ForeclosuresMass - ForeclosuresMass Monthly - Creative Financing - In a Soft Market, Put Real Estate Notes To Work (September 2006)

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!

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.