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Notes and Real Estate

REAL ESTATE AND NOTES: AN UNEXPLORED FRONTIER

This article will suggest the most creative way to buy real estate with discounted notes. It is a wonderfully intriguing method, but if you cannot do this exact method, you will still be left with the very real possibilities of trading your notes that you bought at a discount for full face value on a piece of property. These ideas come from such innovators as Joe Land, Pete Fortunato and others. First, consider that there is a $160,000 duplex for sale with a $40,000 first trust deed on it. The owner of the property, Sally Seller sells the duplex to Paul Payor. Paul puts down $40,000 cash, he assumes the $40,000 first mortgage and Sally Seller agrees to carry back an $80,000, 30 year, second mortgage. She is happy with the extra income from the second mortgage and the $40,000 cash down payment.

Second, consider the older, conservative home owner who owns his home free and clear. His name is Harry Homeowner. Harry decides to sell the home. He does not need all the cash but would like to have a steady income to pay for the retirement home he and his are moving to. Their home is worth $100,000. So Harry Homeowner and his wife advertise that they will sell their home with a 20% cash down payment and they are willing to carry an $80,000 first mortgage.

Third, reconsider Sally Seller who has been receiving payments on her $80,000 note. She is suddenly offered a chance to buy a share in restaurant with a friend. She is excited about the opportunity, but has spent all of her money including the down payment she received. She is not able to borrow the cash to invest. The only asset she owns is the $80,000 note. She calls you. Your name is Ned NoteBroker (or Nancy NoteBroker). You offer Sally Seller $48,000 for her long term $80,000 note, which she gladly accepts after you skillfully explain to her the discount she must take on this very long term note.

Think for a moment about this situation. You have Harry Homeowner who wants an $80,000 note, and Sally Seller who wants to sell and $80,000 note. The only person missing from the picture is you, Ned (or Nancy) NoteBroker!

Your obvious solution to helping the two parties is perhaps, shortsighted. You are saying. Great, I, Mr. or Ms. NoteBroker, will buy the note from Sally Seller for $48,000 and trade it to Harry Homeowner for the full $80,000. If I give Harry Homeowner $20,000 cash down, and he agrees to accept Sally’s note, I will have bought a $100,000 for $68,000. ($20,000 down plus $48,000 for Sally’s note.) Terrific, you say, but this costs a lot of money. You would have to have $68,000 in cash. Can you think of a way to consummate this transaction with no cash??

First, you must convince Harry Homeowner to take back a note on a property other than his own. He was expecting to have a mortgage on his own home. But you can point out to him that by taking the second mortgage on the duplex he has more equity protection and a seasoned note. He has no idea how you, the new buyer, will perform on the loan. But Sally Seller’s loan is several years old and is well seasoned with a good payor. After seeing Paul Payor’s credit report and his payment record, Harry agrees to accept Sally’s note from you.

If Harry is willing to sell you his house and accept Sally’s note then his house if free and clear.

If you are buying Harry’s house and it is free and clear, you can get new financing! You go to the bank and the bank says they will loan you $80,000 if you will make a $20,000 payment. You say okay, and perhaps show the note as your down payment.

All parties agree to the deal and you go to escrow to close the purchase of Sally’s note, and the purchase of Harry Homeowner’s house. The bank has given the escrow officer a check for $80,000 secured by the house you are purchasing from Harry. The escrow officer writes out a check for $48,000 to Sally Seller for her note. The escrow officer then writes out a check for $20,000 to Harry Homeowner and gives him Sally’s note. She transfers the house to you with the $80,000 mortgage on it. She writes out a check for $4,000 in closing costs to the bank. She then says to you: “wait a minute, I still have $8,000 left! What should I do with that?” You raise your hand and say “I’ll take it!”

You have picked a home with $20,000 equity, and you have $8,000 in cash, and have spent none of your own money! The lesson is that real estate notes bought at discount can be traded at full face value in the real estate market. Great profits can be made if you learn this lesson.

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