Posted by John Behle on October 14, 1998 at 22:47:50:
The simple answer to your question is yes, absolutely. I’ve done millions of dollars of those types of transactions. Now for more details.
The note you described as an example would have a payment of $1,824.88 per month if it were fully amortized over 60 months. That would be a rare note to find and wouldn’t discount too severely. If it were the more common structure of a 30 year amortization with 5 year call (balloon), then the monthly payment would be $660.39 and a balloon of $85,562.87.
To buy that note for $60,000 would be a yield of 18.45%. That’s a little high for today’s competitive market. It is possible if you are the only bidder. I find notes through sources few have ever used. I get there quick - many times before they even realize there are other potential buyers. So, that kind of yield isn’t impossible in this market, but is a lot harder to find. Back in the early 80’s my minimum yield I would consider was 24%.
Another way to find a note at a high discount in today’s market is to find a less attractive note. That may be because of a higher loan to value ratio, poor payment history or sub-standard collateral. Then you have the challenge of getting a seller to accept the note. I bought a whole portfolio of land notes to trade one time. Even though the LTV ratios were as low as 15-29%, most sellers still didn’t like the idea of recreational lots.
The higher LTV ratio is easier to deal with. If you have a seller willing to accept a low down seller financing offer, he may accept a similar note that is an existing note.
This is the technique that made me jump into paper. (I’ll send J.P. an article to post describing this technique in detail). The challenge is to put together a portfolio of notes, get enough discount on the notes, find a property willing to accept most of their equity in the form of a note, and then negotiating a very complicated offer.
When I first began, I realized I needed a portfolio to work with, so I used some investor funds to buy $200k in notes. We went through the entire MLS book and called on 103 properties. We made offers on 10 properties and had one accepted. A month’s worth of work, but a $40,000 profit in cash up front. It was worth it.
I streamlined and adjusted things to the point where the computer would search and provide me leads that I gave to my agents. They ran the numbers through a simple computer program I worked up and then presented well structured, tailor made offers to sellers. Nine leads led to three offers and one acceptance. With 8 agents, we were buying a million dollars of property each month.
So, the challenge is first putting together a portfolio of paper. Some notes end up being good cash flows and others with large discounts end up being trading notes. I then use the high discount notes in the offers. I still hold the notes and offer them as collateral instead of a trade for tax reasons. It also provides a guarantee for the seller, proper collections and further profit incentives down the road.
Some of the details of the ways I worked with agents on these and other kinds of offers are in the newly posted article titled “A Million a Month.”