Hypothecation of notes - Posted by John Behle
Posted by John Behle on February 15, 2000 at 13:30:10:
As Mike mentioned, you can hypothecate the note. That way it is borrowed money and the tax hit doesn’t happen. I don’t know of any of the “normal” national funding sources that loan against notes (except FNAC).
So, look for local investors and funding sources. This might be a deal where you “create” an investor through “Equity Arbitrage” or funds from an IRA, etc.
The investor then loans money secured by the note. Actually it is more safe than an actual purchase since they also have the guarantee of the note owner. Yet, there is a little higher risk because they could get tied up in a bankruptcy (but would be a secured creditor) if the note holder BK’d. There could also be a “usury” concern with a loan as opposed to a partial. Actually partial purchases are also high risk in the usury department, but that is another discussion.
You get paid through a fee: 1) from the note holder, 2) from the investor 3) by being in the middle - investor loans to you and you loan to the note holder. Option three could be slick if you had other collateral to put up. You arrange a decent interest rate and loan and then get a higher yield on the “note loan”. Again, “Equity Arbitrage”.
Now, there is one “National” funding source as an option. That is a little more complicated and somewhat results in a commissiondectomy (for future deals with this investor). That would be to put them in touch with First National Acceptance Corp. and the note holder takes out his own “Broker Line”.
If that seemed like the only or best option, you could charge a consulting fee - BUT - you could also form a longer term relationship with this investor and work out somewhat of a note buying partnership using the “Broker Line”. That could look like selling notes to the investor - funded by the broker line or buying notes with the investor and taking a piece of the spread and or cash up front. There could also be a “Buy sell” agreement with the investor that you can buy the notes in the broker line (except the one that would cause him a tax hit) when you are able to fund them through 1) your own Broker Line 2) Investor funds 3) Selling them (last option).
You could then springboard this one deal into your own note portfolio.
In some ways that is how I started. One of the first investors I worked with wanted more “Action” than just loaning against the notes and understood some of the upside profit potential. So, instead of just brokering them - (See “Let the Goose Live” - I was able to sell notes to them, with an option to buy them or split profits as we improved them.
There is a link to First National at my website along with other funding sources and I will be posting the article “Let the Goose Live” in a short while.