paper - Posted by Paul(ok)

Posted by John Behle on October 18, 1998 at 17:51:57:

Private investors do not qualify me or my company. With notes, there is already a payor in place and he or she is the one that we all pre-qualify. Investors in this scenario are not looking to me for payment, only “pass through”. If the payor pays, they get paid. Now with some investors I have worked things where I guarantee payments in the case where the payor has problems. In that scenario, they may want to know more about me or the company. With most situations, there is a moratorium period where there are no payments if the note is in default. If someone is starting out in financing notes, this moratorium is the best setup. It may weed out some investors that need the monthly cash flow.

Reserves is important and can be built up to cover contingencies like this or some of the ones that JPiper mentioned in his post on the cash flow board. I will post more detailed information over there related to reserves and risk management.

Institutions that invest in notes will many times loan money against the notes just as readily. I’m talking primarily about local insitutions. For example, one of our local thrifts that was my primary competitor a few years back also loaned money against notes. They would make me non-recourse loans without even checking my credit. Again, it is the “payor’s” credit that is the crucial factor here.

It isn’t necessarily easy to get institutions to finance paper, but it can be done. It has a lot to do with finding the right one and cultivating a relationship. It is possible to even educate the right one on the process of notes and turn them into a funding source.

There is more information on financing notes in the Cash Flow Forum article “How to Finance Notes”. Also, there have been several posts there recently related to financing paper and the process of finding paper.

paper - Posted by Paul(ok)

Posted by Paul(ok) on October 15, 1998 at 10:11:04:

I know this is a can of worms, but I seen the new section on paper(which by the way is VERY cool thank you T&JV as is the new site) I thought the best(primary) way to use paper was create a note and sell on a flip. Now it seems that there are other strategies for using/creating notes? I am not looking for every possible way to utilize paper. I am trying to figure out if understanding it more would help me finance some/more/all properties. I have a feeling I don’t know what I don’t know. After you get finished laughing at me I would appreciate any help

Re: paper - Posted by Bud Branstetter

Posted by Bud Branstetter on October 15, 1998 at 12:06:47:

I shouldn’t publicly mention this as there are a few investors in the Dallas area that might try it also. As investors rehab and resell they take back small notes for part of their profits. Note buyers won’t give 2 cents for most of them. Why not option up a whole pile of them. Then you have a source of notes to trade at face value for part of the equity in the property you want to acquire. Maybe I’ll trade that note for a boat or a repo’d late model car. Maybe even for a Lonnie deal.

I used to laugh - at paper buyers - Posted by John Behle

Posted by John Behle on October 15, 1998 at 12:04:42:

I began investing in real estate. I came across a technique I found very useful of “creating a second and a third and selling the second.” (I give an example of that one and 4 more in the article that was just posted called "Paper Your Most Valuable Tool).

For that technique, I needed to find some paper buyers. There were only a couple in my area. One of them was in the local exchange group. At first I thought literally that people who bought paper were not “smart enough” or they would be buying real estate instead. Why in the world would they invest money at 18-24% yields (at that time) when they could at least double their money in real estate. But - I sure wasn’t going to tell them, I needed them as a funding source.

One of them violated my theory - that he didn’t know enough. Every exchange meeting or educational event I went to - he was there. Even in other states. Ok, I don’t get it why would he choose paper when he does know real estate.

I was doing the typical high leverage real estate game and working hard to buy properties at market value with at least a break even cash flow. I attended a national exchange meeting in Las Vegas. There he was again (maybe he’ll learn more about real estate and give up paper). I listened to a 45 minute presentation by a man named John Berven. He showed how I could buy mortgages at a discount and then trade them at face value to buy property. You then end up with the property at 60-70% of value.

I was stunned. I walked out of the room and literally was almost stumbling (had an M.O.) and bumped into this paper buyer. He looked at the look on my face and said “see, now you know why I buy paper”. I rushed back to put the technique into practice and quickly learned that I needed to put together a portfolio of notes to make it happen successfully. Once I had a portfolio and began trading for properties, I picked up a book by Carlos Royal and Max Hollis - two of the original Gurus of the paper business. I then learned about re-structuring and improving paper. It grew from there to the point where I found and created (mostly created) over 117 techniques to improve paper. All of a sudden the yields were way beyond the 18-24% and most were impossible to calculate, because I had no cash in the deals and still had a cash flow. I also learned to finance paper 100% and found it as easy to do as financing real estate with less requirements in the way of credit and personal qualification. I had found a powerful tool to help my real estate investment and also that stood alone and compared very favorably as an investment itself.

In about 1982, I had a myriad of management headaches. In particular, I exchanged into what I call the “Triplex from Hell”. I started selling off some of the properties and taking back paper. The triplex cost me massive amounts of money and time while I owned it. When I sold it, I started receiving a nice, consistent, management free cash flow. I was hooked and it grew from there.

I honestly believe there is no better tool for a real estate investor, agent or exchangor. Not only is it a tool, but it is the perfect companion investment for real estate. One very well known real estate investor has a 4 million dollar plus paper portolio. He doesn’t talk about paper much in his courses or books, but has related that through all the ups and downs he has seen, it was his paper portfolio that kept him alive, gave him stability and helped him weather the storms.

Paper as even a sole investment without real estate has many advantages. Cash flow, low management, set rate of return, low market volatility, very low downside, very high upside (improved yields), and even some substantial tax advantages.

Many buy real estate and sweat, toil, labor and wait for that final time period when the get what they want and need to retire - low management, stable, cash flow.

Paper investment - if done right - can build those cash flows immediately. It can be financed 100% and still have a positive cash flow with little risk. A friend I was training in the business asked me what the most important thing about paper was. I told him “finding it”. A few months later, he asked me again. I told him “funding it.” He learned both and topped 100k in income for the first year in his life. Into about his third year he was making 60k per month. Now, nearing the end of his sixth year, his income is much higher than that.

Re: I used to laugh - at paper buyers - Posted by Alex Gurevich, TX

Posted by Alex Gurevich, TX on October 19, 1998 at 09:14:08:

I’ve been pondering this paper thing for a while. I guess the numbers finally convinced me to change some things I’ve been doing. The lifetime income from a note financed on house is, indeed, fascinating.

I have just sold 2 homes for 107K each last week: owner financed, $0 down, about 10.5% for 30 years, no balloon. It only took 1 ad in the paper for 1 day to sell both homes. I had none of my money invested in the homes. Just took over underlying long term mortgages.I will be receiving $300/mo. spread on each of the homes for 30 years. Of course, I realize, I may have to take them back and resell again a few times.

The fascinating part of it is, that each home represents about $108,000 of lifetime income. Even though the money is not going to be worth as much years from today that’s still a lot for a little work it took to buy and sell them. About 10 homes like that would equal lifetime earnings of a school teacher. This is unbelievable !!

Re: I used to laugh - at paper buyers - Posted by JohnBoy

Posted by JohnBoy on October 15, 1998 at 22:59:53:

How do you finance it 100% with less requirements and personal qualification?

One Million dollar portfolio - Posted by John Behle

Posted by John Behle on October 19, 1998 at 13:05:02:

We had a high school teacher here a while back that had a 1 million dollar portfolio of paper. With even a 1% monthly payback, that is $10,000 per month. He taught high school because he wanted too, not because he needed to. I like that.