I have had a couple of inquiries about what makes a note bad, or what makes a note worthless. This is such an important question, I thought I would devote a series to the topic. One of the major mistakes I see is the language used when drafting a note. Be sure to run your note by an attorney.

Case in point. I received a request for a note with a face value of $100k, with the security being 10 acres of land, and a MH in Arizona. The buyer had good credit, as well as a substantial amount down, and everything looked good. However, when I got the note, there was a clause, "Partial Release of land may be given by the beneficiaries under the following: $25,000 to include only one parcel".

How do you interpret this? What is a "parcel"? I interpreted that it meant if the payor gives the note holder $25,000, an unspecified amount of land would be released, and I, in worse case scenario, could be left with a $100k note secured by a MH. The seller argued that he MAY release the land but did not have to, and the note had been drawn up by the title company. It remains that this note language is disputable, and I do not like "disputable clauses" in the notes I buy. His response was "it was just 'understood' that it meant $25,000 an acre as being one parcel." What is "understood" does not over ride what was ambiguously written.

I had to inform the seller that unless the note was modified, I could not purchase his note. I have not heard back from him even after leaving a couple of messages and emails.

Do you see how not making something clear, made this note worthless the way it was worded? He had good payors, good equity, and good terms, but all of this was wiped out by bad language in the paper.

To sell your note contact me. It might save you headaches in the future. Be sure to watch out for little time bombs in the wordage of notes and deeds of trust. In the next issue, I will discuss another way many note holders decrease the value of their note.

Piece of land under one ownership, or a lot within a subdivision

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.

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Last month we put to rest the myth of taking back a 1st lien note on someone with a low credit score (below 550), with little to nothing down, and receiving maximum value on the note. In other words, do not expect a note buyer to make the same mistakes that sub prime lenders were making.

With that being said, there are a couple of techniques where creating a note, including a second lien, might be beneficial. I call this particular one" The Rehabber's Bailout." Here is the scenario.

You, the rehabber, have expertly rehabbed a house, but because the sub prime market has dried up, you are sitting on the house, which is costing you $50 daily in holding costs.
You have a hard money loan, including rehab costs, for $75,000. You are selling the house at appraised value of $100,000. You find a buyer whose credit is dented, but not broken.

Technique #1: Often what is called an 80/10/10 will get you out of hot water. What this means is your buyer will get a bank loan for 80% ($80,000), you carry a 10% 2nd lien ($10,000) making the terms easy on the buyers, and the buyers put 10% ($10,000) down. Here you can pay off your hard money loan, get some cash at closing and take back a "throw away" second.

Technique #2: I have heard some mortgage brokers say they can still do 80/20 loans, where they will lend 80% and you carry back a 20% second lien note, but I have not seen one done lately. Moreover, your profit is completely tied up in the 2nd lien. Not the best of worlds, however it is better than having your house sit on the market for who knows how long, and having to pay $50 a day in interest and holding costs, not to mention your odds of the house being vandalized increases with every day it is vacant. What can you do with your second lien? This is another topic. Look in the Newsletter archives, where I have discussed this before.

Technique #3: Can you do an 80/10/10 where you take back both the first and a second lien, then sell the first? Yes, if the numbers make sense to both the seller and the note buyer. But remember, as a rehabber, your goal in this situation is get rid of your problem and move on. Those who have taken my course have heard me say that all problems look better when they are in your "rear view mirror." All successful investors know there are times when you want to minimize your losses, not maximize your profits.

Technique #4: When time is important in closing, taking back a first lien, or even an 80/10/10, and selling the first at closing is often beneficial. For example, have you ever had a property stay in the title company for 60 days or longer because the funder just keeps delaying the closing? Not fun, is it? One rehabber who does business with me regularly, will often take a small discount on the note, even though he has a buyer with a 650 + credit, and 10% down. Why would he take a discount when the buyer can get conventional funding? Because he knows, he can close within a couple of days of getting an appraisal and title work done. He will gladly take a small discount on the first lien note in order to close in a short amount of time and receive his cash, and maybe have a small 2nd remaining. There are a couple of concepts where I discuss techniques of what you can do with these seconds in *Note Professor Notebook.

As I advise all my investors, use note selling as your Plan B, especially when time and profits are important.

If you would like to discuss how to structure a note to sell, contact me or for a note quote,

July 11 2007 Wednesday
Tom will be speaking at the Texas Real Estate Investment Circle on Wednesday, July 11 at the Crowne Plaza Inn located at LBJ and Coit in Dallas Texas. It is a free meeting and I will be discussing how to buy and sell notes, as well as how to use notes in real estate. Go to Texas Real Estate Investment Circle for details. Ought to be fun and informal. See you there.

July 21 & 22 2007 Saturday and Sunday
Tom will also be giving his seminar on THE ABC's of APARMENT BUYING in conjunction with DFWREIN on Saturday, July 21st and Sunday, July 22nd. Remember, I limit my class size to 20. Do not be left out. For details go to ABC' s of Apartment Buying