If you want to make things work really easy, look for a property that is for sale that has a large, existing privately held mortgage. In other words, a property that was sold fairly recently with a large amount of seller carry back financing.
Millions Through the MLS
To find these properties is much simpler than you might think. Plug in your computer modem, call the Board of Realtors Multiple Listing Service computer and search for properties with private loans. In my state, it is a simple process to search for who the loan is made to. It won't give the name if it is a private loan, it will just say “private.” It is also possible to search for “loan type.” I search for “CT” which stands for contract, which is a Uniform Real Estate Contract or Contract for Deed. Ninety-Nine percent of the time, that means there is a private party on the receiving end.
Profitable Word Processing
In a few areas some of this information may not be available. In others, it is not easily accessible or the system that the board uses does not allow a search for these items. Well, it doesn't take more than a few seconds to figure out that you can download the entire data base onto your hard drive and search through the search feature of your word processor.
Find'em and Feed'em
If you're not an agent with access to the MLS, now is a real good time to take one to lunch and get to know him or her. Let's look at an example. We find a property that is for sale for $100,000 with $20,000 down to assume an existing $80,000 privately held first loan with interest at 9% over 360 months. The payment on this loan is $643.70 and it is worth $51,000 when discounted to a 15% yield.
Success Through “Subject To”
Approach the seller and negotiate the deal along with a “subject to” clause that gives you an out. This might be straight forward as in “subject to satisfactory re-negotiating of the existing first loan” or may just say “subject to inspection and approval of buyer's partner, Jim Shu, which shall take place not later than 5 days of the acceptance of this offer.”
Negotiate to Discount or Substitute
This gives you five days to negotiate with the holder of the first loan. The negotiation will be seeing if the holder of the first loan (let's call him Ben) will discount. Chances are slim that he will discount substantially (30-40%). That's OK, because we know that if he won't discount, there are thousands of others out there that will.
A Trail of Ten Dollar Bills to the Title Company
What we need at this point is to entice him to substitute collateral. I say entice, because there is nearly no incentive that Ben can see to encourage him to give up his trusty collateral for something unknown to him. It's not hard to find some incentive for him that would work. It could be any number of different items like:
1 – Better collateral (LTV ratio)
2 – Higher payments or interest rate
3 – Some principal reduction
4 – Cash or other incentives
We find an incentive that works and then substitute as collateral for Ben a similar note or group of notes to the one that he currently has.
What the Property Costs a Creative Note Investor
This means that the cost of the property is:
$20,000 cash down payment
$51,000 cash (for the $80,000 note)
$71,000 cash – total cost
I like this technique. That means we just bought a property at 71% of value and the seller didn't even take a discount. In fact, he received all cash for his equity.
Existing Seller Financing
When you buy a property where the seller is carrying back a large portion of his equity, you face two challenges. The first is to convince the seller to carry a note and the second is to sell the idea of different collateral other than the property that he is selling. What I like about finding a property with an existing private loan is that someone has already made that first decision to carry paper.
The second part that is nice is that the holder of the loan may have separated emotionally from the property and can be easier to entice to substitute collateral for his loan.
There is little other competition giving hopes of higher prices or all cash prices like there may be in the case of a property seller. The agent, who is usually the biggest obstacle, is not involved and properties with private financing may be found easier in any market than sellers willing to carry paper.