| After finishing a course in 1031 Tax Free Exchanges in | | | | paper buyer. He had a portfolio of discounted land |
| the early 70's the first deal put together on this | | | | contracts in the million-dollar range accumulated over a |
| "revolutionary" means of doing business was a "NON | | | | fifteen-year period. His normal MO (modus oparandi) |
| Qualifying 1031 Tax Free Exchange" using "pure boot". | | | | was to buy land contract first mortgages with a 20% |
| This was not "like property". A builder had been building | | | | to 30% discount. With face note rates of 8% to 10% |
| homes like crazy and suddenly the market turned | | | | at the time, his yields were in the 14% to 15% interest |
| south and no one was stepping up to buy the finished | | | | range. At the time the state statue for usury was 11%. |
| homes. The buyers who had just paid top dollar for | | | | Keep in mind if the note payer refinanced or sold the |
| these new homes and had since moved in would not | | | | property the yields would rocket up to over 20% plus. |
| have appreciated the builder selling the remainder | | | | He loved notes. Race to mail box each month, |
| inventory at a deep discount and thereby eroding the | | | | "Walla"---checks. He had a ready attorney to write |
| value of the entire subdivision on a comparable sales | | | | letters and foreclose if necessary, but was able to |
| price basis. The builder had been through many building | | | | work out most situations with negotiations or the |
| cycles and did not wish to abandon the project leaving | | | | borrower would quit claim back and hit the road. By |
| the prior buyers in a lurch. He rather, found new | | | | being a careful note buyer with good loan to values to |
| buyers, who previously had been turned down due to | | | | protect his investment there was a certain comfort |
| lack of funds to close, and offered to hold 10% to 20% | | | | zone. |
| LTV (Loan To Value) 2nd mortgages. The terms | | | | Now this was a different animal. The loan to value |
| were low and the interest rate was affordable on the | | | | was near the top, but there was "seasoning" of the |
| second mortgages. With a long history with the local | | | | paper, meaning there was a history of on time |
| savings and loan, new first mortgages were arranged | | | | payments on part of the note payer. The father, the |
| and underwritten using the tried and true hand | | | | one holding the bag, was very anxious to rid himself of |
| underwriting; the only way business was done at that | | | | the property and the day-to-day demands of dealing |
| time. Those potential buyers with good job histories, | | | | with 16 separate rental customers. What to do? The |
| reasonable credit and the ability to repay were able to | | | | father agreed to take the 2nd mortgage paper with a |
| move into their new homes with little out of pocket as | | | | 10% face discount and negotiated a two year personal |
| the builder picked up most or all of the closing costs. | | | | and business guarantee of each mortgage. It only took |
| This particular builder in addition to building single family | | | | 14 2nd mortgage notes to balance the equities in the |
| homes had on a parallel tract built 10 to 16 unit | | | | transaction between the purchase price and the |
| apartment buildings for investor groups and himself and | | | | mortgage balance. The builder paid the recording fees |
| he was running with the main goal of accumulating long | | | | and closing costs for all the instruments and |
| term wealth build up and tax shelter. Being located in a | | | | assignments. Even the commission was taken in a |
| state capital city and a major university meant that | | | | note form. For a two-day listing and little selling cost |
| newly built rentals were in high demand. Vacancies | | | | involved, this wasn't bad. Those monthly checks spent |
| were few and in some cases, depending on locations, | | | | very well indeed. In addition, if one of the notes |
| there were large waiting lists. Rents were accelerating | | | | suddenly went bad, the builder reserved the rights to |
| in the light of this high housing demand for rentals. The | | | | substitute another 2nd mortgage paper note if the |
| builder offered every tenant in his system the | | | | need arose. He would then settle the difference in |
| opportunity to own their own home for in many cases | | | | cash or he would substitute a monthly income stream |
| a monthly housing expense a slightly higher than they | | | | on another note to settle the delinquent amount and |
| were currently paying with the added incentive of | | | | take back the note. It was proven the builder had an |
| paying little or no out of pocket. The builder made it | | | | excellent credit rating and protected his subdivisions like |
| affordable. Most were held back by the cash | | | | a jealous lover. If a problem arose, he would intercede |
| investment requirement up front. In less than 60 days | | | | and try to resolve the non-payment situation thereby |
| all the homes had been sold. All 20 excess inventory | | | | saving the his often used lender a foreclosure on the |
