All Forum Posts by: Jeremey J.

Some people we know have expressed interest in partnering with us on some RE investing.

What they bring to the table is capital and nothing else. (Not being rude, that’s from their mouths. They’ve never done anything like this before.)

While this seems to be a nice opportunity, I have no idea on what the possibilities are for a business relationship like this or what options might be available to them.

They are retired, and I’m certain any funds they have are in retirement accounts (though I don’t yet have details on what kind of instruments).

And it sounds like the guy they work with for their retirement accounts is not the sharpest tool in the shed.

In order benefit from this, my wife and I will have to drive this ship, so we are trying to prepare for future conversations.

We’re looking to find out what kind of options might be available to help give them (and us) some direction on the best way to operate or do deals together.

Some questions that come to mind:

- What does it look like to be retired and wanting to access $200k from your retirement accounts?

- They are looking at this as a passive investment opportunity and would prefer as simple as possible regarding their involvement. What can/should this look like? A simple promissory note? Should they become actual partners in the business?

If it were up to them, sounds like they’d just like to write us a big check in return for monthly smaller checks that make the transaction worthwhile.

That sounds too easy if not unwise or impossible all together.

Any help (or where to find it) is greatly appreciated.

Thanks for trying to help figure this out. I apologize if I have been confusing. I'll try to clarify a little:

While the idea for this situation stemmed from my thinking about a real potential deal on the horizon, the scenario I proposed was an exercise for my brain trying to utilize the selling of a note as a tool in structuring a creative financing deal. 

As someone new to the notes realm, I got stuck trying to understand what a note investor may want to see in order to invest in such a deal.

I was also curious to see if and how other note-savvy investors use their knowledge of note structuring/brokering/buying/etc. to aid in putting together creative financing opportunities for RE deals.

Again, my apologies if I wasn't clear.

@Marco Bario

Absolutely fantastic. This is exactly the kind of thing that piqued my interest in notes to begin with. 

But I'm still just learning, and you don't know what you don't know. 

Running scenarios helps me visualize how all this can work, so thank you for taking the time to put that together.

Bringing a note investor to the table at the start seems like excellent advice.

Thank you, @Chris Seveney for the feedback.

You said,  "For the owner, not sure why he would want that as he wants to get his $ and no guarantee note would sell (and definitely would sell for less than balloon price)."

Yes, I definitely see this. I was hoping to find out how the note could be structured in such a way that is a win/win for both parties:

• Seller needs the note structured in such a way that will help him sell the note and still get what he wanted out of the property.
• Investor is willing to pay more for the property over time to avoid the balloon.

It's probably just matter of playing with the financial calculator long enough to see what numbers make something like this work.

But this is more about my brain trying to grasp concepts in how notes are valued and constructed than it is about dollars for an actual deal.

Question - Is there an obvious method to structuring a note in this way to help both parties achieve their goal -- i.e., making the note marketable for the seller to get a good price for the note?

You also said:

"...if you were going to attempt to broker and sell the note for a fee as the borrower that would appear to be a conflict of interest"

Yes, this seemed logical to me. But does that mean it's against the law? Or is it just shady business? I'm not interested in breaking the law or doing bad business. 

But I am interested in finding out how creative one can be within those boundaries, and I get the feeling that a lot of note holders don't really know selling their note is an option until they run across some marketing from a broker or buyer.

Question - If it's not okay for the investor to broker the note he's paying on, what is a legitimate way for him to approach the seller about being able to sell the note (or part of it) as an option to land the deal?

Thank you, @Marco Bario.

My hypothetical scenario did stem from thinking about a potential deal we are considering, so should it actually play out in real life, the primary goal would be to acquire the property via seller financing.

My guess is that this particular seller may not be privy to note buying and selling. So I was trying to think of a way to make the seller financing more attractive to them by providing this option.

The investor generating a broker fee for a note he was paying on seemed too good to be true, but would be a nice consequence of creative thinking if that's a legitimate thing to do.

Thanks also for supplying those other options for structuring the note -- that's the kind of experienced expertise I figured was out there somewhere!

