Creative Real
Estate Financing 5
Bonus
Techniques...
Converting
or selling a real estate note
into
cash, some sellers are in a position where they are not able to sell their properties unless they actually receive cash at the closing.
If you are using one of the techniques that does not allow the seller to receive cash, you might not be able to buy the property unless you can
show the seller how to convert the real estate note you are offering to cash. Lets take a look at several ways that the seller might accomplish this.
Sell Real Estate Note At A Discount
Technique #1
An active market of investors is eager to purchase notes at a discount. While this is probably the least desirable way to generate cash, selling a $10,000 note for $7,000 to $7,500 is not difficult, depending upon its interest rate and term. This process is known as
discounting a note.
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Specific
Situations to
Apply
Technique #1
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The
Property
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The
Buyer
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Cash for
only part of
Down Payment
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No Cash at
All
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Large
Monthly Income
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Poor
Credit
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Credit
Cards with
Lines of
Credit
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Dead
Equity
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The
Seller
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Needs All
Cash for
Equity
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Will
Finance: Wants
Short Payoff
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Outstanding
Financial
Obligations
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Large
Capital Outlay
Coming Up
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Must Sell
Immediately
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Collateralize The Paper
Technique #2
The real estate note could be taken to a bank, with whom the seller has a good banking relationship, and pledged as security for borrowing money. While the seller will probably be paying 3% to 4% more for the money than what is being received from you in interest, this way is still much less expensive
to generate cash than selling the note at a discount.
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Specific
Situations to
Apply
Technique #2
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The
Property
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The
Buyer
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Cash for
only part of
Down Payment
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No Cash at
All
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Good Credit
at Banks or
Credit Union
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Credit
Cards with
Lines of
Credit
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Dead
Equity
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The
Seller
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Needs All
Cash for
Equity
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Will
Finance: Wants
Short Payoff
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Will
Finance: Wants
Added Security
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Must Sell
Immediately
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Use The Paper As A Down Payment To Purchase Real Estate
Technique #3
The seller could use the real estate note at its full face value to purchase a property. A good example of how the seller could do this is given in technique #4, "Using Equity In one property to Buy Another". As earlier discusses, many sellers of property are glad to receive paper that is
secured by real estate other than the property they are selling. Once the property is acquired, the seller could use any number of ways to take cash out of the equity in the new property.
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Specific
Situations to
Apply
Technique #3
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The
Property
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Low
Mortgage, High
Seller Equity
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Owned Free
and Clear No
Mortgage
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The
Buyer
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Lump Sum
Cash Due Soon
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You Know
People With
Cash to Invest
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Equity in
Real or
Personal
property
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Dead Equity
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The
Seller
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Will
Finance: Wants
Short Payoff
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Must Sell
Immediately
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Create Multiple Notes Using One Note As Collateral
Technique #4
Let us say that you have purchased a property and have given a $10,000 promissory note to a seller secured by real estate that you purchased. If the seller does not need the entire $10,000 or even as much as would be received
if the note where sold at a discount, the seller could write a smaller note or even several notes using the $10,000 note as collateral. One new note might be written for $2,000 and sold at a discount of 30% to generate $1,400 in cash. Another new note for $2,000 could be used by the seller
as a down payment to buy real estate. The seller would still have the original note of $10,000. $6,000 of that
real estate note would be free and would generate income for the seller.
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Specific
Situations to
Apply
Technique #4
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The
Property
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The
Buyer
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No Cash at
All
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The
Seller
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Will
Finance: Wants
Short Payoff
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Outstanding
Financial
Obligations
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Large
Capital Outlay
Coming Up
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Must Sell
Immediately
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Sell The Income From The Note
Technique #5
Most people are aware that when they receive a note, they have an asset in the amount of the note. What most people don't realize is that they really have two assets: they have the note itself and also cash flow that is coming each month or each year from
that note.
Assume that you gave the seller a $10,000 promissory note bearing interest at 9%, payable $900 per year. that $900 per year income that the seller is receiving could be sold at a discount, or for that matter, the seller could sell several years of income
at a discount to generate cash. This technique would leave the primary assets, the $10,000 note itself, untouched.
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Specific
Situations to
Apply
Technique #5
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The
Property
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The
Buyer
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|
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The
Seller
|
|
Will
Finance: Wants
Short Payoff
|
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Outstanding
Financial
Obligations
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Large
Capital Outlay
Coming Up
|
|
Must Sell
Immediately
|
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Will
Finance: Wants
High Interest
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The Creative Application of Creative Finance Techniques
None of these techniques are cast in stone. As a matter of fact, they are meant to stimulate your creative lets make a deal thoughts. Look at them as the trunk of a tree on which you can add the branches in any form you choose. These techniques can be contracted,
expanded, and even combined to purchase property. Even though specific interest rates have been used in the explanation of the techniques, you will learn in any negotiation you always start at a much lower rate. In fact, you may want to initially offer the seller a zero interest rate and
increase it during the negotiation process. The main objective to provide a win-win situation for all.
Sell
Real Estate Note to Home
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