Seller selling note, I'm buyer, now what? - Posted by Dee-Texas

Posted by Dee-Texas on July 16, 2001 at 12:26:20:

Thank you so much. This makes it so much more clearer. I’m printing out your post now to reread and study the examples.

Seller selling note, I’m buyer, now what? - Posted by Dee-Texas

Posted by Dee-Texas on July 13, 2001 at 07:28:41:

Hello All,
I’m a totally newbie about notes. A tired landlord called me last night with 5 properties to sell. He said that he would carry the note but that he sells them off. Now my questions. Can the person that buys the note FROM him change our original agreement? ie: going up on rate, terms?
I don’t even know if this is a true deal or not at this point I’m just needing some input from those that do.
Best Success to all,

Re: Seller selling note, I’m buyer, now what? - Posted by David Butler

Posted by David Butler on July 16, 2001 at 11:59:30:

Hello Dee,

“Tired Mortgageee” - right?? Both Doug and Phil touched on several important points that lead to the same place. After the fact here, you still have ways to go - and a great way to begin your own creative note investing endeavors.

Assuming somebody else does purchase the note at a discount… the knowledgeable note buyer will generally look to restructure the note, to improve his return. The trick to that is working up a deal to benefit the Payor at the same time.

As Doug mentions, Jimmy Napier does a wonderful job of explaining this concept in his little pocket manual. And the same thing can be figured out pretty quickly by way of the many examples of deal structuring that Jon Richards covers in his excellent, inexpensive, and easy-to-follow CALCULATOR POWER course (which by the way, is available at CREO’s bookstore here).

So, if you can’t purchase the note yourself at a discount today - you can still purchase it at a discount, by using the installment method yourself. Perhaps the note buyer will approach you with the opportunity. But if he doesn’t, you can always approach him. Of course, it depends on what you can do, and how much room the new note holder has in the deal.

Here’s an example… you are paying $454.35 p/m on a $50,000 note, amortized over 300 months at 10%. The note is three years old, and you have 264 payments remaining. The remaining balance is $48,425.50.

Over the next seven years (84 months), you would pay out $38,165.43 in monthly payments, of which $6,144.83 is principal, and $32,020.60 is interest - and your remaining balance at that time would be $42,280.68

You review your finances, and determine that you can now pay $550 per month, without turning your monthly budget upside down. Doing that, you see that you will now pay out $46,200 over the next 84 months, an increase of $8,034.57 in your total payments on the note during that time frame. Of this $46,200, $17,713.69 applied toward principal, and $28,486.31 applied toward interest - and your remaining loan balance is now only $30,711.81. You paid an extra $8,034.57, but picked up $11,568.86 in equity. And, if you take the loan full term, you will pay it off in only 159.5 months, instead of the scheduled 264 months.

Your total payments over this loan would decrease from $119,948.50, down to only $87,694.98. Total interest savings would amount to $32,253.32!

Instead, you approach the note holder, and offer to increase your monthly payment, if he will reduce your interest rate to 9%, or maybe even 8.5%. Not only do you benefit by accelerating your paydown, you now have achieved a geometric acceleration, by way of the discounted interest payment you just purchased on the installment plan.

Say he agrees to 9% as the new rate. Now the new term of your note will only be 144.5 remaining payments. After 84 months, your remaining balance will only be $26,675.94, instead of the $30,711.81 it would have been, had you simply started paying $550 per month, without asking for the rate reduction.
Congratulations - during the first 84 months, you purchased a $4,035.74 discount on your own note!

And if the monthly payment hike doesn’t work? I have agreements with Payors, like, for example… if they pay me an additional lump sum of $2,000 at anytime over the next 24 months, I will credit an additional $1,000 toward their note balance. I have one, where if they pay an extra $1,500 during the next 12 months, I will credit them another $1,500 toward their note balance.

By the way, similar approaches can be used by renters, who are able to prepay rent.

I am having to move quickly here, so if I bunged up the math… well - so what? It still works… and the concept is what counts.

Hope this helps, and best of luck in your note investing!

David P. Butler

Re: Seller selling note, I’m buyer, now what? - Posted by phil fernandez

Posted by phil fernandez on July 13, 2001 at 16:48:23:

Hi Dee,

No the guy buying your sellers note can not change the original terms that were agreed upon between you and your seller.

Now once the note buyer has acquired the note, you could always approach him and let him know that if he wants to cash out in the future that he should contact you first about buying his note. At a discount of course. It’s kinda like buying back your own debt, but at a discount which could build up your equity even faster.

Upon mutual agreement you and the note buyer could change the terms in the future, but make sure it is to your benefit. But the note buyer can not unilaterally change the terms.

Re: Seller selling note, I’m buyer, now what? - Posted by DougO(NM)

Posted by DougO(NM) on July 13, 2001 at 09:07:34:


When a note holder sells the note, the terms remain the same. The only way they can change is with the payors (your) cooperation.

This is a perfect time to review something that Jimmy Napier has long taught. Anytime that you buy a property with owner finance, you want to negotiate at the time you buy the property, the first right of refusal to purchase the note & mortgage in the event it’s ever sold. Even if you’ve already bought the property, you should still see if you can get it done. Just say to the seller, "if you should ever want to sell this note, since I’m making the payments on it, wouldnt you just as soon sell it to me? (assume he says yes. You figure out what to say if he says no) Next, say "and to be absolutley sure you are getting your best deal you can, if you do decide to sell it, you shop around and get your best deal that you can, and if I am able, I’ll buy it for the same price and terms.

Here’s how that could be worded in the note or a modification agreement if the note is already in force:

“This note may not be sold, assigned, hypothecated, pledged or otherwise conveyed without giving the maker written notice of the price and terms of the proposed sale or other transaction and all costs and commissions. The maker shall have the first right of refusal to purchase the note and mortgage for the same price and terms offered by a bonafide third party, or otherwise match the contemplated transaction, and shall have 60 days to obtain the funds.”

What this does is let the seller find their best deal, and give you a chance to match it. SOmeone else, NOT YOU, sets the terms of the deal, and you aren’t the seen as the “Badguy/badgal”

Why would you want to do this? Because if they sell that note, most likely it will be at a discount, and you want to be able to take advantage of that if you can. In effect, you’ve lowered the purchase price of the property if you buy your own debt at a discount. But you’ve done it through the back-door instead of up front when most sellers are on their guard to get their best price. Basically, you get 60 days, or whatever you negotiate, to borrow the funds from someone else to buy the sellers note, which you’d then retire and give a new one to your new lender for the lower amount.

As you can imagine, there are some twists to this, but nothing that you can’t figure out I’m sure. Drop me a line if you need a better explanation