Zero Coupon Bonds - Creative Real Estate Financing

[Adam Reek]

Looking for some of the creative finance wizards out there to chime in on this one!

I had an interesting conversation with someone in the private lending world yesterday.  As a method of real estate financing and an alternative to traditional bank mortgages or hard money, he was proposing the following:

Private lender puts up the capital to purchase the property (100% financing)

Buyer takes title and gets a mortgage from the private lender at 1% for 30 years.

In addition, buyer pays the lender 3% of purchase price up front.  This money is not applied to the purchase, but is rather a "fee" charged by the lender.  The lender then uses these funds (I assume in conjunction with some of their own) to purchase something called a "Zero Coupon Bond" equivalent to the value of the property.  These bonds can be purchased at a deep discount because, unlike other bonds, they do not pay out interest over their lifetime but instead pay the lump sum full face value at maturity (usually a long-term ie 25+ years).

So the lender makes a minimal amount of money on the mortgage itself, but gets to leverage somebody else's money (the 3% upfront fee) to purchase these bonds.

It's a new concept to me.  What you you all think?