|34 Ways to Improve a note
MANY YEARS AGO when I began selling and investing in real estate, I became acquainted with
"PAPER." As an agent or investor, I would have an occasion to sell a Trust Deed Note
or Uniform Real Estate Contract to put a deal together. I had heard "paper" discussed briefly
in several of the seminars I had attended. Most of what I knew about paper was that for some strange
reason someone out there in the world wanted to buy it.
To me, paper was something that I or another investor created to help make a "high leverage"
deal. It was an easy idea for me to create a note on the property I was buying or on one of my other
properties as part of the down payment. If the seller needed more cash, we could track down
someone to buy the note.
The Excitement of Paper
I always wondered why someone would want to buy a note and remember thinking that if they had any sense
they would invest in real estate instead. As I attended a myriad of other seminars and conventions, it
seemed like everyone had a little bit of good to say about paper. I became intrigued with the subject.
I was still in the dark until I attended a convention in another state where a Broker and paper investor
from my city was also in attendance. It struck me then that whether it was seminars, conventions or
exchange meetings that I attended - he was always there.
I knew he was no dummy when it came to education or experience, so "why did he invest in paper?"
One of the speakers spoke on real estate paper techniques that excited me, especially the prospect of
buying real estate at tremendous discounts using paper. As I walked out with a dazed but excited look on
my face, the Broker I referred to smiled and said "Now you see why I buy paper".
Through books, tapes, seminars and especially practical experience, I fed my desires to learn all I could
about an exciting, extremely profitable form of investment. In this article I'm going to share some of
these ideas with you. You'll see why paper is becoming one of the most profitable and desirable forms of
There are basically three steps:
Step 1 - Buy a note (100% financing can be used).
Step 2 - Fix it up or improve it in some way.
Step 3 - Sell, trade or refinance the note.
Let's look at some of the ways to fix up or improve a note. Each of these techniques can provide a
tremendous profit to you.
Category A - Early Payoff
1. Early Payoff
Many times a note is paid off in full in advance of the time that it is scheduled to. The average life
of a 30 year loan tends to be 7 to 10 years.
2. Early Payoff with a Discount
Offering a small to large discount will many times entice a person to pay a note off early. Example, buy
a $10,000.00 note for $6,000.00 and have the payor pay it off for $7,500.00.
3. Early Payoff Refinance (Them)
If the payor doesn't have the cash, show them how they can finance the property and even lower their
payments by taking advantage of the discount that you are offering them.
4. Early Payoff Refinance (Investor)
If the payor of the note lacks the ability to finance the property, you or another investor could finance
the property by co-signing for the payor or by taking title, financing and then re-selling to the payor
on a wrap.
5. Early Payoff Discount Underlying
You may be able to negotiate a discount on underlying loans as an enticement for an early payoff on your note.
6. Early Payoff Over-finance
By financing more than the amount needed to pay off your note at a discount, the payor may be able to
pocket some cash.
7. Early Payoff Over-finance - Invest the Difference
The payor could finance more than the amount needed to pay your note off at a discount and the difference
can be invested in some paper. The net result to the payor is a discount on his note and a lower net payment
as well as the ownership of some good paper. The result to you would be a profit on your note as well as a
commission on the sale of another note to the payor.
8. Partial Payoff Partial Subordination
For a partial payoff on the note the investor could agree to subordinate to new financing. The investor's
yield (rate of return) on the cash investment he has in the note would increase dramatically.
9. Partial Payoff Lower Interest
In exchange for a partial payoff the interest rate and payment could be lowered. The cash investment in
the note would have a very good yield.
Category B - Restructure Terms
1. Lower Interest Raise Payment
The payor raises his payment in exchange for a lower interest rate. The investor's yield increases
substantially and the payor saves a great deal of interest charges.
2. Lower Interest Graduate Payment
In exchange for a payment that increases each year, the rate is lowered. The payor saves interest and the
investor increases his yield and cash flow.
3. Graduate Payment - Eliminate Balloon
For a gradual yearly increase in the payment, the investor will eliminate a balloon payment, which will
also increase his yield.
4. Graduate Payment - Shorten Amortization
The payor may agree to a gradual yearly increase in the payment just for the difference it would make in
the length of the loan and the amount of interest it would save.
5. Raised Payment - Pop Balloon
A balloon payment could be eliminated in exchange for a raise in the monthly payment.
6. Raise Payment - Balloon Extension
In exchange for a raise in the payment, the balloon payment could be extended for a longer period of time.
7. Wrap Your Loan
The payor may be in need of cash or may be behind in payments and you can loan the money in exchange for
increasing the rate slightly on the entire note.
8. Bad Note - Fix Terms or Clauses
There is a great deal of potential in changing bad terms or clauses of a note. Many undesirable notes can
become very desirable with minor modification. Most of the time it is a win-win situation for all involved.
If a note has a problem, don't look at it as a negative point. Could you buy the note and change the
clause? Be sure to negotiate before the purchase.
Category C - Financing / Collateralizing
1. Collateralize - Financial Institution
Banks and other financial institutions will loan against paper. They may loan more than the cost of the
note and at a lower interest rate. That means 100% financing and a positive cash flow.
2. Collateralize - Investor
Another source of financing is with private investors. One on one transactions and syndications are used to
3. Collateralize - Partial Interests
Several investors can be sold partial interests in a note. This can amount to 100% financing of the cost
of the note and an interest in the note left over for you.
