Phil is right on! For zero coups to work the way they have been “promoted”/“taught” … you have to have a seller that really doesn’t understand what is going on. That is a bad thing for both reasons that Phil gave, plus if you ever end up in front of a judge, number 2 looks even worse to the Judge … you became predatory, not a deal maker.
So I concur that they are a fallacy. A similar concept though would be trading paper at face value when bought at a discount; here it is the seller of the paper that must be convinced and you have to do your due diligence as to the borrower and collateral … but the underlying asset is worth it’s face … go read the cash flow forum and some of the how to articles.
Has anyone, or is anyone successfully using Zero Coupon Bonds to acquire either Commercial and/or residential real estate ?? I heard about this method but never found anyone that was actually, successfully doing it. Is this concept for real or pie-in-the-sky ?? Thanks !!
Posted by John Behle on March 12, 1999 at 22:58:27:
We had an exchange about this a couple months ago on the cash flow forum. It should be searchable in the archives. Try that for a very detailed answer response about the pros and cons - and better alternatives. Bottom line is the “bonds” deal as most teach it doesn’t translate “from the podium to the pavement”.
Re: Using Zero Coupon Bonds - Posted by Bill in OR
Posted by Bill in OR on March 12, 1999 at 11:30:19:
The potential for abuse with these attacts a certain bottom feeder type of “investor”.
However, they can still provide an excellent profit potential… just offer a bit more value when trying to trade em in.
Say you have a property with equity of $100k. And say you have a zero with maturity value of $150K, which costs, say, $70K. Now you have a much better chance of getting some attention, and if accepted, the 70% new loan can pay for the zero you give to the seller.
The problem is trying to be too greedy and going for a “home run” by taking advantage of the sellers financial ignorance. Give more value and your chances for pulling off a reasonable profit is great… and you’ll sleep better.
Using those zero coupon bonds is comparable to what a certain person did who posted that he paid 125% for a property. It’s shameless if the home seller isn’t aware of what those bonds are really worth today. If he is aware of their value and when they will mature then it’s okay. However with the value today being worth less you must also make the sales price relative to that value. For instance if you negotiate with a seller whose home is worth $100,000 to give him $20,000 cash and $40,000 in zero coupon bonds which will be worth $80,000 in 7 years. Then the sales price is really only $60,000. $20,000 now and $40,000 at 10.4% compound interest with no payments and a payoff in 7 years. If he’s willing to do that you might as well just have him carry a note for $40,000 at 10.4% compound interest with no payments and a payoff in 7 years. Then go buy the bonds for $40,000 keep them yourself and when they mature pay off that loan from the seller. Then there won’t be any question as to whether what you did was deceitful or not.
worked for me. look for a motivated seller. put the bonds in a reputable escrow. risk is minimal. add sugar to make lemonade. like buying at k=mart, joe said.
Well Bill I’ve always had this fantasy to use zero coupon bonds to buy property. However to date it’s still a fantasy.
Problem #1 It is hard for the seller to really understand zero coupon bonds and how they might apply to a real estate transaction. A confused mind always says no.
Problem #2 is if you buy a zero coupon bond with a face value of $100,000, the seller might wrongfully think that that bond is currently worth $100,000. How mad is the seller going to be when he finds out that the bond is only worth say $32,000 at the present time. This could lead to the sellers claim of fraud and being misled by you.
In my opinion it would be much better to use the zeros as collateral for a mortgage on the property. Rather than just trading the zeros straight up for the sellers equity in his property.
Again disclosure to the seller goes a long way here. Make sure the seller has legal representation and knows what the bonds are really worth.
I have never ran into anybody that has used this technique.