Posted by John Behle on December 03, 1998 at 12:54:18:
That’s a very old technique, that isn’t real applicable in today’s market. In some ways it never was all that applicable and didn’t translate from the “Podium to the Pavement”.
You can accomplish the same thing through the trade of mortgages puchased at a discount without the negotiation ane ethical challenges.
There is an extreme negotiation challenge with trading bonds for property. You literally have to find someone who is too naive to know they can open up a paper and find out the value of a bond. If you have Realtors and financial advisors involved, you chances are very slim. Most sellers will prefer to have cash than a bond and immediately look into what they could sell it for. If that is 30-40 percent less than it’s face value, then they discover that you are trying to pull one over on them. You are summed up as a “crook” and that deal is dead.
Bonds have a value. One value and only one. There is no question about it, just some people that are too naive to know that. Mortgages are different. A mortgage has a range of values and you cannot open a paper and determine the one and only value. For most, the value is the face value. For a savvy discount mortgage buyer, the value is less, because they have invested themselves with the cash and knowledge to perform a service in buying the note at a discount.
Assuming you find someone so naive, with no financial advisors and no agent representing them, there is an ethical problem with trading zero coupon bonds for property. The problem is you effectively are taking advantage of them. I will not do that. It’s not worth the potential legal risk, risk to your reputation and sacrificing your ethics. I won’t even get into the extreme tax consequences - that alone would burn you both.
Someone who sells this as a viable, profitable and ethical transaction is full of it.
Trading notes that you buy at a discount for properties is a viable, profitable and workable technique - that can also be totally ethical and can be done without sticking yourself or the seller with tax problems (through “hypothecation”).