In a Soft Market, Put Real Estate Notes To Work
By George Riley
We've heard it a hundred times during the past year from the media and the
experts... the bubble has burst, the real estate market is on the
decline, it's a buyer's market, etc. I'm not sure if there is a burst
real estate bubble, but I am sure that prices have gone flat and they may
be slightly declining, and that buyers are taking their time in making
buying decisions.
In fact, many of the sellers who contact me confide that they have had
their house listed for sale for a long time, and nobody has even looked at
it. My response is always the same: "Your price is too high; if you want
to sell quickly you'll need to lower it." This is reality. If sellers
don't want to lower their price, they'll just have to wait until the
market catches up to the price they want.
There is a 6 to 7 year price cycle, and presently we are on the downhill
side, meaning we have not hit bottom yet. We'll hit bottom, at which
point prices will come back and peak higher than ever, but that's perhaps
4 or 5 years into the future. Sellers can wait, or they can lower their
price.
So, how does all this help you as an investor? It's common knowledge that
foreclosures are on the rise, mostly due to over-mortgaged houses versus
declining market values. This presents a great investment opportunity, and
using notes can help seal the deal on many real estate transactions.
* Next 37 17 investors only!
What is a real estate note?
A real estate note is an agreement that one party owes the other party
money or other form of consideration. It should not be confused with a
mortgage - an instrument which ties the note (money owed) to the property.
With notes, always remember the concept of Terms Vs. Price. If you get
good terms from your seller (no payments for the first 6 months; interest
only for some extended period of time; no payments until you cash out;
etc.), you better give a great price to the seller in return. What's a
great price? ... whatever he'll accept and you are comfortable with!
The greatest way to buy a house using notes is the pure "Nothing Down"
deal; an arrangement where the seller takes a note for 100% of the agreed
upon price. If your seller is willing to wait for their money,
understands how notes work and, most importantly, likes and trusts you,
you can offer them a higher price than they would get from a cash buyer.
You get the house, and with no money down! Sure, you'll have to begin
making payments at some point, but hopefully by then you'll already have a
list of potential tenants, other investors or buyers who will pay you more
each month than you are paying the seller.
In practice, and while it is not impossible to transact a 100% financing
deal of this kind, you'll probably end up using notes for some portion of
the deal, in the form of a second mortgage. (Seller held second mortgages
are very common, and are probably a significant factor in precipitating
the recent increase in foreclosures. These seconds are what enabled
people to qualify for loans that they would otherwise not have been able
to get.) It's most likely therefore, that you will need some other source
of cash and combine it with a note to get into an investing deal of this
type.
Let's consider an example of how to make an even greater profit on a deal
when using a real estate note. Assume you buy a house and the seller
agrees that taking a note for a large portion of the price is in her best
interest. You have negotiated terms that allow you to make low payments
on the seller held note and go off in search of a buyer. When the buyer
is ready to close, you contact the seller (to whom you owe payments) and
tell her, "I've just come into a large chunk of cash. If I were to cash
out your note in full, what sort of discount would you give me?" Even if
she doesn't take your offer right away, a few months of low payments might
convince her to offer you that discount. Whatever it is, it's money in
your pocket!
One final word about notes. I am frequently approached by persons who
hold notes and are looking to sell them at a discount for cash. There is
indeed a market for notes, however, most note buyers will not even
consider buying a subordinate note (i.e. one which is not in the first
position). As a practical matter therefore, anyone who holds a second or
third position note should enter into the deal under the assumption that
they will be making the monthly payments themselves.
George Riley is an experienced note buyer with Genesis Funding
Resources. He can be reached at george@genesisfr.com or via his
website at: www.genesisfr.com.
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