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by John D. Behle

As a real estate agent and broker for 20 years, I’ve
found my knowledge and use of notes to be my most valuable tool. I did
the tenants and toilets game for what seems like 100 years. I sort of
backed my way into paper investment. I learned to use real estate notes
in my investing, and mortgage buyers became a valuable resource.

I work with Realtors® daily and teach continuing education for the State
of Utah. Here are five techniques I teach to Realtors®. I hope they work
for you as well as they have for me.

1. Create a second and third; sell the second

Sometimes you’ll find a buyer is willing to pay a good
price for a property, but does not have the cash to assume the existing
financing or the ability to refinance with a large down payment. Many
times the seller needs a particular amount of cash and might consider a
discounted price in exchange for the cash.

Using private financing and your knowledge of seller financing, here is
a technique that works very well:

Let’s say the buyer is short of the cash the seller requires, but the
seller is willing to discount his property a little in exchange for the
cash (or the buyer is willing to pay a little over market value). When
the seller has equity that he will take back in paper and is willing to
discount, there is a way to put this deal together.

The seller wants $17,000 cash, but the buyer only has $10,000. To get
the extra cash, the seller would be willing to discount a few thousand
off the market price. The buyer is willing to pay full price, but needs
a lower down. The value of the property is $50,000. Here are the terms:

The way to put this deal together is to take the seller’s discount and
use it to generate the cash. Instead of creating one $25,000 second to
the seller, create a $10,000 second note and a $15,000 third note. The
$10,000 second is sold in the marketplace for $7,000 cash, and the third
is given to the seller. The seller now has his terms and cash, and the
buyer has his terms.

The buyer pays $50,000 with $10,000 down, assumes the $15,000 second,
and pays the seller on a $10,000 private second and a $15,000 private
third. The seller gets $10,000 cash down, assumption of the $15,000
first, $7,000 from the sale of the second to a paper investor and
receives payments on a $25,000 seller carry back. His total is $47,000.
Both buyer and seller have had their needs met.

2. Prioritized commission notes

Many deals don’t close when there is just a small
distance between the needs of the seller and buyer. Often, the amount of
cash to the seller is the issue, and the agent could close a deal if he
were to take his commission on paper.

Agents and their brokers tend to shy away from this because they feel
they need immediate cash and see no alternative with a note other than
collecting payments. If structured properly, the note could be
structured to be salable immediately with very little discount, and the
deal could be saved. You can double your sales if you don’t walk from
commission notes so quickly.

Those agents that do take their commissions as a note usually create one
that is not salable. Even that would be better than a deal that doesn’t
close, but there is a better way.

Paper that is secured by real estate with a safe loan to value ratio
(LTV), usually 80% or less, is readily salable. Let’s look at two
scenarios. The first is the way most agents would approach the
transaction. The second includes a simple change that makes a major
difference.

$100,000 Sale price
$ 60,000 Existing first loan (assumable)
$ 10,000 Down payment from buyer
$ 23,000 Second to seller (private seller financing)
$  7,000 Third trust deed to broker for commission

Many brokers wouldn’t even insist on a trust deed note to secure their
commission, yet this third may not be very salable. The LTV ratio is
90%, and most note buyers would not buy a third with only 10% equity
above them. Now for one simple change.

$100,000 Sale price
$ 60,000 Existing first loan (assumable)
$ 10,000 Down payment from buyer
$  7,000 Second trust deed to broker for commission
$ 23,000 Third to seller (private seller financing)

The broker takes his commission in a second position, and the seller
subordinates his note to a third position. When the seller requests you
take your commission on a note, it is not out of place to insist that
your note is safe and salable. Usually this will be a small note and
will be paid off soon.

When the second is paid off, the seller’s note, which is currently in a
third position, will drop down into the second position. You can also
structure this transaction so that all of the payments on the seller
financing go to your second trust deed note until it is paid.

3. Lower the rate; raise the balance

This is a tremendous negotiation technique to help bring
buyers and sellers in disagreement together about the price to be paid.

Let’s say that a buyer has offered $85,000 for a property and will
assume a $40,000 first loan. The down payment will be $15,000 and the
seller would receive a $30,000 second loan at 13% payable $331.86 per
month. The seller wants $11,000 more for the property. The buyer thinks
a price of $96,000 is ridiculous, but wants the property. What do you
do? Would you walk away? Beat on the buyer and seller trying to get them
to agree on price?

In cases where the seller is hung up on price, he may not be as hung up
on terms. Do you know you can please both the buyer and seller at the
same time? If the buyer offered a $41,244.16 note at 9%, the payments
would be $331.86 per month for the same period of time as the first
note.

Does the buyer pay any more? No! Does the seller receive his price? Yes!
(Even a little more.) Both notes, if discounted, are worth exactly the
same amount. The real difference is how it looks. You just have the
negotiating advantage of understanding the correlation between interest
rate and price.

A small change in the interest rate can make a large difference. The
buyer will pay the same amount and the seller will receive the same
amount. The difference is in the packaging. Here are the original terms
of the $30,000 note and the terms of the new note:
 

The strategy is to look at an interest rate adjustment when the seller
and buyer disagree on price. A few percent difference in the interest
rate can mean a difference of thousands of dollars in the long run.

4. Graduated payment balloon alternative

Balloon payments are like time bombs
sometimes–foreclosure in embryo, a potential problem and lawsuit. There
are better alternatives than balloon payments that will accomplish the
same goals without the risks.

A common situation that is created is where the buyer has a 30-year
amortization on his or her note and a 5-year balloon payment. A $30,000
note might look like the following:

The balloon payment in five years would be almost
$29,000. Where is the buyer going to get the cash? Can he refinance?
What are the rates? Is the buyer still financeable? These are some
important risks.

If the buyer began with the same payment of $263.27 per month, but
raised it by $50 each year, the loan would pay off in less than one
third the time of the original. Instead of a nasty, potentially
hazardous balloon payment in 60 months, the loan would fully amortize in
106 months.

The sellers achieve their goal of getting their money out quickly with
less risk of taking the property back. The buyer has a far more
palatable scenario of a gradual increase in payments. If the payments
become a burden, the buyer can refinance at a time that makes sense (60
months may not).

5. Balloon payment rollover provision

Another alternative to a balloon payment is an extension
provision that will give the buyer some time to raise funds or workable
financing. This provision may allow for a one-year extension of the
balloon payment upon the payment of 10% of the outstanding principle
balance.

In the previous example, the balloon payment of $28,972 could be
extended for a year upon payment of $2,897 in principle on the note.
This can be structured as a one time or continuous provision. That means
that the next year the same provision could apply if financing were
tight.

The clause can also be qualified as to available financing and interest
rates. This is just a sample of some of the ways agents can use paper to
improve their profits.

About the author…

John D. Behle is one of the foremost educators and practitioners in
the field of discounted paper investment. His innovative strategies and
techniques have shaped the industry. With over two decades in the
industry and an extensive background in real estate and finance, John
Behle adds a wealth of knowledge and experience to his creative
money-making techniques.

John holds an National Council of Exchangors Gold Card and an EMS
designation. He is also listed in Who is Who In Creative Real Estate.
He is the author of several hundred articles published in national
magazines and newsletters.

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