You know you make your profits in real estate when you buy, not when you sell. Buying notes at a discount gives you another opportunity to obtain properties at a discount. In THE NOTE PROFESSOR NOTEBOOK, I discussed how to buy notes and then trade them in at face value on real estate to get sort of "automatic equity" in property.

In this issue, I am going to give you another technique you can use to obtain "automatic equity". In today's environment of record breaking foreclosures, this technique is a powerful way of obtaining real estate.

Let's say you purchased a $100,000 note for $80,000 that will yield you 9.5%. When you contact the payors (property owners), instead of introducing yourself as the big, bad note holder, why not be a little more amicable, and set the stage to purchase the property in the future. You might even get the payors to grant you a "first right of refusal" option. For those who are unaware of this type of option, if the payors (property owners) gets an offer to sell their property, you will have the option to match that offer. If you do not like the price, you just pass. Even if the payors do not give you the option, you have established a relationship with them where they will contact you if they get into financial trouble and need to get out of the property.

Here is a good example. The property that secured the $100,000 note you purchased for $80,000 is worth "as is" $120,000. The payors (property owners) NEED to sell the property, but in today's market there are few buyers. The property owners then come to you. Hmmm, what can you do?

Can you see the opportunities this situation offers?

Why not give them $5,000 walking money and take the house. You now have a $120,000 FREE AND CLEAR house that you have only $85,000 invested ($80,000 for the note + $5,000 to the payors). PRESTO! You now have automatic equity. Now you can either refinance and put around $10,000 in your pocket, then rent it out for a cash flow. Or maybe you would prefer to have a free and clear house in your portfolio, and just rent it out for a large positive cash flow. This is going to jump your yield to astronomical levels. Depending on different variables, such as how much you charge for rent, or if you sell the property for all cash in the future, your IRR would be somewhere between 25% and 75%.

While the creative ideas are flowing, why not sell the house using owner financing. Do you think you would have any takers with 5% down, and carrying a note for $114,000. Now you have $114,000 note that you have only $80,000 invested. Depending on the terms and interest rate, this will increase your yield to double digits. (Play with this for a little calculator practice)

A third possibility, might be to GIVE THE PAYORS ALL THEIR EQUITY (house valued at $120,000-note of $100,000) in the form of a note. In other words, give them a $20,000 note secured against the property or another property.This puts you in a perfect position to obtain a built in discounton your $20,000 note. You then have just increased your automatic equity. Sounds good to me!

What would happen to your note? Good question. There are several possibilities, all of which are in your favor, but we do not have time to discuss them in this issue.

I am going to stop here, because those who have taken my classes, or have purchased THE NOTE PROFESSOR NOTEBOOK, know I teach concepts, not just techniques. Are you beginning to see why buying notes at a discount can be best of all situations? You get either above average yield, automatic equity, or both.

All of the above techniques and concepts need to be discussed with your CPA and/or attorney. I think you are going to like all their answers.

If you want to purchase a note or have a note you want to convert to cash, contact me for professional pricing.
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If you would like Tom Henderson to speak on real estate investing and owner financing with your real estate office or investment group. Contact me for availability.

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