CREATING a note for 20% + Yield - More Jimmy Napier Strategies

[Don Konipol]

Great response to the previous post - so I thought I’d share another hi yield note strategy, although this one is more a note arbitrage play.  And yup, I learned it firsthand from Jimmy Napier

Going back about 40+ years, I didn’t have a lot of capital. What I did have was some knowledge, a little bit of experience, a business education, and what used to be called “common sense”.  Oh yeah, also a LOVE of the real estate industry, and a burning desire to succeed.  

A friend of mine was a broker trying to fill a niche by dealing exclusively with investors. He offered me a deal he had PRE NEGOTIATED, it was a SFR worth $50-55k (remember this is 1982-1983) for $55,000 with $5,000 down and owner financing of $50,000 over 20 years at the then unheard of interest rate of 7% ( new financing was available at 11% +). As if this alone wasn't good enough, he had pre negotiated a SUBSTITUTION OF COLLATERAL clause to be included in the deed of trust/note. Needless to say, I jumped all over this deal.

Now I probably should point out we weren’t very concerned with “fairness, predatory deals, etc” in those days.  “Let the buyer beware” was the underlying viewpoint of the day.  So take this with the that era in mind.

After property purchase I quickly found a tenant willing to pay a rental enough to pay all expenses and leave a couple hundred a month in my pocket.  Which, being prudent even then I put aside for any emergency repairs that may come up. 

Now here’s where it gets interesting. The broker found a lot for sale that appraised at about $60,000, but since land wasn’t selling without owner financing, and the seller needed cash, he accepted an offer of $18,500 for the land.  I entered into a contract to buy the land, and informed the note holder (seller) of the house I recently purchased that I would be substituting the lot as collateral in place of the house.  It had met the requirements of the deed of trust/note since it appraised for a higher value than the house. The necessary paperwork was exchanged, and at closing I secured a conventional loan for the house at the prevailing 11% interest of the times.  So now my holding were a house I purchased for $55,000 with an 11% interest $45,000 loan against it, and a lot I purchased for 18,500, with a $50,000 loan at 7% interest against it.  I also had $26,500 in my pocket ($45,000 new loan on house minus $18,500 paid for lot).  

Next, I found an investor who wanted to build on the lot, but in maybe three to five years.  I made a deal with him for him to take over the payments on the lot, for which instead of him paying me, I would pay him $5k.  The loan also contained a substitution of guarantee clause, as long as the substitute guarantor had a met a minimum credit score, which the builder/investor did. So I was out of the $50,000 note and no longer had ownership of the lot.  What I had was ownership of a house worth $55,000 (exactly what I paid) with a $45,000 loan against it.  And of course $21,500 in cash left from the refinance.  Bottom line was that with a $5,000 initial investment I now had $10,000 equity in a house and $21,500 cash!  I took the cash and invested $20,000 in the  purchase in a first lien note with an interest rate of 9.5% discounted to yield 18%.  

Btw, this transaction was BIG to me at the time. It increased my investment capital about 50%, and was the first of a number of deals I put together that resulted in increasing my net worth.  

Your comments, both positive and negative, would be appreciated.  Can this type of deal still be done today? If so, would more disclosures be needed?  Doing this today should we insist on the seller of the house having legal representation?  Did we take advantage of a seller who wasn’t very knowledgeable?  Was it a “fair” deal?  There is no right answer of course, just wondering how today’s participants in real estate view this transaction.  Is the fact that the seller ultimately suffered no negative consequences and got fully paid make a difference?