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Converting Paper
 Converting Paper

Creative Real Estate Financing, 5 Bonus Techniques

Converting or selling a real estate note into cash, some sellers are in a position where they are not able to sell their properties unless they actually receive cash at the closing. 

If you are using one of the techniques that does not allow the seller to receive cash, you might not be able to buy the property unless you can show the seller how to convert the real estate note you are offering to cash. Lets take a look at several ways that the seller might accomplish this.

Sell Real Estate Note At A Discount
Technique #1

An active market of investors is eager to purchase notes at a discount. While this is probably the least desirable way to generate cash, selling a $10,000 note for $7,000 to $7,500 is not difficult, depending upon its interest rate and term. This process is known as discounting a note.

Specific Situations to Apply Technique #1

The Property

 

The Buyer

Cash for only part of Down Payment

No Cash at All

Large Monthly Income

Poor Credit

Credit Cards with Lines of Credit

Dead Equity

 

The Seller

Needs All Cash for Equity

Will Finance: Wants Short Payoff

Outstanding Financial Obligations

Large Capital Outlay Coming Up

Must Sell Immediately


Collateralize The Paper
Technique #2


The real estate note could be taken to a bank, with whom the seller has a good banking relationship, and pledged as security for borrowing money. While the seller will probably be paying 3% to 4% more for the money than what is being received from you in interest, this way is still much less expensive to generate cash than selling the note at a discount.

Specific Situations to Apply Technique #2

The Property

 

The Buyer

Cash for only part of Down Payment

No Cash at All

Good Credit at Banks or Credit Union

Credit Cards with Lines of Credit

Dead Equity

 

The Seller

Needs All Cash for Equity

Will Finance: Wants Short Payoff

Will Finance: Wants Added Security

Must Sell Immediately


Use The Paper As A Down Payment To Purchase Real Estate
Technique #3


The seller could use the  real estate note at its full face value to purchase a property. A good example of how the seller could do this is given in technique #4, "Using Equity In one property to Buy Another". As earlier discusses, many sellers of property are glad to receive paper that is secured by real estate other than the property they are selling. Once the property is acquired, the seller could use any number of ways to take cash out of the equity in the new property.

Specific Situations to Apply Technique #3

The Property

Low Mortgage, High Seller Equity

Owned Free and Clear No Mortgage

 

The Buyer

Lump Sum Cash Due Soon

You Know People With Cash to Invest

Equity in Real or Personal property

Dead Equity

 

The Seller

Will Finance: Wants Short Payoff

Must Sell Immediately


Create Multiple Notes Using One Note As Collateral
Technique #4

Let us say that you have purchased a property and have given a $10,000 promissory note to a seller secured by real estate that you purchased. If the seller does not need the entire $10,000 or even as much as would be received if the note where sold at a discount, the seller could write a smaller note or even several notes using the $10,000 note as collateral. One new note might be written for $2,000 and sold at a discount of 30% to generate $1,400 in cash. Another new note for $2,000 could be used by the seller as a down payment to buy real estate. The seller would still have the original note of $10,000. $6,000 of that  real estate note would be free and would generate income for the seller. 

Specific Situations to Apply Technique #4

The Property

 

The Buyer

No Cash at All

 

The Seller

Will Finance: Wants Short Payoff

Outstanding Financial Obligations

Large Capital Outlay Coming Up

Must Sell Immediately


Sell The Income From The Note
Technique #5

Most people are aware that when they receive a note, they have an asset in the amount of the note. What most people don't realize is that they really have two assets: they have the note itself and also cash flow that is coming each month or each year from that note.

Assume that you gave the seller a $10,000 promissory note bearing interest at 9%, payable $900 per year. that $900 per year income that the seller is receiving could be sold at a discount, or for that matter, the seller could sell several years of income at a discount to generate cash. This technique would leave the primary assets, the $10,000 note itself, untouched.

Specific Situations to Apply Technique #5

The Property

 

The Buyer

 

The Seller

Will Finance: Wants Short Payoff

Outstanding Financial Obligations

Large Capital Outlay Coming Up

Must Sell Immediately

Will Finance: Wants High Interest


The Creative Application of Creative Finance Techniques

None of these techniques are cast in stone. As a matter of fact, they are meant to stimulate your creative lets make a deal thoughts. Look at them as the trunk of a tree on which you can add the branches in any form you choose. These techniques can be contracted, expanded, and even combined to purchase property. Even though specific interest rates have been used in the explanation of the techniques, you will learn in any negotiation you always start at a much lower rate. In fact, you may want to initially offer the seller a zero interest rate and increase it during the negotiation process. The main objective to provide a win-win situation for all.

Go To Creative Financing 

Real Estate Note