Don't Throw Away Those "Throw Away Seconds"...Continued
When you go into the market
place to sell these notes, the note buyers that do not laugh at you, will offer
20% to 30% of face value, and sometimes lower. This is very discouraging, and
you wonder if you can maximize the value of your second. The answer is YES.
Here are some techniques that
will allow you to get full value for your note, or lower the discount.
If you want to minimize the
discount, go to the payor and offer to discount the note if they will pay it off
within a short period of time, say one or two months. For example, say you had a
$7000 second lien. Note buyers would only offer you $2000 to $3000, if that,
to purchase your note. Not wanting that much of a discount, you go to the payor
and offer to discount the note $2000 if they would pay the note off early.
Because it is such a low amount, often the payors will be able to borrow,
or somehow come up with the funds to save $2000 plus interest. It is an easy
sell job to multiply the number of payments, times the amount of payments to
show how much the payor would save.
Another technique, this is
my favorite, is to trade this note, AT FACE VALUE, for real estate or
other personal property. For example, there is a property in pre-foreclosure
worth $100,000. The owner has received offers of $50,000. You, however, are
going to offer the distressed seller $57,000...$50,000 cash plus $7,000
in your 2nd lien note. This will give the seller the feeling he is receiving
$7,000 more for his property. By using your note as money, you will prevent a
hefty discount. This will serve two purposes. Number one, it will give
you extra ammunition to offer the distressed seller. Adding your 2nd lien
note as a sweetener to the deal is often the deciding factor for the
distressed seller to pick your offer over others. However, more importantly,
you are able to trade your once worthless note for real estate at FACE VALUE.
This same concepts will work with boats, cars, or other personal property
where the owner is a don't wanter. There are tax ramifications on
this technique and ways to get around them. This will be in a future issue of
the NOTE PROFESSOR. Look for it. Be sure to check with your attorney
and CPA.
Another powerful technique
is to use your 2nds as an option. Say you found a property
that is a sleeper, but do not have the funds to acquire
it at the moment, but you do not want to let this deal get
away. Why not
assign the payments as a continuing option on the
property. Or you could offer the note itself for a longer
option. Another method would be to offer the property
owner a continuing option by making monthly option payments
yourself as option consideration. You could make your
option payments to the property owner the same as the payments
you receive from your 2nd lien. This is a form
of compensating notes. Of course, you will have a problem
if your payor quits paying. You would then have to guarantee
the payments of the note…notice I said guarantee the payments,
not the entire note. There is a big difference.
There is a more detailed explanation of this technique
in OPTIONS
USING NOTES for those who are interested.
Here is a quickie of what
you can do with your "throw away second". Simply give it to
charity and take a tax deduction. Many foundations and churches will gladly
accept your note as a contribution. Again, check with you tax advisor.
Sometimes you can make
that 2nd more marketable, especially if the buyer has put little
or nothing down. Ask, and in some cases even demand, the payor put up
more collateral, or have others sign on the note. A good example
would be a young couple buying their first home. Although they came up with some
down payment, there still was not enough to make the deal fly without your
taking a small second. Insist they secure your 2nd with other property,
have others co sign on the note, or even better, BOTH. Frequently
the payors can convince one of their parents to allow your note to be secured by
other property the parent own, as well as your property. The parents would then
not only sign on the note, but your collateral would be enhanced. As an
incentive for the parents to sign on your note, perhaps they could receive 10%
ownership in the property. Perhaps one of the parents would even allow your small
second be moved entirely to property they own, which could move your 2nd
lien into a 1st. Now,
not only do you have a marketable 1st lien, but you also
have the parents on the note. The parents might very well be in a position
to purchase your note at a small discount at some time in the future. You
would then receive much more for your note than if you were selling it on the
open market.
There is one other
strategy you can use on your “throw away” seconds….just do nothing.
That is right...do nothing. This is what most do anyway, because
they know of nothing else to do. The only difference is they worry about it.
If you structured your real estate deal correctly from the start, you already
made a profit when you sold your house. The 2nd lien was only
icing on the cake. Maybe you miscalculated either on the value of the property,
or the amount it would take to rehab your property. As a result, you had to take
back a 2nd to get out quickly and minimize your losses. Either
way, just sit back. If the payments come in, so much the better. You
also have the possibility they will refinance or sell in a short period.
But what do you do if the payments quit coming in, and taking the
property back is not feasible? Instead of getting all upset and throwing
good money after bad, sit back and relax. The $60 or $70 monthly
payments are not worth loosing sleep. The time and energy
spent worrying, could be channeled into finding and transacting more
deals. Just let the foreclosure procedure take its course.
Look on the bright side. Someone might bid the price up at the
foreclosure auction. Remember that bids over the amount of the 1st
lien will go to the 2nd lien holder (That is you !!!!) This
will make the blood pressure stay low and keep you from getting ulcers. Just as
in any enterprise, you are going to have a certain amount of losses and
undesirable things happen. Real estate is no different. Why not just take
the small loss and move on?
Whichever technique you use,
act out of knowledge, and not out of ignorance or fear. You now what
to do with your seconds. You know that you do not need to throw them away.
Keep them, they may have more
value than you thought.
Be sure to contact
THE PROFESSOR with your questions or comments. I love
success stories, and it is from your questions that I get
my topics.
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