4. Collateralize - Seller
If the note seller doesn't need all cash, you can give him part cash and a note secured by his own note or
by another note or property. This way you can give him a higher price and still get the yield that you
Category D - Trading (Collateralizing)
1. Trade - Real Estate
By buying notes at a discount and then trading them or using them as collateral at their full face value,
you can effectively buy real estate at very deep discounts (20 to 45% below market value).
2. Trade - Personal Property
You can also trade paper at face value for all kinds of personal property such as cars, boats, etc.
3. Trade - Face Value for Discounted
It is also possible to trade good paper at face value for less desirable paper at a discounted value.
Expertise in dealing with notes, collection procedures and solving problems can turn that note into a more
4. Overtrading - Bank
Using the spread in the interest rates to make you a profit and solve a problem for your banker is what is
involved in this technique. The banker makes you a loan secured by paper that you own or are acquiring and
in exchange you buy some of his repossessed merchandise (which ends up free to you).
Category E - Underlying Loans
1. Wrap Underlying - Reinstate
If your loan of an underlying loan is behind in payments, that can be the opportunity to advance some
money at a high rate of yield. It can occur by "wrapping" the underlying loan or loans at a higher
rate of interest.
2. Wrap Underlying - Loan Money
If the payor is in need of cash, you can loan them money and use that as an opportunity to wrap the
underlying loans and increase your yield.
3. Buy Underlying - Bank
The most ideal note for you to try and buy is the one that lies beneath any note that you already own.
Even banks will occasionally sell notes at a discount. It is always worth asking about.
4. Buy Underlying - Private
Always contact any private note holders that own a note that is on a property that you have a note on.
5. Refinance Underlying - Discount
Negotiate a discount with underlying loans and then finance the property. You can then sell it back to the
payor on a wrap-around. Possibly at better terms than he already had.
6. Refinance Underlying - 100%
In refinancing the underlying loan or loans, you may be able to finance out the cost of your note also, so
that you have all of your cash out of the property and still have a profit coming in from the note (the wrap).
7. Refinance Underlying - Over-finance
You might also finance the note and underlying loans for more than the amount of your cost on the note. It
could be possible to walk away with cash and even share some with the payor or lessen his terms in some way.
8. Refinance Underlying - Lower Rate
Many times it is possible to refinance one of the underlying loans at a lower interest rate and better terms
than presently exists, especially in the case of second loans. Profits in cash flow or cash could be shared
with the payor.
9. Refinance Underlying - Partial Pay - Lower Interest
In refinancing underlying loans, you might be able to get a lower interest rate and also some of your cost
of the note back.
The chart that follows is what I call the P.A.M. chart, which stands for Paper Analysis Matrix.
When I buy or an considering buying a note, I analyze it using the chart and what possible techniques are
available to improve the note.
||EARLY PAYOFF EARLY PAYOFF WITH A DISCOUNT
||EARLY PAYOFF REFINANCE (THEM)
||EARLY PAYOFF REFINANCE (INVESTOR)
||EARLY PAYOFF DISCOUNT UNDERLYING
||EARLY PAYOFF OVER-FINANCE
||EARLY PAYOFF OVER-FINANCE - INVEST THE DIFFERENCE
||PARTIAL PAYOFF PARTIAL SUBORDINATION
||PARTIAL PAYOFF LOWER INTEREST
||LOWER INTEREST RAISE PAYMENT
||LOWER INTEREST GRADUATE PAYMENT
||GRADUATE PAYMENT - ELIMINATE BALLOON
||GRADUATE PAYMENT - SHORTEN AMORTIZATION
||RAISED PAYMENT - POP BALLOON
||RAISE PAYMENT - BALLOON EXTENSION
||WRAP YOUR LOAN
||UGLY DUCKLING TURNS TO A SWAN
||COLLATERALIZE - FINANCIAL INSTITUTION
||COLLATERALIZE - INVESTOR
||COLLATERALIZE - PARTIAL INTERESTS
||COLLATERALIZE - SELLER
||TRADE - REAL ESTATE
||TRADE - PERSONAL PROPERTY
||TRADE - FACE VALUE FOR DISCOUNTED
||OVERTRADING - BANK
||WRAP UNDERLYING - REINSTATE
||WRAP UNDERLYING - LOAN MONEY
||BUY UNDERLYING - BANK
||BUY UNDERLYING - PRIVATE
||REFINANCE UNDERLYING - DISCOUNT
||REFINANCE UNDERLYING - 100%
||REFINANCE UNDERLYING - OVER-FINANCE
||REFINANCE UNDERLYING - LOWER RATE
||REFINANCE UNDERLYING - PARTIAL PAY - LOWER INTEREST
||(((Your contribution here)))
Get Involved These have been a few of the ways to make profits with notes from the standpoint
of owning them or controlling them. A brief synopsis may not give you the full idea of how to execute a
technique. The purpose of the article is to give you the opportunity to get involved in the profits
of paper. Paper can be as profitable or more profitable than real estate investment and is the perfect
compliment to any real estate investor's portfolio. In future articles we will explore some of these
techniques more fully. If there are any in particular that you would like to see explained more fully,
then feel free to drop me a line and let me know which ones.
© 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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