The following is an excerpt from Mr. Behle's book "Mortgage Magic",
which is part of "The Paper Game Trilogy".
One of the tried and proven techniques of profiting through real estate investment is a well known
three-step process. The steps to this simple process are:
STEP 1 - Buy a piece of real estate under the most favorable terms and conditions possible with
as much leverage (OPM--other people's money) as you can.
STEP 2 - Fix it up or improve it in some way. This step could involve anything from paint and elbow
grease to converting an apartment complex to condominiums or timeshares.
STEP 3 - Sell or finance the real estate in some way to be able to compound profits and find more
real estate to follow the same three-step process.
This three-step process can be applied to other forms of real estate investment as well. One of the most
profitable of these is in the field of "real estate paper," which includes: contracts, trust
deed notes and mortgage notes. What a person buys when they buy real estate "paper" is the right
to receive a future income in the form of a series of payments and/or a lump sum payment. Buying paper
involves buying the note on a property and having the property as security for the payment of the note.
Paper has long been known to be one of the safest, most secure investments available. Now it is taking a
whole new change of direction and is becoming one of the most creative and profitable forms of investment.
Paper Can Be Leveraged
A similar three-step process is being used very successfully in the field of real estate paper. Investors have
invested in paper for years and years, but seldom have used the principle of leverage. Paper can be financed
just as real estate can be financed. There are many institutional and private sources of financing available
for real estate paper which can make it as easy to finance as real estate.
Paper can be financed 100 percent and at a lower rate of interest than it is bringing in. For
example, you might buy a $10,000 note at a discount of 40 percent for $6,000. Your
yield or rate of return might be 24 percent, but you might borrow the entire $6,000 at
17 percent--which would give you a 7 percent return on borrowed money.
In the case of this note, that would mean an immediate cash flow of over $30 per month. Since it was
borrowed money, this monthly cash flow would be free to you. Also, you would show an immediate increase in
your net worth of $4,000 (the amount of the discount) because you have a loan of $6,000
which purchased an asset of $10,000 (the face value of the note). Wouldn't it be fun if you just did
this first step 10 or 20 times?
Paper Can Be Improved
How in the world can you fix up paper? You can't paint it and re-carpet it, but you definitely can
improve it. You can't raise rents, but you can raise the payments. You can't do a condo conversion on it,
but you can restructure it.
There are over 117 different ways to improve real estate paper. I will discuss one way of improving
real estate paper that is so simple, you will have wished you knew about it several years ago.
Sell Paper At A Profit
Once the paper has been improved or "fixed up" in some way it can then be resold at a profit or
refinanced to be able to keep the profits compounding at an astronomical rate. Let's look at the three steps:
STEP 1 - Buy or control paper through one of 11 different sources and finance paper through one of 12
STEP 2 - Improve paper through one of over 30 different ways all of which are very advantageous to all
parties involved in the transaction.
STEP 3 - Sell for a profit or refinance.
Sell It To The Payor
One of the quickest and easiest ways to make profits in real estate paper is to sell it back to the payor.
You might buy a note at a 40 percent discount and sell it to the payor at a discount of 25
percent. You would think that the first person that the seller of a note would contact when he wants to sell
his note would be the one paying on it, but most of the time they don't. They assume that if they could
pay off the note that they would have already done so or that if they had any interest they would have
already contacted them.
This means that we can make a profit by just asking the person the simple question of whether they would
like to pay off their note at a discount. An example might be where you purchase a $10,000 note at a
discount of 40% or a price of $6,000. We could then contact the person paying on the note and
offer them the opportunity to pay off the note for $7,500. This would mean a profit to you of
$1500 on an investment of $6,000 and could happen in as little as 30 days. This would
be a 25% profit on your investment, which doesn't sound too exciting until you consider that you did
it in only one month.
If you financed the note, then you would have made that $1500 without even needing to invest
anything but your time. What if you had purchased a $100,000 note? Would $15,000 profit in
30 days interest you?
As soon as a person gets over the shock of this simple way to make a big profit, they usually ask this
question, "What if the people don't have the money to pay off their note at a discount?" Some
people will have the ability to pay off the note, but most will not happen to have $6,000 stuffed in
An Offer They Won't Refuse
What if you could approach a person paying you on a note and show them a way to:
* LOWER THEIR MONTHLY PAYMENT
* LOWER THEIR LOAN AMOUNT BY $2,000
* PAY OFF THEIR LOAN IN THE SAME AMOUNT OF TIME
* PUT $500 CASH IN THEIR POCKET
* AND YOU'LL MAKE $1500 IN THE PROCESS
Do you think you might be able to get their attention if you could make them an offer like that? If they
don't get excited, then you better check for a pulse and call for the paramedics. They might also get a
skeptical look on their face and start looking for the "Candid Camera."
Here's how to do it: If the person paying you on the note were to go to the bank and put on a new loan for
$8,000, they would have $500 cash left over after paying you the $7500 that you said
you would take for their $10,000 note that they owe to you.
The terms on the original note were as follows:
12.5% 180 months
The terms on the new note are:
$ 8,000 $117.50/mo.
16% 180 months
As you can see, the amount of the new loan is $2,000 less and the interest rate is higher. The term
of the loan is the same, but the payment is actually lower.
Summary Of The Three Steps
Here's a summary of the three-step process and how it would apply to this particular situation.
STEP 1 - Sam calls you on your newspaper ad about buying notes. You purchase his $10,000 note
at a 40% discount for $6,000. Your bank or an investor loans you the $6,000 at
17% and you buy the note at a 24% yield or rate of return.
STEP 2 - You meet with Paul that pays on the note and offer him a discount. Paul agrees to pay off
the note at a 25% discount for $7500. He doesn't have the cash, so Paul gets a loan from the
bank for $8,000 and puts $500.00 in his pocket. Paul has lowered his monthly payment and made
a profit at the same time.
STEP 3 - In this case, there would be no need to further finance or sell this note, because in step
2 you sold it to the most logical person - the buyer.
Profits For You
This is another example of a very profitable form of investment that will become increasingly more popular
in the coming years. Paper has many uses and profits can be made in many different ways. Shouldn't you be
making these profits too?
© 2000 Cashflow Specialists. All rights reserved.
John D. Behle, is one of the premier educators and practitioners in the field of "Real Estate Paper".
John has an extensive background in consulting and coaching. In addition to the original "The Paper Game"
book published in 1982, he is the author of 7 other books, several home study courses and over 200
nationally published magazine and newsletter articles on paper investment. You can visit him on the web at
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