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A COMPLEX DEAL: In which we keep making offers to the payor! This is an example of how you can buy a note and improve it. It's called "recasting" a cash flow. You change the terms to increase the note's Present Value. Follow along with your calculator and you will find out that it is easier to "fix-up" a note than to "fix-up" a piece of real estate; and it is more lucrative (and there are no tenants or stopped up toilets.) Rockee Smyth brought this note to us. He had taken one of our classes we
offer every month. We had pointed out to him that one could very nicely to one's
income by finding notes for sale and bringing them to us. We would pay a
finder's fee of one percent of the price if we decided to purchase the note.
Well, Martin, who had more energy and imagination than time and money, put an ad
in a local neighborhood newspaper and soon got a call on the following note.
Ricardo and Maria Ceuvas had sold their home several years ago and taken back a
note on the property. The original terms were as follows:
Five years had past by and now the note looked like this:
Mr. Ceuvas had an opportunity to open up an auto repair place with his
brother-in-law and needed the cash to do so. We always like to make at least two
offers and preferably three, but we knew in this case, he wanted as much money
as he could get. Since this was a first, we knew this note would qualify for an
institutional lender. The home had originally sold for $70,250, so we knew the
ITV would be way below the 75% that most institutional lenders require on an
owner occupied house. So we decided on an 18% offer, knowing we could sell it at
13%. We did make two offers and as usual we made the partial offer at a higher
per cent (21%) as follows: Full purchase:
Partial purchase:
1) Our first strategy is to tell the Santinis, the payors, that if they would
increase their payments to $1000 per month, they could pay off their loan only
55 months and save themselves $13,300 in interest payments over the life of the
loan. 2) In fact, the Santinis ignored this proposal so a month later we sent them
another letter in which we offered to reduce their balance due by 10% or $4,500
if they would pay off the loan in the next 30 days. We suggested that they
refinance or use an equity loan. We even gave them the name of a mortgage broker
they could call who would help them find a new loan. This technique often works
especially if it's a substantial savings like $4,500. However, in this case the
Santinis were uncomfortable about refinancing and again didn't bite at this
offer. 3) A month later we decided to change our strategy and give them two offers
to choose from rather than one offer to accept or reject. We decided to go with
higher monthly payments in exchange for a lower interest rate.
We lowered the rate to 7% and doubled the payments to $1140. We pointed out
that not only would they pay off the loan in only 45 months, but they would also
save over $17,000 in interest payments over the life of the loan.
By doing this we increase the value of the note from $38,178 to $40,428!
What would our institutional investor pay for these new terms?
By doing this we increase the value of the note from $38,178 to $41,023! Perhaps we just wore the Santinis down or we finally gave them an offer they
couldn't refuse. They chose (a), and we sent them a revised contract with the
new terms which they signed and returned. We immediately went to our
institutional investor, and they accepted the note at 13% for $41,023.
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