Question -- could you elaborate on your comment:  "Partials can limit the discount taken by a seller as well."

Do you simply mean since the total discount of the whole is spread out over the partials that the seller wouldn't have to take as big a discount if he sold some of the payments and kept the others? Or is this a nuance of partials that the relative discounts are smaller than on selling an entire note?

Is this a thing?

RE investor approaches property owner about seller-financing.
Owner is on the fence. Cash now is more attractive for them than passive income.
So investor suggests a balloon option at, say, 5 years.
Owner likes the compromise and the deal ensues.

But what if instead of the balloon, which is a less convenient position for the investor, the note was promised to be sold at 5 years with the investor serving as the broker? (Or maybe the investor could find a different broker who would find a note buyer.)

In order to net the same result for the seller, the terms of the loan would likely need to be structured differently so that the seller received the desired amount upon the discounted sale of the note.

I understand there is risk involved for the investor here since there is no guarantee of being able to sell the note. But perhaps the investor is willing to bear the risk and pay more in the long run to avoid coming up with the balloon in the short term. 

Or perhaps this could be an option in the deal instead of replacing the balloon all together, effectively making the balloon an exit plan should the note not sell.

My 2 questions:

1) Are there any ethical, legal, or practical limitations to this from the note investing/brokering side? Is this even a thing?

2) I know there are a ton variables to consider with the note structuring, but what differences might you expect to see, generally speaking, in the note terms between these two scenarios to make the deal possible?

This is all hypothetical -- it came to me while up with a sick kid at 3am -- but I appreciate any insight our experienced note investors are willing to provide to ease my overly tired (and thus oddly creative) mind.

@Chris Seveney said: 

"3. Legal ramifications in the industry."

As someone who is trying to learn the lay of the land of this sector of RE, this would be my vote for #1 under-discussed topic -- and not just with notes.

It makes sense, though, right? (Frustrating as that may be...) There is probably a fine line between discussing legal ramifications and offering legal advice. 

That combined with the sue-me-society (more like, sue-you-society) we live in likely discourages folks with helpful experience or knowledge to contribute in this way.

I've received perfect legal advice from someone who would not have been qualified by anyone's standard to offer it. And I've received very bad legal advice from people who are allowed and paid to give it!

As a result, I'm of the persuasion that people should be free to exchange and consume ideas, opinions, and advice knowing that everyone accepts the responsibility for their own choices.

Those who don't do proper due diligence on their deals will have to deal with the consequences.

Why should it be any different for legal matters? After all, we're big boys and girls, right?

I would much rather have to sift through lots of discussion, opinion, and varying experiences that is non-official legal advice than to have a drought of information on legalities.

The former requires some critical thinking and homework, but at least you have insight on potential avenues to pursue or avoid.

The latter can often leave a person with seemingly nowhere to go, or more likely, going somewhere all the while not even realizing there was a potential legal pitfall.

Let the legal ramifications discussions flow!

@Kai Van Leuven

I'm not a lawyer and I don't play one on tv, but I'm not sure why you would have to record anything with the county unless there are state or local laws that require it. 

It sounds like the LOC is already established against the property, i.e., you aren't placing a new lien on it.

If that's the case, then with proper documentation (a well-drafted promissory note, corporate minutes approving the action, etc.), this should be no different than any other business transaction unless there's something in your LLC's member agreement (or state/local law?) that forbids lending money to the LLC's members/owners.

Terms would be detailed on the promissory note. It would be recorded in the LLC's books as an asset. It's not income for you personally since it's a loan and not a distribution, which can be easily proven with the appropriate documents and clear bookkeeping from both the LLC and your personal records.

I found this article that might help. (I am not affiliated with this firm -- just thought the information might be helpful to you.)

@Jay Hinrichs

Thank you, sir, for the clarification and encouragement. I always appreciate your experience and candid feedback.

You are right—Kokomo is in our backyard. Nice to hear you have had successful deals there.

@Joshua Howaniec  We are about 45 minutes northeast of Carmel. We're new to the game -- and so are likely small fries for who you're looking to do business with -- but if you'd like to connect, I'm always looking to expand our local (and semi-local) network.