Note from thin air?? - Posted by Steve (OH)

Posted by Steve (OH) on January 04, 2001 at 18:00:56:

Wow! Great post with explanations. I need to re-read it to fully grasp it, but thank you for taking the time to give such an in-depth lesson!

Best of luck to you as well.


Note from thin air?? - Posted by Steve (OH)

Posted by Steve (OH) on January 04, 2001 at 14:36:43:

OK, I went to “” and reviewed the tactics involved in creating notes…I also reviewed several posts on this site. I am new to notes (creating), but have 18 units that I own and have gotten a little creative with them. However, if I am understanding this all correctly and were looking to buy a 5 unit (just made an offer on one that was denied.) and apply the create-a-note method, I could do the following:

if comps in the area are 450-500k on multi units (4-6 units) and I found this 5 unit for 325k as an agreed upon price (this is a desirable area due to college kids), I could create a note with 16% interest rate and amortized on a 20 year term with a balloon due in 36 months. Interest only payments for 36 months. This would make a payment of approx 4300/month.

If I were able to show valid comps equal to a 30% or so discount (“creating” 70% LTV), I would sell this note to a private investor and this would allow me to get into the property with no cash out of my pocket.

Am I off my rocker or do I understand this concept?

Thanks in advance…Love the site.


Re: Note from thin air?? - Posted by David Butler

Posted by David Butler on January 04, 2001 at 17:01:21:

Hello Steve,

Hey… you aren’t entirely off your rocker :wink: Seriously, you do have some grasp of the principles it sounds like… but you have a few apples mixed in with your oranges.

We have had some lengthy discussion on several of these points, so I want to refrain from covering the same amount of ground here. Perhaps you can use the Archive Search to explore the issue a little further.

But, couple of quick points… first, the way you are describing the deal, is technically a “manufactured” note, and as such, is in reality a loan. Nothing wrong with that, and it is done frequently… but it is important to understand that there are significant differences between a loan, and the sale of an existing note (even if the note has only existed one minute).

Your state laws on mortgage financing and usury rates will control how and what needs to be taken into consideration, and both state and federal consumer financing laws often come into play as well. Fortunately, you generally have a lot more leeway on nonowner occupied investment properties than you would in a standard residential loan transaction.

As to the “Create A Mortgage” program, Jon is dealing with what note investors prefer to deal with, and that is seller carryback purchase money mortgages. So, in your instance, the note the investors would be willing to purchase, is the note you give to the seller of the five unit complex, as part of the purchase price. If structured correctly, they would purchase that note at the closing table, immediately after the close of the transfer of the real estate from the Seller to you - allowing the Seller to receive cash at closing.

There is more to the mix, but in general terms, note investors aren’t out there to throw their money away. They generally look to the lower of the sale price versus appraisal in determining how much ITV (investment to value) they will put up in terms of hard dollars. They will also look at the hard equity (down payment) contribution by the buyer (Payor), the credit rating and income history of the Payor, and several related factors, in determining what YIELD they need to receive on their investment to compensate for the risk rating they come up with.

Income properties have an advantage in that note investors will also look at the soundness of the income generating capabilities of the property itself, and the debt coverage ratio available from the property’s operating history.

Each investor has their own idiosyncracies in determining the discount they will apply to your scenario (again, remember the discount is a function of yield, and will be greatly affected by the rate and term of the note itself). However, you may find it helpful to have a look at our FREE report, NOTE GRADING/PRICING GUIDELINES, which provides a fairly accurate industry overview of note pricing and yield structures. You may find this report at:

After studying this report, you should also have a pretty good feel for the kind of information Jon, or any other investor, will be looking at to determine what price they can pay to purchase that particular note.

Hope this helps, and best of luck on your transaction!

David P. Butler