good advice. I can see where that could be a huge benefit. I will keep this in mind for future deals. Defenitely great advice.
Although, I couldn’t do it right now, cuz I don’t have a property with anywhere near that much equity. The most I’ve got in any one property is maybe $20K. All together, I’ve maybe only got $35K in equity. Just really started buying. I’ve only got 2 properties right now, so I’ll have to make a few more acquisitions before I could do something like this.
In the meantime, is there anything else you can think of that I can do with this note.
