Lessened Motivation - Posted by John Behle
Posted by John Behle on January 26, 1999 at 14:44:47:
You create a note to the seller like in a normal seller financing situation. Instead of giving him his own property as collateral for the newly created note, you give him another note as collateral (which you buy at a discount).
The property seller doesn’t take a discount, it is the seller of the note you buy (to use as collateral) that takes the discount.
Sometimes people have taught that you can give the seller his own property as collateral and then substitute some other collateral later. It sounds good - and can happen sometimes - but doesn’t really translate from the “Podium to the Pavement”.
In real life, once you have solved the seller’s problem by buying their property, their motivation to be flexible, creative or work with you is long gone. Yes, you can have them agree to a substitution of collateral, but it can be a pain to enforce. It’s always better to get them off of the collateral that they are emotionally attached to while you have bargaining power.
In substitution of collateral situations (particularly the “Paper Trade”) sellers many times ask what why they can’t have their own property as collateral. Sometimes the answer just has to be a blunt “Because I did not OFFER you your own property as collateral.”