Back in 1985 when I wrote, 121 Real Estate T.I.P.S., seasoned investors use this technique quite regularly to quickly acquire property and build their portfolio of properties.
Creating paper (a mortgage and a note secured as a 1st or 2nd in Minnesota) can be a great tool in your tool chest once you have your first property. Of course to set things in motion you first need equity. Most investors know that buying right is the key to building quick equity and positive cash flow. If you buy the property with the right terms and conditions you can quickly create equity. Many times this requires creative financing such as carry back notes, contract for deeds or even personal property as down payments. While most sellers want all cash out offers, those diamonds in the rough or distressed properties can sometimes be secured by creative terms and conditions.
When we create a mortgage and note (hereinafter referred to as paper) it will most likely be secured by property we hold. Yet it could be secured by a Free and Clear (FC) car, boat, RV or other personal goods. The note is the promise to pay with specific terms outlined. Sellers will not pay taxes on the gain until the payments are made and will continue to receive interest as determined by the terms of the note. In the days of assumable mortgages this technique was a gem as it allowed the buyer to write paper against a property they owned that had positive cash flow to secure another property they could build quick equity in. Many times these buyers would also have the right to transfer the paper to another property, so it allowed them to extract cash if they refinanced the secured property. Sometimes the original seller will even consider this transfer back technique after the buyer has secured a new mortgage on the seller’s property and their original property has been fixed up. Many really didn’t want all the cash anyway as they were going to pay a tax on the gain and in this way they could spread it out over time and even earn some interest on their equity. Savvy sellers will increase the interest rate over the term of paper so it increases the likelihood that they will be paid off in a shorter time.
As you begin to build you portfolio look for ways to increase your equity to create these note opportunities. The concept is also a great way to create sweeteners (a little something extra you drop into a deal to sweeten it) that can become the tipping point to getting a deal tied up. But now I talking about another topic for discussion best saved for another day.
Build From Within – Learn Something New Every day.
Paul Palmer
