All Forum Posts by: Philip Klinck

I have. When I first got started I flipped a house. We had $91k in it and the selling price was $140k. It was taking a while to sell so we exchanged that house for 5 Notes with no payments, no interest, against lots that were to have houses built on them. Each of the 5 notes was $46,000 for a total of $230,000. But, they would only pay off as the houses were built and sold 1 at a time over 3-5 years depending. The first house took over a year to build and wasn't even finished yet. We decided to get out of that deal and exchanged the 5 Notes of $230,000 for $65,000 in cash and 2 Notes at $57,000 at 5% $363 payment each against rental houses that had been paying for more than 4 years and had a balloon coming up in less than 3 years. This all took place over about 2 years.

So there were a couple exchanges going on there. 

We did each deal to try and advance our position or get out of what turned out to have been a less than stellar position. Notes are great tools in real estate because they are like silly putty. You can do anything you and the other party dream up and both agree to. And exchanging is a good part of the business because you both don't have to liquidate at a cash discount first before you buy something you want with the lesser amount of cash. 

Have you ever exchanged a note for another note? And why did you do it? 

I buy and create notes for many reasons. Some are for cashflow. Some are to raise funds. Some are to exchange. Some are to balance equity in a real estate exchange. 

Why do you buy notes? 

Use a Trust instead of an LLC for each property. Have the LLC be the beneficiary of all the Trusts.

As far as the actual deal goes you could have offered a Price that made your payment doable and let the seller carry back an option which preserved their equity. You could buy that option back later or allow the seller to keep the upside. 

These exchanges happen more than you think. It is a bit harder with the larger deals because many times the seller is not an individual or few investors. If the seller is a fund or large group its almost impossible to get an exchange done. However if they are a family or individual that bought the property a long time ago for a low amount vs the selling price an exchange can make all the sense in the world. If they sell for cash a large amount of the proceeds go to capital gain and recapture...if they can find a cash buyer. 

Lets say they have a $9m apartment complex that is very management intensive. They can trade that for a package of dollar generals or sfr notes and get very passive long term income and stretch out the tax implications. 

Hypotheticals are less helpful than examples. I gave $19,500 and a lot to a guy in exchange for a $39,500 note against his house at 9.9% with 150k of equity above the note. He did not want the lot but the $19,500 was to catch the payments up on his house. I sold my lot and he got to keep his house. I would have never just lent him the cash in 2nd position at 9.9%. But, I did it to get rid of my lot. He would have never taken that lot but he did it to save his house. 

Yes, you can 1031 the paper if you set that up prior to the contract with a QI. 

But even better your 1st is now leverageable. You can borrow against it where you could not with the equity in 2nd or its very hard to. You can use this as a down payment or option consideration and gain massive leverage. You could even keep the payments and give a note against your note that only has a single balloon payment for option consideration. So now you have cash flow and huge leverage for upside. Notes and options are the most versatile parts of real estate because they are both contracts that can be whatever you and the other party agree to and both can be secured by Trust Deeds or Mortgages. 

Put up your cashflow in the note to buy a lot, solve a cash flow problem, or even buy personal property like a Truck or Boat. Its cash flow, it can be used however the otherside of the transaction agrees to. We are (hopefully) taking an F-250 and Scout 23' center console boat with 225 Yamaha as a down payment on a house we are selling. Depending on the terms of your leveraged note we might take that in exchange. 

Everything CAN be exchanged, its just a matter of coming to terms. 

There is about $6.6T of based money supply which is essentially cash or cash equivalent. There are over $100T of real estate, stocks, bonds, etc. So everyone cannot go to cash at the same time which puts a premium on cash or in other words cash demands a discounted price for non-cash assets. But, if you can exchange one asset for another there is less of a reason for discount because you do not have to go through the cash market. These transactions are also more efficient because there are less steps involved and less fees involved. 

 You can also loan paper out. 

Lets say someone has a dark commercial building that eats $40k a year while its dark. You loan paper out that has similar income to the $40k negative they are enduring. But, your deal with them is to get cash back on repayment. So you don't get your 30y term note back, you get cash back in 1 year. Now they must move quickly to get the building leased and sold/refinanced so they do not lose the building. 

Your risk is that you get the building or paid off at auction, rather than getting paid off as agreed within 1 year. If you like the building then there is essentially no risk because in every scenario you get something you want. 

I am not an accountant so please consult your accountant. 

It is my understanding that if you exchange (outside of the 1031 code which allows for cash to enter the transaction under certain rules) you can do a simultaneous exchange without tax consequences. Example: I have a $100k house and you have a $100k house and they both are legitimately those values. We can simultaneously exchange and the only thing that happens is we carry our basis with us to the property. 

Equally, if I have a $279,000 house and someone else has a $22k lot for a down payment, they can give the lot as a down payment and I can carry back a mortgage for the balance. The value of the lot is exchanged but the income from the note and mortgage are taxed under the installment sale code.