HOW ABOUT A FEW ways to fund notes at full face value or very low yields?
The Paper Trade
One of the primary reasons I plunged into paper was to use it to buy real estate at great discounts.
The profit in real estate should be made (and easily can) on the buy, not hanging on for years in hopes
of an eventual profit.
60-70 % Of Value With No Down and a Positive Cash Flow!
There are few reasons why you need to pay full price for properties. Let's look at a particular technique
that I like. Using real estate paper, it is easy to buy properties at as much as a 40% discount from the
The idea is simple - buy a $100,000 note for $60,000 and then turn around and trade it to someone for the
full face value of $100,000. The result is you have bought a property for $60,000 cash or 60% of value.
Finance - Current Market Rates
Turn around and finance the property and you have a nothing down, cash in your pocket, below market deal.
When I first began to try to implement this exciting technique, I ran into many problems. What I found
1 - YOU NEED A PORTFOLIO OF NOTES
2 - NEGOTIATIONS ARE CRUCIAL
3 - FINDING THE RIGHT PROPERTY
4 - QUALIFYING THE PROPERTY QUICKLY
5 - PULLING YOUR CASH BACK OUT
6 - AVOIDING TAX PROBLEMS
1 - You Need a Portfolio of notes
Without a doubt, before you even start, you need a portfolio of notes that you either own, control or
have an option to own. You'll need a backup package with all of the information that an individual and
their financial advisors might need to determine the quality of the collateral. We originally began
using this technique before putting together our pool of paper. Others teach that it is possible and
easy to do it that way. Just tell the seller you will show them the collateral - after they sign.
Sounds good but doesn't work. One of those techniques that doesn't translate from the "Podium to
the Pavement." It works, you just need to know how and be set up to do it.
2 - Negotiations are CRUCIAL
When you are trying to talk a seller into taking some collateral that is foreign to him, you have a real
challenge. These negotiations with a seller and his advisors are the backbone of getting this type of
transaction through. I can't go into details here, but they are covered in The Paper Game book.
3 - Finding the right property
When we started, it took a month to find and qualify 10 good properties. Now I can find dozens in a
minute or two on the Realtor's Multiple Listing computer. If you use some of the powerful search tools
available on the web or through the MLS computers you can easily identify the right potential properties.
4 - Qualifying the property quickly
You can waste a lot of time and eventually your whole life trying to put together a deal on the wrong
properties. I learned to spend a few minutes on the phone and about 95% qualify a property. The most
important part is dis-qualifying the properties that won't work. At first it took 106 calls and 10
offers to get a property. With the refining of the finding and qualifying process, it takes about 9
calls for 3 offers and one out of three offers is accepted.
5 - Pulling your cash back out
It takes cash to buy the paper and a loan to refinance out of the property. How the purchase is
structured can make a tremendous difference on how easy it is to get your cash back out through a
refinance. It's possible to finance the property right at the time of purchase or a few days or weeks
later to get your cash and possibly some cash profit back out.
6 - Avoiding Tax problems
At first I tried to trade the notes. That carries with it some tax consequences. They are: immediate
taxable gain for the buyer (investor) and taxation as if cash were received for the seller. If a
property is bought and a new note is created, it may qualify as an installment sale for the seller. If
an identical existing note is traded, it is taxable as cash. If the same existing note is used as
collateral for a new note that is created, it should be taxable as an installment sale.
The best step is to use an existing note as collateral for a newly created note. Many people shy away
as soon as they see some problem, yet behind each problem is profit. These six problems weren't that
hard to solve.
If you want to make things work really easy, look for a property that is for sale that has a large,
existing privately held mortgage. In other words, a property that was sold fairly recently with a large
amount of seller carry back financing.
Millions Through the MLS
To find these properties is much simpler than you might think. Plug in your computer modem, call the
Board of Realtors Multiple Listing Service computer and search for properties with private loans. In my
state, it is a simple process to search for who the loan is made to. It won't give the name if it is a
private loan, it will just say "private." It is also possible to search for "loan type." I search for
"CT" which stands for contract, which is a Uniform Real Estate Contract or Contract for Deed.
Ninety-Nine percent of the time, that means there is a private party on the receiving end.
Profitable Word Processing
In a few areas some of this information may not be available. In others, it is not easily accessible or
the system that the board uses does not allow a search for these items. Well, it doesn't take more
than a few seconds to figure out that you can download the entire data base onto your hard drive and
search through the search feature of your word processor.
Find'em and Feed'em
If you're not an agent with access to the MLS, now is a real good time to take one to lunch and get to
know him or her.
Let's look at an example. We find a property that is for sale for $100,000 with $20,000 down to assume
an existing $80,000 privately held first loan with interest at 9% over 360 months. The payment on this
loan is $643.70 and it is worth $51,000 when discounted to a 15% yield.
Success Through "Subject To"
Approach the seller and negotiate the deal along with a "subject to" clause that gives you an out.
This might be straight forward as in "subject to satisfactory re-negotiating of the existing first
loan" or may just say "subject to inspection and approval of buyer's partner, Jim Shu, which shall
take place not later than 5 days of the acceptance of this offer."
Negotiate to Discount or Substitute
This gives you five days to negotiate with the holder of the first loan. The negotiation will be seeing
if the holder of the first loan (let's call him Ben) will discount. Chances are slim that he will
discount substantially (30-40%). That's OK, because we know that if he won't discount, there are
thousands of others out there that will.
A Trail of Ten Dollar Bills to The Title Company
What we need at this point is to entice him to substitute collateral. I say entice, because there is
nearly no incentive that Ben can see to encourage him to give up his trusty collateral for something
unknown to him. It's not hard to find some incentive for him that would work. It could be any number
of different items like:
1 - Better collateral (LTV ratio)
2 - Higher payments or interest rate
3 - Some principal reduction
4 - Cash or other incentives
We find an incentive that works and then substitute as collateral for Ben a similar note or group of
notes to the one that he currently has.
What the Property Costs a Creative Note Investor
This means that the cost of the property is:
$20,000 cash down payment
$51,000 cash (for the $80,000 note)
$71,000 cash - total cost
I LIKE THIS TECHNIQUE. That means we just bought a property at 71% of value and the seller didn't even
take a discount. In fact, he received full price for his equity.
Existing Seller Financing
When you buy a property where the seller is carrying back a large portion of his equity, you face two
challenges. The first is to convince the seller to carry a note and the second is to sell the idea of
different collateral other than the property that he is selling.
What I like about finding a property with an existing private loan is that someone has already made
that first decision to carry paper.
The second part that is nice is that the holder of the loan may have separated emotionally from the
property and can be easier to entice to substitute collateral for his loan.
There is little other competition giving hopes of higher prices or all cash prices like there may be
in the case of a property seller. The agent, who is usually the biggest obstacle, is not involved and
properties with private financing may be found easier in any market than sellers willing to carry paper.
© 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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