You didn’t credit the source of information. Your argument that you didn’t want to plus a website is bogus. People suggest websites all the time. But then again, what did we expect? Who knows if you’re even capable of something ethical and original? In fact, the only reason I read your posts is to learn how to recognize the unethical tactics that some investors practice. So by all means, keep posting. It’s an education for me either way.
These are some really great ways of using paper. Some of these I use and some I dont. Take what you like and run with it.
Most real estate is purchased with paper. Whenever you sign a
mortgage to buy real estate, you have created paper as part of the
transaction. Paper is defined as “any written and executed right,
obligation or promise that has monetary value and is negotiable.” Most
examples that follow deal with real estate promissory notes and their
security agreements (mortgages or deeds of trust).
Other types will also be considered.
Many property sellers will accept the benefits of paper when making a
transaction. Some sellers prefer to keep the paper (carry the loan) with
a sufficient down payment. Why?
They may want regular payments instead of cash.
They may be able to get a higher price by offering
financing for the buyer.
They may want a higher return on their money than CDs will give.
They know the property and have enough down
payment to make them feel more secure than
they would in other investments.
Many sellers will carry the loan because they can’t sell any other way
or they would have to discount their price too much to get all cash. A
seller who will carry a note may accept a substitute note on another
property if: 1. There is a record of prompt payments.
The substitute paper has higher payments.
The substitute paper has a shorter term.
The substitute collateral property has greater value.
The substitute collateral is more attractive.
A knowledgeable seller will make certain that the substitute paper does
not have either a senior lien value or a final loan-to-value on the
substitute property greater than those values on
the transaction property. Even without this precaution, the seller may
accept substitute paper if it has a present value greater than the note he
would otherwise receive on the transaction property.
Transaction Techniques With Real Estate-Secured Notes
In most of the following techniques, knowledgeable investors are willing
to be either buyer or seller. They make the transaction favorable to
themselves no matter what role they take.
PAPER OUT: Seller has a $100,000 house with a $75,000 first lien. Buyer
offers to assume the first and give a $25,000 balance seasoned first lien
note on another property which he purchased for $15,000. Seller accepts
because he is leaving town. This would be more acceptable if the note
were larger than $25,000, which gives a higher price.
Seller gets his full price and can move with peace of mind because he
does not have to make payments on the vacant house. Buyer purchases at a
discount and with no cash down. Buyer also converts an existing equity,
which he acquired by discounting the note, into real estate equity.
CREATE PAPER TO BUY PROPERTY: Seller likes to carry paper, but he wants
to be protected. He will not finance his $600,000 apartment building
100%. Buyer has a free-and-clear strip shopping center that produces a
good cash flow, but he does not want to sell or trade it.
Buyer creates a $150,000 first lien note on the shopping center and uses
that for part payment. Seller carries back a $450,000 first lien note on
his apartments.
This is similar to a blanket mortgage on two properties, done to
provide extra security; but different because the two properties are not
tied together. This allows buyer more freedom to control his investments.
Seller is happy, having good notes with plenty of equity.
PAPER FOR DOWN PAYMENT: Buyer offers to buy Seller’s property by assuming
the $60,000 first lien and giving him a $40,000 second lien for 15 years
at 10%. Seller considers accepting because he will receive more than if
he got all cash, but he is afraid that Buyer might default and return a
mismanaged property. Buyer offers Seller paper that he owns worth $16,000
as a down payment and asks Seller to take a $24,000 second lien for 15
years at 10%. Seller feels protected and accepts because now Buyer has
something invested in the transaction.
PAPER TO PAY THE PAYMENTS: Buyer still owes Seller 36 payments of $350 on
a 10% note with a remaining balance of $10,847. Buyer has the opportunity
to purchase a trust deed with a remaining balance of $10,728 (it pays $500
a month at 11% for 24 months) for $8,900.
He purchases it and offers it to the Seller in exchange for the remaining
payments on his note to Seller. Should Seller accept the offer even
though the remaining balance is $199 less than the
note he is now holding from Buyer?
In this case, Seller wants an 18% rate of return. If he discounts both
notes to yield 18%, the existing note will have a present value of $9,681
while the new note has a present value of
$10,015. Seller accepts the offer since the quality of the notes are
similar. Seller will benefit with a higher present value, higher
payments, and a quicker payout. Buyer also benefits because
he pays off the loan at an 18% discount.
PAPER FOR AN OPTION: The owner of 30 acres wants to sell, but development
is 5 years away. A developer wants to acquire the land, especially since
the asking price is below market. Developer wants a 7-year option on the
30 acres. He offers Owner an existing first lien note on another property
with 5 years remaining, a 10% interest rate, and a remaining balance
equivalent to 20% of the land’s asking price as an option consideration.
