Posted by David Butler America’s Note Network on June 08, 2000 at 14:28:41:
You are right… many Lonnie dealers face that same challenge. That’s where note brokers come in. Two things…
In California, it is awfully difficult to find many $10,000 mobilehomes - but that runs in cycles. In the wipe-out we had back in 1992-1994, cash strapped folks affected by the massive defense contractor layoffs found themselves having to sell homes they paid $50,000 for one or two years earlier, for $10,000 to $15,000, UNLESS they were willing to carry paper.
But, assuming for a moment you found one, and could come up with the $10,000 (either by yourself or with a partner who split it with you), and then resell it for $20,000. Say you got $5,000 down, and carried back the $15,000 note with 8 yr amortization at 13%. It will take a little under two years to recapture the other $5,000 out of the deal, so you can do another.
However, you can sell that note, and possibly pocket anywhere from $9,000 to $13,000, depending on the quality of the home and the Payor. Or better yet, as Lonnie himself suggests, you only sell part of that note, to get your cash back out. In this case, to recover your $5,000, you may only need to sell somewhere between 24 to 28 of your 96 monthly payments, leaving you with almost all of your profits plus interest, yet recapturing your $5,000 now, so you and your partner now have your $10,000 back in your pocket to work with… along with a note that is worth another $12,000 to $12,500 to you when the remaining payments revert back to you. Then you do it again… and again… and again… until you build up the bankroll to just carry all of your paper full term.
Meanwhile, you are building up substantial paper profits with large future returns… which is what you are setting out to do as a Lonnnie dealer in the first place, right?!
Now, from the other side. Yes, if you go in as the note investor, you put up your $5,000 to purchase 24 to 28 months of the Lonnie dealers’ paper. Here, you would be recapturing the money at the rate of $252 per month (at a yield ranging from 18% to 30% in the example I used for this discussion). As each payment comes in, you put it in a money market account (paying 4% to 5.5% currently), so that money stays working, while you are waiting for the remainder to come back in.
At 19 months, you have fully recaptured your $5,000, so now you go invest it again… meanwhile, you still have 5 to 9 months of payments coming to you on the first deal. With that coming in, and the cash flow off the 2nd note investment kicking in, your recovery time drops to 15 months… the third time, it’s down to 10 months, and the fourth time, its down to only four months… and each time, as you can see, your residual payment stream is growing longer and longer!!! After a bit, you are fully recovered, and just turning your own capital over.
Is there a way to speed that up… yes. If you are in a position to obtain a working line of credit from your bank, use home equity, or other reliable sources, (even credit cards - IF YOU KNOW HOW TO MANAGE THAT KIND OF BORROWING AND RISK) or borrow money from friends or relatives at a lower yield than you are generating off of your note deals. If you operate prudently and in a businesslike manner, you will effectively leverage your $5,000 to where you can turn it two or three times every 12 months. At that rate, you are working your bankroll up much faster.
One last thing… putting all of this together still leaves one important part - a lot of work, especially in locating and negotiating your deals. That’s why you are able to earn these types of returns. Anybody can do it. But that’s not to say everybody can do it. If everybody could do it, everybody would be doing it.
Hope this helps, and best wishes for your success
David P. Butler America’s Note Network