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A Free 350,000 house (Part 1 of 2)
| | Wednesday, August 28, 2002 @ 05:00 AM EDT
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Contributed by: John Behle
John Behle Properties
Read more archived articles about Paper and Mortgage Investing
Just for fun let me show you a deal that will blow your mind. Lay back and fantasize for a while. Come along for the ride and see if it jump starts your greed glands. I control the vertical. I control the horizontal. The deal is real. The profits are realistic.
At times, I like to show people the potential beyond their current position. A little like showing you a
picture of Chateau Lake Louise in Waterton, Alberta, Canada - even though you may currently be driving though the desert in Arizona. It’s on the road, just some miles away.
If it makes your brain hurt, don’t worry, it did the same for me when I needed to bring in the investors and explain it to them. Some deals are harder to explain than they are to understand. It’s easy to know that a deal is profitable (especially when you get something for free), but sometimes it takes massive spreadsheet calculations to show someone else how much.
The "Paper Trade"
It started with a standard "paper trade" scenario. We just had too many deals on the table at the moment and not enough un-encumbered paper (most of it was financed at very attractive rates).
The "Paper trade" in it’s simplest format is buying notes at a discount and then trading them at full face value for real estate equities. I buy a $100,000 note for $70,000 (30% discount) and then use it as collateral to buy a $100,000 house. I end up buying the house at 70% of market value. Most of the time the "Trade" takes the form of using the note (or notes) as collateral - a term called "hypothecation."
$100,000 Property Value
$100,000 Note used as collateral (Hypothecated)
$ 70,000 Cost of note purchased and used as collateral
$ 70,000 New loan taken out on purchased property
Results:
$100,000 Property
$ 70,000 First loan - new loan from Last National Bank
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$ 30,000 Equity - that didn’t cost a cent
To get the cash needed, I finance the property for $70,000 and it becomes a nothing down deal at 70% of value with a positive cash flow.
Note: John D. Behle is one of the foremost educators and practitioners in the field of discounted paper investment. His innovative strategies and techniques have shaped the industry. He is the author of several courses and books that deal specifically with Real Estate Paper. Learn more about his courses and books here.
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