| After finishing a course in 1031 Tax Free | | | | huge discounted paper buyer. He had a portfolio |
| Exchanges in the early 70's the first deal put | | | | of discounted land contracts in the million-dollar |
| together on this "revolutionary" means of doing | | | | range accumulated over a fifteen-year period. His |
| business was a "NON Qualifying 1031 Tax Free | | | | normal MO (modus oparandi) was to buy land |
| Exchange" using "pure boot". This was not "like | | | | contract first mortgages with a 20% to 30% |
| property". A builder had been building homes like | | | | discount. With face note rates of 8% to 10% at |
| crazy and suddenly the market turned south and | | | | the time, his yields were in the 14% to 15% |
| no one was stepping up to buy the finished | | | | interest range. At the time the state statue for |
| homes. The buyers who had just paid top dollar | | | | usury was 11%. Keep in mind if the note payer |
| for these new homes and had since moved in | | | | refinanced or sold the property the yields would |
| would not have appreciated the builder selling the | | | | rocket up to over 20% plus. He loved notes. |
| remainder inventory at a deep discount and | | | | Race to mail box each month, "Walla"---checks. He |
| thereby eroding the value of the entire subdivision | | | | had a ready attorney to write letters and |
| on a comparable sales price basis. The builder had | | | | foreclose if necessary, but was able to work out |
| been through many building cycles and did not | | | | most situations with negotiations or the borrower |
| wish to abandon the project leaving the prior | | | | would quit claim back and hit the road. By being a |
| buyers in a lurch. He rather, found new buyers, | | | | careful note buyer with good loan to values to |
| who previously had been turned down due to lack | | | | protect his investment there was a certain |
| of funds to close, and offered to hold 10% to | | | | comfort zone. |
| 20% LTV (Loan To Value) 2nd mortgages. The | | | | Now this was a different animal. The loan to value |
| terms were low and the interest rate was | | | | was near the top, but there was "seasoning" of |
| affordable on the second mortgages. With a long | | | | the paper, meaning there was a history of on |
| history with the local savings and loan, new first | | | | time payments on part of the note payer. The |
| mortgages were arranged and underwritten using | | | | father, the one holding the bag, was very anxious |
| the tried and true hand underwriting; the only way | | | | to rid himself of the property and the day-to-day |
| business was done at that time. Those potential | | | | demands of dealing with 16 separate rental |
| buyers with good job histories, reasonable credit | | | | customers. What to do? The father agreed to |
| and the ability to repay were able to move into | | | | take the 2nd mortgage paper with a 10% face |
| their new homes with little out of pocket as the | | | | discount and negotiated a two year personal and |
| builder picked up most or all of the closing costs. | | | | business guarantee of each mortgage. It only |
| This particular builder in addition to building single | | | | took 14 2nd mortgage notes to balance the |
| family homes had on a parallel tract built 10 to 16 | | | | equities in the transaction between the purchase |
| unit apartment buildings for investor groups and | | | | price and the mortgage balance. The builder paid |
| himself and he was running with the main goal of | | | | the recording fees and closing costs for all the |
| accumulating long term wealth build up and tax | | | | instruments and assignments. Even the |
| shelter. Being located in a state capital city and a | | | | commission was taken in a note form. For a |
| major university meant that newly built rentals | | | | two-day listing and little selling cost involved, this |
| were in high demand. Vacancies were few and in | | | | wasn't bad. Those monthly checks spent very |
| some cases, depending on locations, there were | | | | well indeed. |
| large waiting lists. Rents were accelerating in the | | | | In addition, if one of the notes suddenly went bad, |
| light of this high housing demand for rentals. The | | | | the builder reserved the rights to substitute |
| builder offered every tenant in his system the | | | | another 2nd mortgage paper note if the need |
| opportunity to own their own home for in many | | | | arose. He would then settle the difference in cash |
| cases a monthly housing expense a slightly higher | | | | or he would substitute a monthly income stream |
| than they were currently paying with the added | | | | on another note to settle the delinquent amount |
| incentive of paying little or no out of pocket. The | | | | and take back the note. It was proven the builder |
| builder made it affordable. Most were held back | | | | had an excellent credit rating and protected his |
| by the cash investment requirement up front. In | | | | subdivisions like a jealous lover. If a problem |
| less than 60 days all the homes had been sold. All | | | | arose, he would intercede and try to resolve the |
| 20 excess inventory homes that had been | | | | non-payment situation thereby saving the his |
