Most note investors originate new notes or purchase existing notes (sometimes at a discount to principal)..  To obtain an “outsize” return on originating notes the note holder needs to assume a larger than normal risk, or find a “niche” not currently being serviced, the note BUYER needs to negotiate a purchase at a larger than market discount.  While I have done  both in the past, it seems like it’s harder and harder to accomplish as time goes on.  Information and exposure has been increased radically in the last 10 years, and hence those killer deals don’t seem to be there anymore.

Fortunately for me, I had the good fortune to know and learn from the (imo) absolutely most knowledgeable, innovative, and talented note investor teacher back 40 some odd years ago.  Jimmy Napier (Invest in Debt) taught not only note buying and originating, but how to /WORK THE NOTE. Part of this was creating a high return investment from converting your current real estate holding to liquid note investments. 

A couple of months ago I had an opportunity to put one of Jimmy’s techniques into effect.  And while there are many ways to calculate the profitability of the note I created,  the resultant investment yields significantly more than purchasing an investment in the competitive market environment.

A summary of the deal is thus: My partners and I owned a 11,000 square foot retail/service center on a main thoroughfare in North West Houston.  For numerous reasons we decided to sell, and received at offer from the Church that was one of the occupants, for a price equal to appraised value.  Two appraisals were performed, and the values were $1,650,000, and $1,600,000.  At a $1,625,000 price, the church was going to borrower $1,000,000 from their bank at 9%.  The bank also wanted the church to maintain “compensating balances” in their checking account.

We had an existing $650,000 mortgage secured by the property, which had been paid down to $615,000.  The mortgage had 10 + years left at 4% interest.  Amazingly, the bank holding our note AGREED to allow the note to remain in place after we sold the property and allow us to do a “wrap” (the bank has done significant business with us, and obviously wants to continue the relationship).  I should point out that I nor my 2 partners have given a personal guarantee on the note. 

So, I proposed this deal to the Church, which they accepted and we closed on April 2.  The Church pay us $1,7000,000 for the property (a premium of $75,000) to “entice” us to carry a larger note than the bank would.  The church put a down payments of $412,000 down, and we carried back a “wrap” note of $1,288,000 for 124 months (to “match” the length of time left on the underlying 4% note) at 9.999 % interest (had to be under 10% to comply with the board of directors of the Church without going for another vote), and payments of $16,701.57 monthly for 124 months.  Once our payments on the underlying note is approximately $4,000 this provides us a cash income of $12,700 monthly. Based on a CASH sale price we would have received $1,625,000 as a cash sale, less the $615,000 note payoff, or $1,010, 000 CASH,  By CREATING the wrap note, we received $412,000 Cash and the note.  So, for giving up $$598,000 in cash, we receive net of $12,700 monthly for 124 months.  Using TMV calculator, this is an annual return of 23% on the cash I would have received by a cash sale.  So, by creating and working a note, I’m able to create a 23% return.  This is possible on a 9.999 percent note because (1) I’m earning 9.999% on the $615,000 underlying note but paying out only 4% and (2) by providing seller financing I was able to obtain a $75,000 higher sale price.