Full Funding Options - (part one) - Posted by John Behle

Posted by John Behle on January 21, 1999 at 14:13:22:

Full Funding Options

(By John D. Behle)

How about a few ways to fund notes at full face value or very low yields?

The Paper Trade

One of the primary reasons I plunged into paper was to use it to buy real estate at great discounts.

60-70 % Of Value With No Down and a Positive Cash Flow

There are few reasons why you need to pay full price for properties. Let’s look at a particular technique that I like. Using real estate paper, it is easy to buy properties at as much as a 40% discount from the market value.

The idea is simple - buy a $100,000 note for $60,000 and then turn around and trade it to someone for the full face value of $100,000. The result is you have bought a property for $60,000 cash or 60% of value.

Finance - Current Market Rates

Turn around and finance the property and you have a nothing down, cash in your pocket, below market deal. When I first began to try to implement this exciting technique, I ran into many problems. What I found out is:








Without a doubt, before you even start, you need a portfolio of notes that you either own, control or have an option to own. You’ll need a backup package with all of the information that an individual and their financial advisors might need to determine the quality of the collateral.


When you are trying to talk a seller into taking some collateral that is foreign to him, you have a real challenge. These negotiations with a seller and his advisors are the backbone of getting this type of transaction through. I can’t go into details here, but they are covered in The Paper Game book. If you don’t have a copy, drop me a line and I’ll send you the extremely helpful pages that have to do with the negotiation.


When we started, it took a month to find and qualify 10 good properties. Now I can find dozens in a minute or two on the Realtor’s Multiple Listing computer.


You can waste a lot of time and eventually your whole life trying to put together a deal on the wrong properties. I learned to spend a few minutes on the phone and about 95% qualify a property. The most important part is dis-qualifying the properties that won’t work. At first it took 106 calls and 10 offers to get a property. With the refining of the finding and qualifying process, it takes about 9 calls for 3 offers and one out of three offers is accepted.


It takes cash to buy the paper and a loan to refinance out of the property. How the purchase is structured can make a tremendous difference on how easy it is to get your cash back out through a refinance.


At first I tried to trade the notes. That carries with it some tax consequences. They are: immediate taxable gain for the buyer (investor) and taxation as if cash were received for the seller. If a property is bought and a new note is created, it may qualify as an installment sale for the seller. If an identical existing note is traded, it is taxable as cash. If the same existing note is used as collateral for a new note that is created, it should be taxable as an installment sale.

The best step is to use an existing note as collateral for a newly created note.
Many people shy away as soon as they see some problem, yet behind each problem is profit. These six problems weren’t that hard to solve.


If you want to make things work really easy, look for a property that is for sale that has a large, existing privately held mortgage. In other words, a property that was sold fairly recently with a large amount of seller carry back financing.

Millions Through the MLS

To find these properties is much simpler than you might think. Plug in your computer modem, call the Board of Realtors Multiple Listing Service computer and search for properties with private loans. In my state, it is a simple process to search for who the loan is to. It won’t give the name if it is a private loan, it will just say “private”. It is also possible to search for “loan type”. I search for “CT” which stands for contract, which is a Uniform Real Estate Contract or Contract for Deed. Ninety-Nine percent of the time, that means there is a private party on the receiving end.

Profitable Word Processing

In a few areas some of this information may not be available. In others, it is not easily accessible or the system that the board uses does not allow a search for these items. Well, it doesn’t take more than a few seconds to figure out that you can download the entire data base onto your hard drive and search through the search feature of your word processor.

Find’em and Feed’em

If you’re not an agent with access to the MLS, now is a real good time to take one to lunch and get to know him or her.

Let’s look at an example. We find a property that is for sale for $100,000 with $20,000 down to assume an existing $80,000 privately held first loan with interest at 9% over 360 months. The payment on this loan is $643.70 and it is worth $51,000 when discounted to a 15% yield.

Success Through “Subject To”

Approach the seller and negotiate the deal along with a “subject to” clause that gives you an out.

This might be straight forward as in “subject to satisfactory re-negotiating of the existing first loan” or may just say “subject to inspection and approval of buyer’s partner, Jim Shu which shall take place not later than 5 days of the acceptance of this offer.”

Negotiate to Discount or Substitute

This gives you five days to negotiate with the holder of the first loan. The negotiation will be seeing if the holder of the first loan (let’s call him Ben) will discount. Chances are slim that he will discount substantially (30-40%). That’s OK, because we know that if he won’t discount, there are thousands of others out there that will.

A Trail of Ten Dollar Bills to The Title Company

What we need at this point is to entice him to substitute collateral. I say entice, because there is nearly no incentive that Ben can see to encourage him to give up his trusty collateral for something unknown to him. It’s not hard to find some incentive for him that would work. (For more details on this process, the article "The Discount Refinance might be of help.) It could be any number of different items like:

1 - Better collateral (LTV ratio)

2 - Higher payments or interest rate

3 - Some principal reduction

4 - Cash or other incentives

We find an incentive that works and then substitute as collateral for Ben a similar note or group of notes to the one that he currently has.

What the Property Costs a Creative Note Investor

This means that the cost of the property is:
$20,000 cash down payment
$51,000 cash (for the $80,000 note)

$71,000 cash - total cost


That means we just bought a property at 71% of value and the seller didn’t even take a discount. In fact, he received all cash for his equity. We started off by talking about how to buy properties where the seller is carrying back a large portion of his equity.
Solve Two Major Challenges

In the first type of transaction, you face two challenges. The first is to convince the seller to carry a note and the second is to sell the idea of different collateral other than the property that he is selling.

Existing Seller Financing

What I like about finding a property with an existing private loan is that someone has already made that first decision to carry paper.

The second part that is nice is that the holder of the loan may have separated emotionally from the property and can be easier to entice to substitute collateral for his loan.

Little Competition

There is little other competition giving hopes of higher prices or all cash prices like there may be in the case of a property seller.

The agent, who is usually the biggest obstacle is not involved and properties with private financing may be found easier in any market than sellers willing to carry paper.

In another article, we’ll talk about many more options for “Full Financing” of Paper by creative techniques.