Finance Articles

How Real Estate Investors Use Mortgage Note To Purchase Properties

Many of you may not be aware of the various ways notes can be used. The average person's understanding about notes is that people create them because they are desperate to sell a property. Nothing could be further from the truth.

Real estate investors are now creating notes to finance properties they wish to buy--then selling the notes in advance--then buying the property with the proceeds--in effect, with little to no money down; of their own.

Selling a property by being willing to create a note actually shows savvy on the part of the seller. Even some real estate agents view a seller's willingness to sell by owner financing as a desperate...but the real estate agent who knows better is very hard to find. Most of them are missing not only the boat, but the whole ocean!

Not to demean real estate agents, but most of them have a linear kind of thinking about how to sell property and it not only limits their own income, but hinders them from being the best helper they could and ought to be to property sellers.

Real estate investors and savvy property sellers bypass working with real estate agents for mainly the above mentioned reasons......not to mention the savings realized by not using real estate agents and having to pay their fee.

Okay, so here's a scenario we recently worked on to give you an example:

Mr. A wishes to buy Happy Trails Apartment Complex from Mr. B. The Happy Trails Apartment Complex is a 300 unit complex and is desirable when you run the income and expense calculation numbers on it.

The price is $25M and the appraised value is around $29M. Mr. A envisions that if he were able to create a note for $29M and sell it to note investors at a discount, he might still be left with enough to make an offer to the seller. Confused?

Okay, Mr. A approaches us with a proposed $29M note he wants to create in advance to buy Happy Trails Apartment Complex from Mr. B. We investigate the case and find that the property can service the debt.

Mr. A has good enough credit and sufficient equity in other properties to pledge as collateral to satisfy our investors. All that's needed from this point is for Mr. B to accept Mr. A's offer and for the appraisal to come in at $29M or better.

Mr. A approaches Mr. B and offers him $25M for his property. Mr. A proposes that he give Mr. B $21M upfront and asks Mr. B to carry back a $4M note. This allows Mr. A to not only give Mr. B $21M but it also allows Mr. A to keep $4M in reserve.

Mr. A now has two mortgages. One for $29M and one for $4M. All Mr. A has to figure out now is how best to structure the payment terms on the $4M note.

Although Mr. A will pay $31M dollars for the Happy Trails Apartment Complex in the end, how long do you think it will take for the property to be worth another $4M? Not many. And if Mr. A did some small thing like freshly painted all the units and raised the rent by only $5, he would generate an additional $15,000 per month instantly!

I could go on but hopefully I have sufficiently explained how real estate investors are creating notes and taking advantage of our Table Funding/Simultaneous Closing Program to achieve their goals.

If you would like to know whether Simultaneous Closing could work for you, contact us and let's discuss what your options are.

Frederick Webb is a Certified Cash Flow Consultant and is President & Co-Founder of Webb Funding Group, a small debt brokerage agency he runs with his wife, Kashita Webb.

Visit their site: http://www.mortgagenotecash.com

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