26

of the refinance would come the funds to buy the property from its owner.

Short of an equity position, one might offer the holder of an underlying mortgage a higher interest rate in exchange for certain concessions that would facilitate the purchase. In a recent Santa Fe, New Mexico, transaction, on buyer came up against a non-assumable private mortgage on the property he wanted to buy. By giving the holder a three-point interest increase, he eliminated the hurdle and bought the property. In effect – the holder became an investment partner who said, “Help me make more money and I will see to it that you get the property.” The variations are endless.

8. INVESTORS

In the eighth area of creative financing flexibility. We turn to investors for help with down payments. Our interest is in a particular kind of investor – the kind specializing in buying and selling second trust notes. When a note is created, it tends to have a life of its own. It can move from master to master as it continues to generate monthly payments in accordance with the terms its originators gave to it. The person to who it is first given – as for example in a real estate transaction where the seller carries back paper in his equity – can turn around and sell it in the marketplace for cash. In order to convert it to cash, he will have to sell it in the marketplace for cash. In order to convert it to cash, he will have to sell it at a discount, anywhere from, say, twenty to fifty percent, depending on the nature of the note, how seasoned it might be, its collateral, etc. But the seller is willing to do this for the privilege of having at least a major part of the face value of the note in the form of immediate cash.

It is the marketability of the note, as well as the difference between its face value and its cash value, that makes it interesting to real estate buyers. There are two major possibilities to keep in mind. If a buyer can acquire second trust notes in the marketplace at a discount, and then use them at face value as down payments on real estate, he has effectively picked up the difference between the discounted value (cash value) and the face value. That difference has now been converted to equity in the property he has purchased and since the note traded into the subject property is secured by another piece of property altogether, he can “crank” funds out of his newly acquired real estate to take care of buying the note in the first place. It is a remarkable chain of events that can yield handsome rewards. The other major role for the second trust notes in creative real estate is generating cash for the seller who needs more money down than the buyer can provide. The following technique illustrates the approach:

26