No Equity? No Problem! Advanced Wrap Technique
Those who do not live in Texas are
able to use contracts for deed as wrap vehicles on
homesteads without jumping through hoops.
However, in Texas, contracts for deed can still be a
valuable means of disposing of property where the
buyer is not a homeowner, but an investor. At
here is another number crunching exercise that
the power of wraps, whether you are selling
contract for deed or a note.
To buy a note or sell a note, contact me at www.hpnotes.com
Say you purchased a house for $150K, with terms of
30 yrs @ 6%, with payments of $893.33 P+I. Ten
minutes after you purchased the house, you decide
you want to move. OUCH!!!
Why not immediately sell your property for $155K with
$5k down using a wrap, except change the interest to
9% and the terms to 40 years. I know some of you are
Let's look at your underlying note:
PMT= $899.33 P+I
Now let's look at the wrap note:
PMT= $1,157.04 P+I
Not looking bad, is it? $1,157.04 - $899.33 equals
Positive Cash Flow.
What happens in an early pay off, pray
Let's look. Assume the buyers pay off the loan in 2
years. Here are the pay off figures.
Wrap Note Balance: $149,160.93
Underlying Note: $146,202.23
Money To YOU $2,958.70 (TAX
+ Payments for 24 mo
(24x257.51) + $6,180.24
This is a total of $9,138.94 in two years
with a house
with no equity.
Not bad, huh?
How can this be? It is just another wonder of using the
time value of
money to solve problems. Are you starting to
understand why I like using
notes as a tool to buy and sell real estate?
What is amazing, is the longer the pay off, the
more of a
spread in the note balances. According to my
difference in spread balances is tax free. (This means
more money in your pocket.)
As usual, be sure to check with expert legal and tax
advisors before using any owner finance technique.
If you have questions about notes, or know of
someone who wants to sell
a note remember
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All rights reserved
Note Professor Notebook
If you have not attended a Note Professor "How To Get
Rich with Notes" class, be sure and purchase the
Note Professor Note Book manual to enhance your
knowledge of creative real estate
financing and note selling.
Owner Financing Education
Why Is There a Discount on MY Note?
One of the most frequently asked questions I receive
from note holders is "Why is there a discount on
Note"? If you answered because of the time value
money, you are only partially correct. The time value of
money does not explain the sudden change in note
pricing for properties with low equity combined with a
buyer's mediocre credit (below 650).
Buy or Sell Notes
The correct answer to the above question is "the
discount of a note is proportional to the RISK being
taken by the purchaser of the note." The concept
time value of money is only one risk to be considered.
In this issue, I am going to concentrate on how the
discount on your note has been affected by current
events, specifically the subprime meltdown.
discount on notes has increased greatly on those
notes that have payors with low equity in the property
and mediocre credit (below 650).
There are several risks in investing, not only in notes
and real estate, but in any investment. Let us
examine 2risks that are affecting the price
note buyer can pay for a note in today's.
1. Collateral Devaluation and Deterioration
With real estate prices declining in many areas
around the country, there is the possibility that prices
could decrease drastically in any neighborhood.
buyers have to take the climate of the overall real
estate market into consideration when purchasing a
note. For example, if a house with a $95,000 1st lien,
is worth $100,000, and there is a 10% devaluation in
real estate prices, the note buyer is now faced with the
possibility of having a $95,000 note, with a house
worth only $90,000. If foreclosure happens, the note
buyer must account for the cost of foreclosure, any
needed repairs, and any devaluation of the property.
Therefore the note buyer is looking at a possible triple
(This is becoming a reality for many banks). Note
buyers are not going to make this same mistake and
are now taking into account the risk that the collateral
could decline in value.
2. Credit Risk of Payors
Contrary to what many believe, note buyers
would rather have a root canal
than to be forced to foreclose. For this reason, the
amount of the discount on the note is now strongly
influenced by the risk of having to foreclose. Credit
scores are merely a way to measure this risk. Here
are some statistics from Equifax that will put credit
scores into perspective: for FICO scores of 500 to
549, there is a 70% probability that either a loan will
go into default and bankruptcy filed, or a loan will fall
at least 90 days past due within the next 2 years.
Scores ranging from 550 to 599 have a 51%
probability of the above scenario, while scores of 600
to 649 have a 31% probability of going bad. With
650 to 699 the probability of default drops to 14%, and
while scores of 700 to 749 statics show only 5% of
debt will go bad.
WIth scores of 750 to 799 the chances of a loan
going bad decreases to only 2%.
Using only these two risk factors, are you beginning to
see why note buyers are no longer paying 90+%
notes that have little equity, and have credit
the low 600s. Not only does the note buyer take
risk of the price and value of the property going down,
but this risk is magnified when statistics say 31% of
the notes who have borrowers with credit scores
below 650 are going to get into some sort of debt
problem within two years.
Remember, note buyers do not have private mortgage
insurance. If the note goes bad, the only "insurance"
we have is the equity in the collateral of the note.
Because of the declining real estate market, and
increasing foreclosure rate, the mediocre credit
scores, with only 5% down, are not looking as good
they did 2 years ago, when real estate prices were
THE SOLUTION: If you are owner
sell to someone with credit below the mid 600s,
MUCH DOWN AS POSSIBLE (10% to 20%). Look
their credit application to see if they have other assets
they can trade or convert to cash to use as a down
With all this being said, QUALITY NOTES are
getting 90% of the face value of the note. I
quoted a price of 94% of the unpaid balance on a note
where the seller put down 20% and had a 680 credit
score, with a year of seasoning and an 8% interest
So if note broker/buyer tells you the reason for the
discount is the time value of money, just take it in
stride. You now know the real reasons for the
discount, and that is what is important. The discount
is proportional to the risk being taken.
you have a note to sell, contact me.
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All rights reserved
Possibility an investor will not be able to sell an
investment quickly enough or in sufficient quantities
because buyers are not available to assure a rapid
conversion from an investment to cash. This concept
also applies to collateral of a debt.