| homes that had been finished and setting vacant with | | | | books and in this case the 2nd mortgage. He would do |
| the interest and expense meter ticking were sold. The | | | | this by paying the note payer to move and perhaps |
| homes were scattered among four subdivisions. The | | | | rent one of his properties and quit claim the property |
| builder's profit came in the form of monthly checks on | | | | back all the while saving the borrower/buyers credit |
| the 2nd mortgages. A year had passes, most paid on | | | | rating to be used another day. Life is messy |
| time and genuinely appreciated the opportunity to be a | | | | sometimes and through illness, divorce or job loss and |
| home owner and were working very hard to keep it. | | | | such non-payment results. Time has proved this |
| Déjà vu all over again, building cycle after | | | | builder's utilization of this winning formula for success |
| building cycle builders are again in many areas of the | | | | by becoming a multi millionaire many times over in up |
| country setting on inventory and not knowing what to | | | | or down building cycles. He always used paper to |
| do. Many builders are tempted to go bankrupt or in | | | | make a rescue when needed, like in a down building |
| some cases run away with the buyers deposits | | | | cycle. If he had to take a property back, he would rent |
| before finishing during these down periods. It is for the | | | | it until he used paper again or sold it out right with |
| builder with moxy to survive. | | | | super term financing. |
| In this particular case, a listing of a 16-unit apartment | | | | Today builders and homeowners are again operating in |
| building had been taken immediately across the street | | | | a soft market. The "paper business" is a great way to |
| from a small metropolitan airport. All units had two | | | | make deals work. With the advent of corporate note |
| bedrooms and were bigger than the older complexes | | | | buyers in the market place the deep discounted |
| in the area. The flight paths were not over the | | | | opportunities can be limited, however, there are still |
| property but it was a super location between the | | | | opportunities. If you end up with paper on a deal, |
| university and the state capital and major employment | | | | hopefully at a discount, many creative practitioners |
| centers. | | | | using them at face value to put together purchase and |
| There weren't any vacancies. A son had convinced | | | | trade deals. There is more than one way to put real |
| his father, who had proficiency in other investments, to | | | | estate sales together. If a buyer has a car, truck, |
| go on the mortgage note with him to provide financial | | | | semi-truck, semi-trailer, boat, mobile home, motor cycle, |
| strength to the deal. | | | | vacant lot, gem stones (the appraisals are varied), |
| The son was to do all the management and handle | | | | diamonds, collectibles, personal property loan, business |
| the day to day needs of the property. After being in | | | | note, judgment award, lawsuit pending on a traffic |
| the property for a year, the son started having marital | | | | accident, life insurance annuities, inheritance, business |
| problems and his business was on the decline. The son | | | | inventory, chattel mortgages on equipment or any |
| moved to another state leaving dad holding the bag. | | | | number of combinations can be used to make deals |
| The father was totally out of his comfort zone. The | | | | work. Yes it is sometimes sticky, but if you can stay |
| son had no investment in the deal and so he quit | | | | within your comfort zone and two parties agree after |
| claimed his interest back to his father. The wife signed | | | | utilizing professional appraisers and such, give it a go. |
| off as well. He wanted out of this situation ASAP. The | | | | The alternative is to do nothing and let the market roll |
| builder and his agent came calling. In these days, | | | | over you like a run away freight train, or you can |
| mortgages were assumable with qualifying. Another | | | | make something happen. After all, that was how |
| savings and loan in the area held this particular | | | | Manhattan was bought, barter and trade. |
| mortgage. The listing had been on the market for two | | | | Déjà vu in the market place today. Think |
| days. The builder did an inspection and was aware of | | | | outside of your comfortable universe and see an old |
| the builder's work that had constructed the 16-unit, | | | | way of doing new business. Sometimes the deals can |
| apartment building three years prior. First inquires were | | | | be "like kind" property and qualify for favorable tax |
| made to whether the seller (dad left holding the bag) | | | | treatment can be achieved, other times, it will just be |
| would have an interest in taking 2nd mortgage paper | | | | "boot" with no tax benefits. Other times it could be |
| as a down payment on the deal. As it turned out, at | | | | both. Déjà vu. Here we go again. |
| the time, the father/seller was a huge discounted | | | | |