Need a better deal - Posted by Sean

Posted by Sean on April 08, 1999 at 12:31:16:

Well, I scanned the archives and didn’t find anything that cast bright illumination on the subject, but I think I already understand the basic idea.

Basically I buy a note at a discount and swap it with the mortgagee for face value. Since I don’t have enough cash to buy a note, I’ll need some financing, and that’ll mean getting a conventional loan from a bank using the property as collateral.

So my current plan is as follows:

  1. Get pre-qualified for a refinance loan.
  2. Find a note with acceptable terms.
  3. Approach the mortgagee with the idea.
  4. Tie up the note with an option agreement.
  5. Get the loan funded, and complete the deal.

Am I missing anything or am I going about this in the wrong order? How will I find a note? Should I approach those “I BUY NOTES” people in the paper to see if they’ll sell one, or is there a better way?

Need a better deal - Posted by Sean

Posted by Sean on April 07, 1999 at 16:12:18:

In January 1998 I purchased a small condo for $31,880 no money down, 10% interest, payments of 265.67 monthly seller financing. There is a balloon payment due 5 years from the date I closed. I had thought I had significantly underpayed and that a refinance would be quickly coming after a year, but a comparable property sold March 1999 for $32,000 in the same complex.

Now I am nervous about accumulating the required 20% equity I’ll need to refinance. I want to start paying more money a month, and I could theoretically pay up to an additional $115 a month and still have it covered by my tenant (assuming no vacancy). But if I agree to make more payments I expect a better interest rate or something. Any ideas as to how or what I should negotiate for?

Even one better than that - Posted by John Behle

Posted by John Behle on April 07, 1999 at 21:16:11:

You could ask for a reduction in the interest, but it might not be very likely that the note holder will do it. It can’t hurt to ask.

A better option in this case would be a “DISCOUNT REFINANCE” or “ISCOUNT SUBSTITUTION”. Both have been detailed here in recent posts. If they have fallen off the bottom, you can search them in the archives.

In essence, the “Discount Refinance” involves the note holder taking a discount now for cash - that you get from refinancing. You create equity in the discount.

Not every seller wants or needs cash - or will take a discount. In that case, the “Discount Substitution” involves finding another similar note that you can buy at a discount and then trading that (substitution of collateral) for the note you are paying on. The note holder accepts the new note as security and releases the property which can be refinanced to get the money to buy the note that is being substituted. Again, you create equity - and get rid of the balloon payment.

A “Partial Subordination” can work here too. Get the seller to subordinate 20% of the note in exchange for paying them the 80% (or less if you can negotiate some discount) early. The seller gets 80% of their cash now and extends the 20% second to a longer term amortization - the balloon is gone.

A combination of all three can work also.