| finished and setting vacant with the interest and | | | | often used lender a foreclosure on the books and |
| expense meter ticking were sold. The homes | | | | in this case the 2nd mortgage. He would do this |
| were scattered among four subdivisions. The | | | | by paying the note payer to move and perhaps |
| builder's profit came in the form of monthly | | | | rent one of his properties and quit claim the |
| checks on the 2nd mortgages. A year had | | | | property back all the while saving the borrower |
| passes, most paid on time and genuinely | | | | buyers credit rating to be used another day. Life |
| appreciated the opportunity to be a home owner | | | | is messy sometimes and through illness, divorce |
| and were working very hard to keep it. | | | | or job loss and such non-payment results. Time |
| Déjà vu all over again, building | | | | has proved this builder's utilization of this winning |
| cycle after building cycle builders are again in many | | | | formula for success by becoming a multi millionaire |
| areas of the country setting on inventory and not | | | | many times over in up or down building cycles. He |
| knowing what to do. Many builders are tempted | | | | always used paper to make a rescue when |
| to go bankrupt or in some cases run away with | | | | needed, like in a down building cycle. If he had to |
| the buyers deposits before finishing during these | | | | take a property back, he would rent it until he |
| down periods. It is for the builder with moxy to | | | | used paper again or sold it out right with super |
| survive. | | | | term financing. |
| In this particular case, a listing of a 16-unit | | | | Today builders and homeowners are again |
| apartment building had been taken immediately | | | | operating in a soft market. The "paper business" is |
| across the street from a small metropolitan | | | | a great way to make deals work. With the |
| airport. All units had two bedrooms and were | | | | advent of corporate note buyers in the market |
| bigger than the older complexes in the area. The | | | | place the deep discounted opportunities can be |
| flight paths were not over the property but it | | | | limited, however, there are still opportunities. If |
| was a super location between the university and | | | | you end up with paper on a deal, hopefully at a |
| the state capital and major employment centers. | | | | discount, many creative practitioners using them |
| There weren't any vacancies. A son had | | | | at face value to put together purchase and trade |
| convinced his father, who had proficiency in other | | | | deals. There is more than one way to put real |
| investments, to go on the mortgage note with | | | | estate sales together. If a buyer has a car, truck, |
| him to provide financial strength to the deal. | | | | semi-truck, semi-trailer, boat, mobile home, motor |
| The son was to do all the management and | | | | cycle, vacant lot, gem stones (the appraisals are |
| handle the day to day needs of the property. | | | | varied), diamonds, collectibles, personal property |
| After being in the property for a year, the son | | | | loan, business note, judgment award, lawsuit |
| started having marital problems and his business | | | | pending on a traffic accident, life insurance |
| was on the decline. The son moved to another | | | | annuities, inheritance, business inventory, chattel |
| state leaving dad holding the bag. The father was | | | | mortgages on equipment or any number of |
| totally out of his comfort zone. The son had no | | | | combinations can be used to make deals work. |
| investment in the deal and so he quit claimed his | | | | Yes it is sometimes sticky, but if you can stay |
| interest back to his father. The wife signed off as | | | | within your comfort zone and two parties agree |
| well. He wanted out of this situation ASAP. The | | | | after utilizing professional appraisers and such, give |
| builder and his agent came calling. | | | | it a go. The alternative is to do nothing and let the |
| In these days, mortgages were assumable with | | | | market roll over you like a run away freight train, |
| qualifying. Another savings and loan in the area | | | | or you can make something happen. After all, |
| held this particular mortgage. The listing had been | | | | that was how Manhattan was bought, barter and |
| on the market for two days. The builder did an | | | | trade. Déjà vu in the market place |
| inspection and was aware of the builder's work | | | | today. Think outside of your comfortable universe |
| that had constructed the 16-unit, apartment | | | | and see an old way of doing new business. |
| building three years prior. First inquires were made | | | | Sometimes the deals can be "like kind" property |
| to whether the seller (dad left holding the bag) | | | | and qualify for favorable tax treatment can be |
| would have an interest in taking 2nd mortgage | | | | achieved, other times, it will just be "boot" with no |
| paper as a down payment on the deal. As it | | | | tax benefits. Other times it could be both. |
| turned out, at the time, the father/seller was a | | | | Déjà vu. Here we go again. |