Owner knows the economy is slow
and a sale may take 2 or three years, but he needs some money now. Since
exercise of the option may be 7 years away, he gets a 10% higher price.
Owner benefits by having the income stream from the note and a probable
sale within 7 years. Developer benefits by securing choice acreage for
future development at a good price without cash outlay.
Usually, note holders will accept other notes of similar quality for part
of all of the payments due them, if the payments are greater and they get
their money sooner. This little poem helps an
investor deal with notes and present value: Whenever you get money,
Sooner is better than later And more is better than less
And more sooner is best. Whenever you must pay, Do this the other way.
OVERPAY WITH PAPER TO BUY AT A DISCOUNT: Buyer offered to acquire
Seller’s property by assuming a $30,000 first lien, paying $10,000 cash
and giving the Seller a second lien note for
$60,000. Seller wavered, but would not accept the offer. Buyer has three
good quality second lien notes with total remaining value of $69,000 and
slightly faster payout (than the second lien
note he first offered). He offers these notes to Seller instead of the
$60,000 Seller-carried second lien. Seller accepts.
Buyer benefits because he purchased the three second lien notes for
$48,000, which gives him a $12,000 discount on the price of the property.
Seller benefits because he received a greater price for his property, and
he is receiving a faster payout.
PAPER AS A SWEETENER: A large transaction is about to collapse. Seller
wants $510,000 with $100,000 down, but Buyer, who has only $80,000 cash,
is asking Seller to carry a $430,000 first lien.
Buyer finds out that Seller doesn’t need the extra $20,000 down (100 - 80)
but wants it for sufficient protection and peace of mind. Buyer
restructures his offer to $75,000 cash, a good quality $40,000 first lien
note (which he had bought for $30,000), and asks the Seller to carry a
$400,000 first lien note on the property.
Seller receives the security he wanted and a slightly larger price.
Buyer completes a transaction he was about to lose with a slightly smaller
net price to him and $5,000 less out-of-pocket cash.
When a transaction is about to bog down, adding a note as small as
$5,000 may sweeten the pot enough for the seller. The price is higher,
but a good deal is completed for just a little extra
with no more out-of-pocket cash.
PAPER TO BALANCE THE EXCHANGE: Newly-created paper or existing paper may
be used to balance exchanges. Developer has agreed to exchange his small
apartment complex worth $240,000 for 10 acres worth $350,000. The owner
of the 10 acres would be glad to accept
secured paper for the $90,000 difference, but Developer must have the land
free-and-clear if he is to get a construction loan. Developer gives
Seller a $90,000 note he created on another property he owns
to substitute for the carry-back note on the 10 acres.
CURE THE EAT (NEGATIVE CASH FLOW) #1: Seller has an apartment complex
with a high vacancy, and he expects the Eat on it to continue for three
more years because of poor management and area overbuilding. Buyer
offers an existing first lien note on another property he owns to Seller
for his equity; however, the payments will be assigned back to Buyer for
the next 3 years to compensate for the negative cash flow on the
apartment building.
Seller gets relief from the Eat, saves the full equity, relieves his
management worries and has a more secure investment. Buyer trades a
non-appreciating asset for one that will appreciate under
his management and obtains some tax shelter. Buyer also gets payments
from the note, which gives him a break-even investment, which he may be
able to turn around into a positive cash flow in less than three years.
CURE THE EAT #2: Seller has a shopping center with negative cash flow and
he is tired of management. Seller also has a good quality second lien
note on which he has been offered 65% of its
remaining value. Buyer offers to exchange his smaller shopping center
with a positive cash flow for Seller’s larger center and Seller’s note to
balance the Eat.
Seller gets out of management and removes his negative cash flow
problem. Buyer increases his assets and the size of his estate and
improves his tax shelter. Buyer also gets a note to compensate for theEat.
PAPER FOR PROPERTY & CASH: Seller has a vacant warehouse and cash for
rehab, but he does not have the time or expertise for the job. Buyer has
several medium-quality first liens, but not much cash. Buyer offers
Seller the $200,000 remaining value in his notes for Seller’s $150,000
building if Seller will add $50,000 cash for fix up.
Buyer gets full value for his notes and a property with enough cash
for rehab to make the property productive. Seller trades idle assets for
a good income stream from the notes.
Geez, could you at least the The Papersource a little plug; since you reproduced thier email WORD FOR WORD… then again, I haven’t checked The Papersource board in a while, perhaps your posting the “How To” articles from here over there.
What are comments like that supposed to do? Just wondering because I dont know you from a hole in the ground and no one really even cares to hear those stupid little remarks.
I posted that because it was sent to me and it was informative. Pull that stick out of your A##, pull yourself away from your computer for a minute and use the info. K?
Nothing else.
“good things come to those who wait,but it’s
usually whats left over from those who hustle”
