Over the last few decades many sellers and businesses have taken back first and second mortgages on property they have sold. This was often necessary in order to sell the property due to high prices and interest rates. Often, these "notes" as they are called are sold to raise cash. Such notes have a FACE VALUE (the unpaid principal), an INTEREST RATE at which the note is being paid and a TERM (the amount of time left before it is paid off).
Due to the "time value" of money which assumes a dollar today is worth more than a dollar at some future time, these notes are sold at discounted rates - usually at 50-80 cents on the dollar. (Currently, some sell for as high as 95 cents on the dollar because interest rates on savings, CD's etc. is low, making mortgages with higher interest rates very attractive.) Some investors specialize in buying and selling such notes. Check the WANT ADS in your newspaper under MORTGAGES. Better yet, network among those who would know who has such notes =- CPA's, tax attornies, financial planners - even Realtors who may know sellers who took back notes.
Why would someone sell a note worth $50,000 for as little as $35,000 or less? Because cash today, in one lump sum, is more valuable than a monthly trickle of income. This is why many lotteries - including Powerball - only pay one-half the jackpot to people who choose the cash option. If you choose the annuity option, you get the entire jackpot. Again, the "Time Value of Money" in action.
Always remember - in 10-15 years, a dollar will have lost value due to inflation. If a dollar that you collect in 10 years is only worth 80 cents when you collect it, why would you pay a dollar now for the privilege of collecting 80 cents in ten years? If you pay 80 cents now for a dollar you collect in ten years, you waited a long time to break even. So, if you are going to wait a long time to get your money back, these factors - plus a fair profit for you, the investor - must be taken into consideration. Therefore, these mortgages are worth between 50-80 cents on the dollar today, in cash. No one in their right mind is going to pay $30,000 cash for a $30,000 mortgage - by the time they get their money back, they will have lost a lot of money. You would make out better by stuffing your money in a mattress. If you invest $30,000 for ten years, you expect to be worth more in ten years, not less.
Mortgages are like the lottery - each is a "structured settlement", so to speak, giving off a predetermined income stream over a predetermined period of time. To exchange those small, regular payments for cash, the owner must give up a chunk of the face value.
Keeping this in mind, let us see how we can benefit from this without the need for cash or credit.
Let's say you find a property valued at $160,000. The seller is retiring, owns the place free and clear (no mortgages) and wants to buy a condo in Florida for $60,000. You suggest that he invest the balance of his equity into seasoned mortgages worth $100,000 and paying 8% interest (or the going rate in the current market), with monthly payments of about $1000 per month to supplement his Social Security. This income will not affect his Social Security. Living on a fixed income is not so great and the interest rate being offered by the notes is much higher than that on CD's, so the seller agrees.
Now, locate one or more mortgages with a total $100,000+ face value, at 8% (+/-) interest with monthly payments of at least $1000 (locating and obtaining discounted mortgages is discussed in detail elsewhere in "The Simple Man's Guide to Real Estate"). Offer the mortgage holder $70,000 or so, to be paid in cash at closing. The note is to be placed into escrow along with a signed copy of the agreement (preferably notarized, or at least witnessed).
At closing, your bank (if YOU are buying the property) or your buyer's bank (if you are selling to a third party - detailed in "The Simple Man's Guide to Real Estate" using "Double Escrows") puts up the money for a first mortgage of 90% of the price, or $144,000. From this amount:
1.) You pay $70,000 for the note. The note seller goes home, happy, and you own the $100,000 note
2.) You pay the seller of the property $60,000 cash and give him the $100,000 in mortgage(s). He goes home, happy
3.) There is $14,000 left "on the table". This belongs to you, along with $16,000 in equity in the property (the difference between the $144,000 mortgage and the $160,000 value).
If you bought and sold simultaneously at a double escrow, you would walk away with $30,000 cash - in other words, the $14,000 left on the table and the $16,000 equity you sold to your buyer (his down payment).
Without any cash, and without any credit (if you double escrow), you have plucked $30,000 cash out of "thin air". And you may have noticed that you even arranged to buy the notes without needing any cash of your own (the note is purchased only at closing). This is simply wise investing using OPM - Other People's Money. A wise investor always seeks ways to use Other People's Money, Other People's Time and Other People's Talents.
Do not limit yourself to using discounted mortgages in this way. Use your imagination and combine it with other strategies in the course. For example:
You are considering buying an $160,000 property. The first mortgage on the property is held by the previous owner. The mortgage has a current face value of $108,000. Without telling the mortgage holder that you are buying THAT particular property (if he knows this, he'll keep the note and receive full value when the property is sold), offer $72,000 cash for his mortgage, to be paid at closing. Your agreement and the note goes into escrow.
Assuming you are buying this as your own home, you get a first mortgage from your bank in the amount of $132,000 - $72,000 to pay for the note seller's mortgage on the property, $52,000 to pay the seller his equity and $8,000 to cover closing costs. You now own a $160,000 home for which you paid $124,000 plus $8,000 in closing costs. You now own $28,000 in equity (the difference between your new $132,000 mortgage and the $160,000 value of the property), you made no down payment and even the closing costs have been taken care of. Really sweet!
By combining these and other simple strategies in "The Simple Man's Guide to Real Estate", you could reap as much as $50,000 or more profit from this one deal.
As an aside, once you have built up some ready cash, look for more mortgages to buy at about 65-70% on the dollar. Then, with these in hand, go to the owners of these properties - the people who are paying on these mortgages each month - and offer to sell his mortgage back to him at 80-85% on the dollar. He can refinance the house to eliminate a pesky payment and save thousands on his mortgage - a great deal for him. You make a quick 15-20% for a few hours work. Not bad!
What if an owner doesn't buy back his note to save money and reduce his monthly payments (he'd have to be insane!)? No worry - you own the note, and the payment he makes each month is yours, giving you a return of 20-30% - and that is not bad, either!
Of course, with a few of these notes, say, $30,000 face for which you paid $20,000, you can offer them as a $30,000 down payment on your next property, which gets your money back and saves you another $10,000 to put in your pocket.
There really is no end to the possibilities.
This, and many other tips and strategies are included in "The Simple Man's Guide to Real Estate" by Bill Vaughn, published by IntelliBiz on a non-profit basis. They would not be found in courses like those referred to by many as the Armando Montelongo Scam or any of the other "infomercial guru" courses. The Bill Vaughn course is the only one that has maintained an A+ rating at the Better Business Bureau for over 20 years.
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