171-TNG Radio - Bill Tan 4-24-10
This week Bruce is joined by Bill Tan. Bill owns Bill Tan Investments, and he is the creators of the San Diego Creative Investment Association. He is a nationally recognized real estate investor and mortgage exchanger. He speaks now and trains people.
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Bill started in the real estate business when some friends of his started doing it. He became really interested in the business when a man came out with a book named Nothing Down. He went to a lot of seminars. He has been investing since the late 1970’s. His mentors are Jon Schobb, Robert Allen, Jimmy Napier, Peter Fortunato, Jack Miller and the Four Horsemen of Florida.
Bill’s company provides several services. Bill acts as a real estate investment counselor, his company makes hard money loans, buying notes, and his company invests in real estate. Getting into the note buying business took some training. Bill got into note buying when he was encouraged to buy real estate in another state. There are a lot of challenges that come with that, such as property management. After a while, he got sick of having to travel to solve these problems, so he chose to sell the property but he had to become the bank in order to do so. Once he did this, he stopped having to deal with the tenants and the check appeared in the mail box every month. He then went to a real estate training seminar and told other people what he had done. They then started selling their properties and began carrying the notes as well. They also began needing an extra chunk of cash for their deals, so Bill started giving loans. This was when Bill learned all about negotiation. The best note deal he ever made was a $10,000 dollar note buy which he got a $100 dollar cash flow on.
Later on, Bill began taking even more training, so that he could fully understand the business of note buying. He took a set of classes from Carl Aubey, John Stefenskay, and John Behle. He learned the most from a week long class he took with John Behle.
There are some market circumstances that make seller carry back notes more likely. When lending becomes tight or interest rates rise, sellers have to compete with lenders to get financing for their properties. In these situations, buyers often have difficulty getting financing. There are many people at this time with damaged credit due to foreclosure.
Right now, we have the worst equity position for owners in history. Many people are upside down on their properties. These people are not candidates for the deals that Bill makes. The only protection that people have when they take back a note is the value of the property and the equity position of that home. The equity is usually brought about by a down payment, but right now many properties have negative equity.
At any time, 1/3 of all properties are owned free and clear. A lot of the properties that are free and clear are land, but there are many elderly people who own properties because they have spent their lives paying off their mortgages. Those people are good candidates for carry back notes.
If a senior citizen has a property free and clear which they do not live in, and they want to sell it and carry the note, is their declarable gain the interest they receive or is it the principal they have not received? Bill says there could be two scenarios in this situation. If they have a 100,000 dollar home that they own free and clear, and they take back an IOU on the property for $100,000, and they do not get paid for a while, that is considered an installment sale. If they have an interest only note, then they are only getting rent on their note. In this case, they would not get taxed on their profit, but they would pay tax on the note’s interest. This could go on until they are no longer with us, and then this would cause an estate issue, but they would only have to declare their interest portion. If they were to create an IOU against the property for 30 years, then part of every payment they receive would be interest and that would be taxable. Also, part of every payment they receive would be principal pay down, and that is taxable also.
There is no such thing as a typical seller carry back note. What is nice about notes is that whatever two people agree to can be modified. Sometimes grandparents want their grandchildren to go to college. At certain points over a 4 year span, lump sums will be paid on that note. So in this case, one could just pay a large sum of $10,000 pay down after 4 years. With this specific deal, he bought it as a fully amortized note, but then changed the structure of the note to help his client. Bill’s client was going to put their money into the bank at a 1 percent interest rate, so he gave them the opportunity to earn a higher interest rate through the note. That may be an easy transaction for Bill to do, but it could become very difficult if you deal with a large number of deals. Bill has the opportunity to deal with many creative solutions in a market place where lenders are very tight. If the government had not intervened a short time ago, notes would have likely skyrocketed.
Finding out who owns a note has changed to some extent. When Bill first started buying notes, his business was nearly unknown. Because of the internet and the rumors going around from investment courses, more people are becoming aware. When a person takes back a note, they usually believe they are taking back the note until it is paid off. Most of the contact that Bill has with other note owners shows they are advertising from title companies. Nearly 100 percent of Bill’s notes are referred to him.
Bill has many stories about people who thought they had a legitimate note, but really did not. There is always fraud when money is involved. Fraud is more common when note brokers don’t check on the ownership of their notes. There is more involved in checking the value of a note, because you have to first check the value of the house, and then the person making the payments, and then the value of the note.
If you are creating a note that you want to be sellable, shorter works better than longer, and larger down payments work better than smaller. The longer the term of the note is, the more we have to account for inflation. If somebody were to bring you a fully amortized 30-year note today, and you needed to get a yield on a 10 percent interest note, you could only pay approximately 50 percent of today’s face value of the note in order to get a 10 percent return on the investment at a 6 percent interest rate. This is a hard sell. If you are setting up a note you want to sell, it is important to know that there is a 10 percent market rather than a 6 percent market. If you carried a 30-year, ten percent note, there is a possibility you could get close to earning the full value of the note, but probably not if you were working with Bill. However, there is another opportunity for people who do not need all the money out of their note immediately, because Bill can buy part of the note. For example, there was a note on a property in West Covina. Bill helped structure the note for this property, so that the owner could sell the note after she sold the property. The note’s face value was $100,000. They could not qualify for a new loan, but they had $5,000 dollars down, so they took back the $100,000 dollar note. This note was for 30 years at 7.5 percent interest. She used this money to go to Idaho and buy a condo near her daughter. Bill bought the first 60 payments on that note, and he gave her $30,000 dollars in exchange for them. With this money and the $5,000 dollar down payment, she was able to pay the closing cost of her house and buy a new $20,000 condo. Bill got a good yield from this deal, and at the end of those 60 payments, Bill stopped receiving the payments and she took the payments. At the end of five years, her $100,000 note had amortized to $95,000.
Bruce has taken Bill’s beginner course. Bill’s technique is very effective, because he makes his students struggle. Bill believes the only way we can learn is by making mistakes, so the more mistakes Bill can help his student s make, the more they will learn. Bill’s more advanced class is the 3-day Creative Financing Technician’s Strategy class, and you do not need a calculator for this class. Bill may be having this class in June.
Bill’s website is www.billtaninvestments.com
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