Posted by JD on May 24, 2000 at 24:04:49:
Thank you for confirming my suspisions.
Has anybody use bonds when buying real estate properties? - Posted by Thurman
Posted by Thurman on May 22, 2000 at 21:33:07:
Hello, everybody!
Last week, I bought a used real estate course written by a real estate investor, Dr. Richard C. Powelson, dealing with using zero coupon tax-free municipal bonds in place of cash when buying properties. I was excited at first after reading through the manual the first time.
However, after reading the manual a second time, I begin to question if the concept would really work in most cases. Let me explain a little about the concept using a example:
You, as a real estate investor, want to buy a $100,000 house to use as your personal resident. You have no money for the down payment nor good credit to qualify for a conventional loan.
The seller owns the house free and clear and he doesn’t need any cash. He would consider seller financing the $100,000 plus interest for 10 years. However, since he is moving over 1000 miles away, he DOESN’T want the worry of default and having to take the house back.
Solution: You offer to give him $100,000 worth of zero coupon tax-free municipal bonds that will mature and payoff in 10 years (this would eliminate his fear of getting the house back due to default) and would pay him his principal at that time. Then you would only have to pay the seller interest only payments for the next 10 years.
You buy the $100,000 worth of zero coupon tax-free bonds for about $35,000, or more if you want, by financing the house to pay for the bonds.
Dr. Powelson give many other techniques to buy properties with bonds. However, I can see the only time this concept of using bonds would work if: 1. The seller did not need the cash and 2. The seller did not want the house back.
Perhaps, after I reread the manual again, I will discover how Dr. Powelson’s concept can work in most, if not all, real estate transactions.
So back to my original question: Has anybody use bonds in buying real estate properties?
Thank you for reading my post.
Your friend,
Thurman
Re: Has anybody use bonds when buying real estate properties? - Posted by phil fernandez
Posted by phil fernandez on May 23, 2000 at 06:49:55:
I also got excited about Powelson’s zero coupon bond strategy until I realized who are you going to convince to take the bonds. It is a difficult concept for the seller to grasp. And as the old saying goes " a confused mind always will say no".
The other possible problem would be if the seller does not fully understand that the $100,000 bond at the time of closing is really only worth $35,000 not the $100,000 face value of the bond. It would be easy for the seller to cry fraud. Didn’t the seller really sell his house for $35,000, not the $100,000 that he thought. I know you could add more bonds to take care of some interest, but the whole concept while creative just seems too problematic.
I wouldn’t waste alot of your time with this.
My Dad bought with Zero Coupon Bonds!! - Posted by Soraya
Posted by Soraya on May 23, 2000 at 24:57:11:
My dad and a partner of his bought a house in San Diego county with Zero Coupon bonds.
The following is approximately what happened:
FMV of the property was about $300,000
The lady had about $75K - $100K loan on the property.
Dad financed the property.
Paid off the first loan.
Gave the lady a few thousand $'s.
Bought zero coupon bonds in Escrow with the money he borrowed from the bank and gave the bonds to the lady.
I believe the face amount of the bonds was about twice as much as the amount owed to the lady. (In order to provide her with principal and interest. I don’t recall the exact formula he used. It could have been 3X’s the amount owed the lady.)
Bonds had different expiration dates that spread out over 20 years or so.
Each year some of the bonds would mature. Each year the lady was paid the equivalent of approx 1/20 of the principal and some interest.
My dad put $75,000 cash in his pocket.
I think my dad had to make about 100 offers or so before he found a seller that would accept his offer.
This was approximately 1985 or so that he did this.
Soraya
Re: Has anybody use bonds when buying real estate properties? - Posted by JD
Posted by JD on May 22, 2000 at 23:21:22:
The chances of getting such a zero coupon bond offer accepted are slim at best. You would most likely insult the Seller, and lead him/her to suspect you are a crook. What is Dr. Powelson a Doctor of?
Re: Has anybody use bonds when buying real estate properties? - Posted by Laure
Posted by Laure on May 23, 2000 at 07:50:16:
In calculating the payments on the 35k bond added to the interest only payments on the original 100k, the whole thing just doesn’t make sense. Am I missing something?
15yr amort., 9% interest on 35k = 355/mo
7% interest only on 100k = 7k/yr or 583/mo
Straight 15 yr at 9% = 1014/mo
Not too much of a savings for all the hassle. What did I figure wrong?
Laure 
Don’t be impressed - it’s a mail order degree. - Posted by John Behle
Posted by John Behle on May 23, 2000 at 17:26:29:
For a few thousand anyone can add a few initials to their name.
What is Dr. Powelson a doctor of? - Posted by Thurman
Posted by Thurman on May 23, 2000 at 08:51:01:
JD, Dr. Powelson has a Doctor of Philosophy degree (Ph.D.). Thanks for your response to my question.
Your friend,
Thurman
What did I figure wrong? - Posted by Thurman
Posted by Thurman on May 23, 2000 at 09:03:41:
Laure, nothing wrong with your math example. In Dr. Powelson’s example, this solution answered the buyer’s problem of buying his own house with no down payment and qualifying for a loan; the seller’s problem of a quick sale at full asking price without the risk of default and having to take back the house.
Thank you for your response to my question.
Your friend,
Thurman